Lakala, breaking the deadlock, seeks to raise funds through listing in the Hong Kong market to expand overseas

This payment service provider plans to go public to raise funds for expanding overseas business, aiming to reverse the decline in both revenue and profit

Key Points:

• Seeking to expand growth space outside the fiercely competitive Chinese market, Lakala, a listed company on the Shenzhen Stock Exchange, has submitted an application for a Hong Kong listing.
• To offset the impact of declining revenue and profit in the domestic market, this payment company is looking for new growth engines.

Liang Wuren

Going overseas has become an important proposition for Chinese enterprises. Whether such actions can succeed is another matter, as Chinese companies not only face competition from domestic peers but also inevitably encounter local and established global competitors in unfamiliar overseas markets.

Lakala Payment Co., Ltd. (300773.SZ) is joining this trend, planning to raise funds for overseas expansion through a Hong Kong listing to enhance its international reputation. In the listing application documents submitted last Friday, the company clearly stated that the core goal of this fundraising is to build a global layout.

Lakala's ambitious international expansion plan is not an isolated case. As the Chinese economy faces pressure, many companies across various sectors, from manufacturing to retail and financial services, are accelerating their overseas ventures to boost sluggish growth in the post-pandemic era. However, overseas expansion is easier said than done, requiring long-term investment and significant costs, which is the reason behind Lakala's fundraising in Hong Kong.

Lakala stated that it has subsidiaries in the United States, the United Kingdom, Japan, Singapore, and Hong Kong; however, these overseas businesses generate little revenue and have not yet produced income. The company admitted that due to the small scale of overseas revenue, it cannot disclose regional segmentation in its financial reports.

Nevertheless, Lakala firmly believes that the situation can be reversed, hoping that international investors, who are the mainstay of the Hong Kong stock market, can understand its globalization vision and provide funding to help achieve its goals.

The company has provided a preliminary overseas roadmap, stating that it will prioritize using the listing funds to focus on expanding into the Hong Kong, Japan, Southeast Asia, Americas, and European markets; aiming for strategic layouts in all core economic regions. Specific measures include applying for licenses, forming local teams, establishing new offices, and launching comprehensive marketing promotions.

In addition, Lakala plans to strengthen its technological capabilities and develop global products; at the same time, it is looking for acquisition opportunities that can aid in the development of international business.

As a veteran payment enterprise in China, Lakala lacks the recognition and scale effects of Alipay, WeChat, and UnionPay in the domestic market. Last year, the company's revenue fell by about 3% year-on-year to 5.75 billion yuan (approximately 807 million USD); in the first half of this year, the downturn intensified, with revenue declining by another 11% year-on-year to 2.65 billion yuan, highlighting its predicament in the domestic market.

Profitability Continues to Face Pressure

The weakening profitability poses an equally severe challenge to Lakala. The company's gross profit margin has significantly narrowed from 33% in the same period last year to about 25% over the past six months. The deterioration in gross profit margin is due to the rising commission rates provided to channel partners, as the proportion of commissions paid to promote POS terminal equipment to merchants through channel partners continues to climb.

In the first half of this year, Lakala's commission expenses fell by less than 1% year-on-year, far below its 10% revenue decline during the same period. The gap is significant The disparity may be due to intensified market competition, forcing companies to offer concessions to channel partners, sacrificing profit margins in exchange for collaboration. Such situations will lead to a dual blow of deteriorating profits and declining revenues.

This has triggered a continuous decline in profits, with the company's profits falling year after year since 2023. In the first half of this year, net profit decreased by 41% year-on-year, shrinking from 420 million yuan in the same period last year to 248 million yuan (approximately 35 million USD).

Lakala views overseas expansion as a bet to revitalize profit growth, simultaneously advancing efforts to strengthen the provision of comprehensive digital operation solutions beyond payment categories to merchants, relying on artificial intelligence and big data technology.

Currently, the revenue contribution from such "end-to-end digital solutions" is minimal, with the main income still coming from bank card and QR code payment processing fees. However, the company emphasizes the growth potential of these products in major global regions in its listing documents in Hong Kong, seemingly intending to make them a core pillar of its overseas expansion.

Lakala cites third-party research indicating that in Southeast Asian countries, a popular destination for Chinese enterprises, the market for end-to-end digital solutions is expected to have a compound annual growth rate of 15% from 2025 to 2029, higher than the 10% in the Chinese market. The outlook for Japan is even more promising, with an annual growth rate forecast of 18%.

Since its inception as a payment service pioneer in 2005, Lakala is seeking to break through. The company was co-founded by current chairman Sun Taoran and Xiaomi founder Lei Jun, with investment from Lenovo Holdings, the parent company of Lenovo.

In its early years, Lakala expanded by capitalizing on the credit card popularization wave driven by the establishment of UnionPay in 2002. After forming a strategic partnership with Alibaba in 2008, it reached a high point, allowing Alipay users to recharge their accounts through POS machines located in convenience stores nationwide, which became an important source of revenue. In 2011, the company was among the first batch to be awarded a third-party payment license.

Unexpectedly, the rise of smart devices led to a comprehensive impact on POS terminals from mobile payments dominated by Alipay and WeChat. The company once launched a mobile audio jack credit card reader in response, but after a promising start, it faced several unsuccessful transformations, resulting in a continued deep reliance on bank card transaction fees.

Since its listing on the Shenzhen Stock Exchange in 2019, Lakala's stock price has shrunk by more than a quarter, but its valuation still holds relative advantages, with a price-to-sales ratio (P/S) of 3.5 times, higher than that of domestic competitor Yika (9923.HK) at 1.2 times, and also better than global giant PayPal (PYPL) at 2.1 times