CLPS' Financials Are Strong, But China Risks Push Stock Lower

The IT company has to show investors that its overseas business is not threatened by China's regulatory tightening.
Oct. 16, 2021 00:34
CLPS' Financials Are Strong, But China Risks Push Stock Lower

(CapitalWatch, Oct. 15, New York) CLPS Inc. (Nasdaq: CLPS) has shown strong financial results for the half-year and 12 months through June 2021, but its stock ended the day 6% lower on uncertainty over regulatory risks. Specifically, investors may question whether China's new laws will let CLPS continue growing overseas.

The Hong Kong-based IT solutions provider with an international footprint said it booked $67.7 million in revenue in the six months through June, a 45% increase year-over-year. The core IT consulting business saw 43% revenue growth. Net income surged 166% to $2.1 million, or 10 cents per share.

In the fiscal year ended June, CLPS generated $126.1 million in revenue and $7 million in income, up 41% and 128%, respectively. Non-GAAP income increased by 72% to $11.9 million. Overseas revenue grew by 28% to $13.6 million.

CLPS continues to rely on a few major clients for a big portion of its sales. In fiscal 2021, revenues from the top five clients attributed nearly 46% of the total, while it served 251 clients overall during the period. Among its clients have been Citibank (NYSE: C) and eBay (Nasdaq: EBAY), and the company sees the financial institutions as its main sector while also serving clients in e-commerce and hospitality.

Global expansion has been a priority for CLPS over the past few years: That was CEO Raymond Lin's key message in an interview with CW back in May 2020. Today, in the company statement and call with analysts Lin again noted the company is being "aggressive on its global expansion strategy" and highlighted U.S. revenue growth from "IT services contracts in the U.S. from major players in e-commerce industry."

Recently, CLPS established a subsidiary in the Philippines as part of its SEA growth plan. With the new location, CLPS aims "to penetrate the domestic financial IT services market in the country" and "maintain a strong foothold in the region," the company said in an announcement last month. Earlier, CLPS acquired the financial IT firm Ridik in Singapore and turned it into CLPS' SEA headquarters.

However, today, a Chinese company's overseas expansion has turned from a sign of growth into a sign of risk in the eyes of investors.

Global Strategy at Risk?

This year, Beijing has waged its war on the transfer of Chinese citizens' data overseas, with the new Personal Information Protection Law (PIPL) set to go into effect on Nov. 1. Just yesterday, markets witnessed a significant drop in the stock value of two successful independent trading apps with overseas business, Futu Holdings Ltd. (Nasdaq: FUTU) and Up Fintech Holding Ltd. (Nasdaq: TIGR).

And while the firms vow compliance with China's regulations, the recent probes, fines, divestitures, and forced overtake of 1% ownership in the companies that seemed infallible has set a precedent and rendered Chinese stocks much riskier.

PIPL first and foremost affects companies that collect individual user data, and CLPS may not be directly affected. However, CLPS has to show investors that China's prohibition of cross-border corporate data transfer does not pose risks to its operations. 

In June, China passed a general data security law that provides for punishment for "violation of the national core data management system," with data defined as "data related to national security, national economy, the people's welfare, and major public interests." The law went into effect on Sept. 1 and some say its broad definition requires more clarity. 

Thus, Gibson, Dunn & Crutcher LLP said in a June statement: "The new laws do not make clear how they might apply to work product that is simply based on, reflects or incorporates data stored in China, and whether professional services firms are required to seek approval from relevant Chinese authorities before sharing such work product in foreign judicial proceedings or with enforcement authorities."

In early August, CLPS' chairman Xiao Feng Yang released a letter to shareholders commenting on the recent regulatory measures that may relate to the company's operations. Specifically, Yang said CLPS does not have a variable interest entity (VIE) structure – an issue Chinese authorities have placed under review, threatening many U.S.-listed Chinese companies with VIE structure. Secondly, Yang said CLPS' IT training programs in partnerships with universities are non-profit. These will not be affected by China's recent wipeout of the private tutoring market.

Lastly, the chairman's letter stated: "CLPS sees to it that its business client's confidentiality clause is strictly adhered to including data protection to avoid any cybersecurity risk." 

NFTs Are Legal and CLPS Is On It

Yang also commented on CLPS' partnership with Columbus Century Development Co. The two have set up a JV, called LinkCrypto Finance Technology, with CLPS holding 55% in the venture, to "develop and upgrade blockchain-based solutions for financial institutions." When the company announced the deal in June, it said the aforementioned solutions will "include custody, exchange, payment, and non-fungible token (NFT) distribution platforms, particularly in wealth management and various investment transactions." The partners also plan to set up a JV on the British Islands "and will eventually plan to set up wholly owned subsidiaries in Hong Kong SAR and Hainan."

Here, another of China's recent tightening measures, the eradication of cryptocurrency-related transactions, comes to mind. But unlike bitcoin, NFTs remain legal in China and are flourishing, with tech majors like Tencent (OTC: TCEHY; HKEX: 0700) and dozens of small startups in on the hype, as Protocol reported last month. While in the West, NFTs are inseparable from crypto, the medium writes, Chinese developers are using blockchain structures that are not completely decentralized and are thus more controllable, less risky, and still legal.

In the earnings call on Friday, executive VP of CLPS, Wilson Wong, avoided giving a clear response to an analyst's question on whether CLPS will continue exploiting the opportunities in digital currency management for financial institutions outside of China.

For the fiscal year 2022, CLPS forecast a slowdown in its growth pace. According to today's report, the company expects sales to increase up to 35% and non-GAAP net income to increase up to 37% compared with the 2021 financial results.

CLPS stock closed at $2.95 per share Friday after a significant rise in daily trading volume to 1.1 million from the average of 111,400. The stock is down about 3% year-to-date.

CLPS, China, Tencent, NFTs, Crypto, Blockchain