Tenet Fintech: A Rising Unicorn with a Falling Stock After Impressive Earnings
Investing
November 24, 2021
Following a strong quarterly earnings report, the market showed an unfavorable reaction to Tenet Fintech Group (CSE: PKK, OTC: PKKFF), with losses amounting to 25%.
The proof is in the pudding for our to-be-named TNT NASDAQ ticker, yet the FUD (Fear, Uncertainty, and Doubt) is taking an unwarranted toll on its stock price. It remains crucial for a long-term, value-based investor to never fret about the daily stock price following an overreaction from the market as it may not represent the underlying growth of the business.
It appears there's been a misinterpretation of the significant progress made in recent months. As expected, many bears (and shorts) will try to take advantage of the inexperienced in times of confusion. My goal is to assess the data and financials and simplify them for the ordinary investor to understand - especially when I enjoy discussing the business and its potential.
Once again, this is just my opinion on underlying facts and data revealed in the company's earnings report and not financial advice. Let's dig in.
There's a lot to cover, but my main objective is to analyze Tenet's third-quarter financials - so I'll keep it short.
Tenet Fintech Group, a Canadian-based company doing business in China, formerly known as Peak Fintech, can attribute most of its success to its core unique business model: facilitating lending between financial institutions and commercial borrowers through an online ecosystem. Tenet uses artificial intelligence to assess credit risk and willingness to loan and generates matches for lenders and borrowers within the ecosystem. For more info on their core business model, head to Mr. Dotto of StockFam's exquisite write-up: Is Peak Fintech Group the Next Canadian Tech Darling?
As China recovers from the lasting impacts of COVID-19, the Chinese government is looking to boost the economy by providing the 44 million micro and small enterprises with easier access to funding. Similarly, China's updated data and transparency policies are sending some of their largest entities scrambling for a solution - and Tenet is prepared and waiting with open arms. This little Canadian company seems to be in the right place at the right time.
With terrific management and subsidiaries based in China, the second-largest economy globally, Tenet Fintech Group seems as if it can become a staple in the five-year plan to revamp the nation's economic landscape.
It has been an incredible journey thus far. However, the road ahead sparks interest from investors, including global institutions, who are salivating at the opportunity to open a position of Tenet Fintech as it uplists to the NASDAQ and transforms into a worldwide business facilitation machine.
Rebranding into Tenet Fintech and trademarking their solution model as a Business Hub™ is just the beginning of management's production of a system that can alter how global trade takes place - inducing growth, transparency, and ease of commercial operations.
By now, it's used for more than just facilitating commercial lending and financing. The business hub has become a complete ecosystem where businesses can buy, sell, obtain financing, improve logistics, and get paid quickly from clients to eliminate cash flow issues.
A quick review of their subsidiaries in the latest corporate presentation reveals the core services for all types of businesses across the Chinese market, from data, financing, and credit solutions to supply chain processing and analytic solutions.
At this point, there are over 55,000 registered loan brokerage representatives, 62 financial institutions, and over 70,000 business members, which consist of social media influencers, retailers, and distributors of some of China's most recognized brands and companies. Since its inception in 2018, Tenet Fintech has now facilitated over $2.24B of commercial transactions.
Tenet has already proven its success in the Chinese market, working with some of the nation’s largest corporations and state-owned equities with the likes of JD.com, COFCO, ShopEX, and more.
However, the solution is just as applicable to businesses operating elsewhere. For example, Tenet plans to establish a comparable "hub" in Canada and connect it with China's Business Hub to help partners and registrants trade across borders by the end of the year and early Q1 of 2022.
Mind-blowing possibilities exist.
Before jumping into the Q3 earnings report, I wanted to review the projected revenue, EBIDTA, and net income for Tenet in 2021 through 2023.
For Tenet Fintech Group to be considered a global player in the fintech player by this time next year, it will have to continue its hyper-growth trajectory and post numbers that rival some of today's best publicly-traded companies.
Based on the projections above, which are solely based on operations in China, they are very much in the driver's seat to do so, expecting a 25% profit margin by 2023 on a whopping $814M in revenue. This would instantly list TNT among some of the most efficient businesses in the world.
The moment we've all been waiting for – time to dig into the oh-so-misunderstood financials.
This past quarter marks another fantastic quarter for the Tenet Fintech team. So let's break down the key indicators an investor should use when evaluating the quality of Tenet's quarterly performance.
For the three months ended September 30, Tenet Fintech reported total revenue of $25,695,570, an increase of 71% compared to the same quarter in 2020 with revenues of $15,116,369.
This is where investors who are not familiar with Tenet may be caught off-guard and become underwhelmed by the results. With the second quarter's earnings report citing a revenue total of $30,649,179, the quarter three report would have shown a decline of ~$5M. So, why did this drop-off occur?
While revenue streams are still primarily generated in China, Tenet's revenues can fluctuate with the economic activity level during each period. Therefore, it is not all about the top-line growth QoQ. Instead, what should be in focus is the year-over-year (YoY) growth.
Producing 71% sales growth is an incredible feat while remaining solely in China, yet Tenet is still just scratching the surface. However, showing exceptional top-line growth YoY gives a clear path to expansion given the number of doors Liang "Golden" Qiu and the team in China has opened.
The revenue growth indicates newfound stability, starting with raw material suppliers, factories, wholesale distributors, retail shops, and consumers. In addition, the company has incorporated unique platforms for four industrial sectors: insurance, steel, oil & gas, and clean technology, which it perceives is driving significant growth in China and has the opportunity to expand globally.
It was made clear that the China-based subsidiaries will outperform in quarters two and four due to massive shopping holidays such as the 618 Shopping Festival, the second-largest shopping day in the world. Without the aid of revenue-boosting events such as the 618 Shopping Festival, which took place in Q2, Tenet still generated almost $26M in the third quarter.
With the year-to-date revenue totals now surpassing $70.5M, the $109M estimate is still very much on par, given the activity and expectations in Q4.
The Q3 results flaunted a net income of $1,526,286 - an astonishing number given the decrease in the top line. Here is where rational investors will remain calm.
The reduced revenues were countered by even further reduced expenses.
One example of this is the cost of service expenses related to the company’s supply chain financing bundle, which amounted to $21,120,835. The ratio of those expenses to the revenue generated from the supply chain financing service bundle was reduced by 9.9% from Q3'20, continuing the trend from Q2'21. By bringing outsourced activities internally through acquisitions similar to the Gold River Platform, Tenet will continue to lower costs and increase efficiencies.
Reaching profitability for the first time in Q2, Tenet continued transforming into a capital-efficient machine, improving its margins to 5.94% from 0.97% while being unprofitable just a year ago.
Return on Capital employed (ROCE) was also impressive, increasing once again along with the earnings growth. ROCE is an excellent indication of a company’s ability to generate profit from the capital it has invested in its business. As a business like Tenet continues to improve efficiencies and lower operating expenses, they expect continued growth in ROCE, which will ultimately translate into a powerful shareholder value-creation machine.
As pictured, Tenet Fintech reported a ROCE of 3.3% for Q3'21, up from -1.45% the year prior - demonstrating Tenet's success at generating revenue and profits without excessive investment costs.
Comparing Tenet’s ROCE to UpStart, a fintech company
*ROCE = EBIT / (Capital Employed OR Total Assets - Current Liabilities)*
As mentioned in the earnings report, Tenet used the quarter as a "springboard for future growth," and cited from the MD&A, "Tenet does not expect to wait very long to start seeing some returns on the investments it made in the third quarter of 2021. In fact, many began to pay off almost immediately and are expected to dramatically impact the Company’s fourth quarter 2021 results."
Tenet Fintech Group completed its short form prospectus financing for a total of approximately $52 million, including an exercise of oversubscription to increase the originally filed preliminary short form prospectus considering a maximum of $15M. However, after receiving significantly increased interest for the offering from potential investors, they had decided to refile at a more considerable sum.
At the closing of the financing, CEO Johnson Joseph commented, “This financing marks the beginning of a new era for Peak." The funds will primarily be used to help expand services in China, to markets outside of China, and for working capital and general corporate purposes. Given the financing, Tenet ended the September quarter with $46.02M in cash at the quarter’s close.
Tenet Fintech completed several strategic acquisitions over the last quarter, including Heartbeat Insurance Brokerage Ltd. Here is an example of management's ability to react quickly and remain ahead of the curve. By working closely and understanding the objectives of the Chinese government's new policies, JJ and the Tenet team have managed to expand quickly to support each angle.
The new regulations, which began on February 1, enforce "all insurance brokers to have systems that allow them to share data with, and that is directly linked to, the country's insurance companies." By acquiring the Heartbeat Insurance Brokerage, Tenet now offers insurance brokers one of the only platforms to aid compliance.
On October 12, management had published a news release that showcases the immediate traction of the new acquisition, stating that the "Heartbeat insurance brokerage platform processed 152,016 insurance policies between May and September".
Not only does each investment provide great returns, but every expansion, through in-house developments or M&A, aligns Tenet with some of the most prominent names in China and globally. For example, the Heartbeat platform links them to some of the most notable names in insurance: Ping An Insurance (Group) Ltd., China Life Property & Casualty Insurance Company Ltd., The People's Insurance Company (Group) of China Ltd., and Bank of China Insurance Company Ltd.
Their partnerships, including those with Government-Owned-Equities, provide them with a solid foundation to capitalize on future market opportunities based on knowledge of its region and consumers' demands.
As I previously stated, Tenet is currently expanding into Canada, which now has the Cubeler platform operational for financial institutions and SMEs to pre-register.
However, Canada is only the beginning, with additional operations planned in the United States, France, Brazil, and other regions. The potential to create economically evolving solutions continues, and with several countries searching for innovative methods to increase international trade and supply chain transparency, the possibilities are endless.
Tenet predicts that over half of its revenue will be brought in from outside of China by 2024, according to the MD&A. As shown above, Tenet expects more than $800M to be made in revenues in China alone in 2023, with the opportunity to (more than) double the predicted figure with global expansion.
The SEC is working diligently with the Tenet team on the 40F-form that was re-submitted in October. The delay, which has alarmed many, was due to the initial form requiring additional comments on the risks of working in China - and nothing more.
Operating in China has been a sensitive topic for many investors throughout the globe. Despite these skeptics, CEO Johnson Joseph has made it very clear that Tenet is in a great place working directly with the Chinese government and large GOEs to solve their challenges.
Need more proof? Hear it from Johnson himself, as he discusses the misconception of being a fintech company working in China as part of an incredible interview with Sean Khatibi and Hammy of StockFam.
They have until November 26 (30 days) to approve the uplist. As noted earlier, with the NASDAQ ahead, followed by the Hong Kong Stock Exchange, we expect global eyes to focus on a growing player in an accelerating market. And while investors patiently wait for the SEC to approve their NASDAQ listing, there is certainly a quiet backlog of heavy-hitting news releases building up to be shared post-uplisting.
Following their earnings on Tuesday, a news release presented on Thursday detailed a "marketing cooperation agreement with China UnionPay subsidiary, Rongbang Technology Ltd. ("Rongbang"), whereby the parties will promote the other party's services to their respective clients, including through joint-marketing initiatives."
On July 29, in the third quarter, Tenet had announced that it had acquired a minority stake in China UnionPay subsidiary Rongbang Technology Ltd. (“Rongbang”), totaling $500,000 (CAD).
Having ownership in a subsidiary of China UnionPay, an entity larger than both Visa and MasterCard, proves to be paying dividends already. Adding a marketing agreement with a massive audience, including GOE's and SME's will spark growth from hereon, proving management's proactive thinking and efficiency of capital even further. As you can tell, each deal Tenet makes includes synergy opportunities that allow Tenet's management team to grow exponentially over time without dilution.
The excitement continues as we await fourth-quarter results, which will include the acquisition of analytics and AI company Cubeler, meaning global expansion is in full swing. In addition, we'll see results from Singles' Day, the most valuable shopping day globally that reported $139B in sales, and plenty of other catalysts ahead.
The story only gets stronger each quarter, and if you pay attention to the third-quarter earnings conference call with Tenet's management team, you will see the same confidence and calmness instilled in them as well.
I greatly appreciate your support and feedback! Please feel free to send any comments or questions via email or reach out on Twitter. As always, thank you for taking the time to read my blog, and if you enjoyed it or found value, please subscribe to my blog below!