Wirecard is the German-listed payment processor valued by the market at almost €6bn. It’s a market darling, a fast growing tech stock with a share price which has quadrupled in the last five years, raising €0.5bn from shareholders along the way.

Much of the growth has come from Asia, where the group has bought up a string of local payments business. However J Capital Research, a US and Hong Kong registered independent research group, went looking for Wirecard in the region and reports finding thinly staffed offices, and in two places no office at all.

The report, which is undermined in part by some faulty assumptions about Wirecard’s accounting, contrasts starkly with opinions from the 23 bank analysts covering the stock, of whom 17 are buyers and just one is a seller. The company has rubbished JCap’s work, saying it “fundamentally misunderstands the Wirecard business model”, while also disclosing it does not have a physical presence in some of the countries where it claims leading market positions in payment services.

JCap published its first report on Wirecard with a recommendation to short the stock. Let’s consider what it said.

The Asian elements

Here’s part of the summary:

we have attempted to use Wirecard in many parts of the world and have found it virtually impossible outside of Germany to fund the prepaid cards or use Wirecard in payment for anything. Although Wirecard is named as a payment mechanism on some websites outside of Germany, when we click through, we almost never reach a live page. We have found very few executives in the payments industry who know of Wirecard or call it a competitor; Worldpay, which seems to be the most directly comparable business, never mentions Wirecard. Hardly needful to say, neither does PayPal.*

Having found little evidence that Wirecard has any volume of business, we visited five of the subsidiaries in Southeast Asia. Only one of the premises had a reasonably credible presence, and even that one appeared much smaller than disclosures would suggest. At two of the listed locations we could find no company at all, although there were unrelated companies with similar names.

The latter claims seem the most controversial, and potentially the most significant. Since 2009 Wirecard has regularly bought small payments related businesses for large sums as part of a strategy to swiftly expand its customer base. The nature and extent of its business in the region is central to Wirecard’s image as a high growth company, as well as the value of a great pile of intangible assets listed in its accounts.

In our first post in this series we looked at questions surrounding those deals, including undisclosed portions of some transactions, Wirecard’s unusual practice of making large downpayments in some cases, and apparent discrepancies between different sets of accounts. In our second post we considered one acquisition in particular, a company which reported significant licence fees from a strange and short lived business in Bahrain.

JCap questions the build up of intangible assets and goodwill associated with this acquisition spree: “we find little evidence for new technologies in their disclosures about core business that differentiate the company with its new acquisitions from itself sans these new subsidiaries, or to differentiate Wirecard from its competitors.”

Singapore & Vietnam

Singapore headquartered Trans Infotech was a then loss making business Wirecard acquired in 2012, describing it as “one of the leading payment service providers in Vietnam, Cambodia and Laos.” JCap reports:

Headquartered in Singapore… their competitors told us the company had about 20 employees and that Trans Infotech has no capacity for providing services, which would require at least 100 people. The facilities we visited were very quiet. We visited their offices in Hanoi and Ho Chi Minh, checking both current and former addresses to ensure we had covered all facilities. They were located in office parks rather than a mixed retail/office facility like some of their competitors. While competitors had visible call centers and employees talking with customers, Trans Infotech had almost nothing.

At a new Trans Infotech office in Ho Chi Min City, Vietnam, JCap reports finding about 5 people in an office with space for 50. The authors describe a business which had made little impression on its neighbours in the building. They say competitors know the business as a seller of point of sale (POS) machines used to process card transactions in shops under contract for a Chinese manufacturer.

Cambodia & Laos

JCap says it was not able to locate the operations of Trans Infotech or Wirecard in Cambodia, or Laos.

The address they looked for in Cambodia was that given by the company on its contact page. We called the phone number listed, and it was not in service.

Susannah Kroeber of JCap said she visited the building, and also spoke to the leasing agent who said no office has been leased in the previous decade to Wirecard, Trans Infotech or its Cambodian subsidiary. JCap was unable to find corporate filings for Trans Infotech or Camsingnet, its subsidiary, at the Ministry of Commerce.

In Laos, JCap says the only corporate filing for a company matching or similar to Trans Infotech or Wirecard was the unrelated Infotech Co, with a post office box address. The phone number for the entity was an answering service which only had a PO Box number on file. Ms Kroeber says she was given a Laos phone number to call by the Vietnam office of Trans Infotech, which was picked up by the same answering service used by Infotech Co.

She went to the district matching the area code of the Trans Infotech phone number and the PO boxes.

When we visited the district the PO box addresses are associated with, we found a predominantly Chinese business district with wholesale, retail, and money transfer businesses. None of the businesses we spoke with had heard of Trans Infotech or Wirecard.

Wirecard said “In Cambodia Wirecard does not have an office, and does not have any employees. The photo connected to Laos is a fake” referring to an illustrative photo of the area in the JCap report captioned, perhaps unfairly, “the location of Wirecard’s reported subsidiary in Laos”.

Wirecard said “Transinfo Tech employs 79 staff, is headquartered in Singapore and has offices in Hanoi and Hoh Chi Minh City, [Vietnam].” Sales to Laos are run from Singapore.

Given that Wirecard regularly says in its filings — Trans Infotech “ranks among the leading providers in the payment services sector for banks in Vietnam, Cambodia and Laos” — it might surprise some investors it can do this without teams of Laotion and Cambodian speakers based in either country.

Malaysia

In Malaysia are two businesses Wirecard has purchased, merged and renamed, Systems@Work and Korvac.

When we visited, Korvac had just moved from an office space we estimate could have held no more than 10 employees. The office was located in a building where fewer than 10% of occupants had their offices unlocked during business hours. The new office, in a glitzy building downtown, had capacity for 50 employees, but we observed fewer than a dozen.

JCap says it found a third registered address listed in corporate filings for Korvac housed a secretarial firm which had previously handled logistics and mail before the company set up office space.

Systems@Work has a registered address in a technology park, and the listed address was inside a building owned and operated by a single conglomerate (IRIS), which does R&D in contactless payments and other high-tech payments and identification solutions. While management confirmed that Systems@Work had at one point had an affiliation and operated in their facilities, they had moved out an indeterminate amount of time prior, and all contact information that had been left was either invalid or disconnected.

Indonesia

In Indonesia JCap found what it called the “most plausible” of the subsidiaries visited: Prima Vista, a combination of PT Prima Vista Solusi bought by Wirecard in 2014 for €40m, and PT Aprisma acquired for €74m, with assumed debts.

The staffing rates were closer to what we expected, at around 100 employees, although fewer than the 200-300 range Wirecard reports, and the company had operating post-sales service centers. Our assessment in speaking with competitors was that Prima Vista operated a reasonable POS business with post-sales service and has an online payments-processing presence. They said the company has low volumes, however, and undifferentiated technology.

When accounting for these deals, Wirecard attributed €160m of the value to the customer relationships it was buying. JCap comments “the balance sheet is bloated with phantom assets. Wirecard’s goodwill and intangibles ballooned to a nearly combined 50% of revenue by 2014”. It also questions whether Wirecard has the staff to oversee the legal and compliance requirements of the transaction volumes it reports processing in Asia.

Wirecard said “we employ 901 staff at our subsidiaries in Asia: Singapore, Indonesia, Malaysia and Vietnam (excluding employees who will join with the successful completion of the most recent acquisition in India).” For compliance “there is a dedicated team that globally, and also locally, oversees risks”. It also said:

In Asia, Wirecard’s subsidiaries mainly provide innovative online payment, POS, mobile POS, mobile ATM and Issuing services for large financial institutions, retailers, public transport companies and mobile network operators. All of these services and technologies are back-end oriented, none are consumer facing. The author presents to have checked, and not found enough evidence of Wirecard’s business. This is of course a ridiculous remark, how did the author check that, by looking into swipe machines? So what the JCAP author writes about the Asian business is ultimately misinformation and incorrect. In reality, Wirecard has successfully expanded into some Asian markets (namely Singapore and Indonesia), and is the number one player in its field. Around 25 % of Wirecard’s transaction volume relate from merchants headquartered outside Europe (from which of course Asia is the largest portion).

Can you load a pre-paid card?

Pre-paid cards are one of the simplest forms of electronic payment, and were commonly used in the early days of the internet. JCap said it tried to load Wirecard pre-paid cards in 25 jurisdictions around the world, but only succeeded in Germany, and not with ease. Ms Kroeber said this raised questions about the strength of the underlying strength and scale of Wirecard’s payment network.

However JCap did report success loading cash onto a Wirecard Skrill Mastercard.

As part of several questions to the company, we asked where it is possible to load a Wirecard prepaid card outside of Germany, and for examples of websites where Wirecard is the payment mechanism.

The company said JCap had fundamentally misunderstood the Wirecard business model.

Wirecard is not a prepaid wallet for gaming, or a wallet, or a consumer facing brand at all. Wirecard is the leading European online payment processing company; at a standard merchant installation (an airline, a retailer, a software download or a financial institution) Wirecard is not seen as a consumer brand, but the whole payment process is outsourced to Wirecard as a back-end processor. The consumer pays directly via Visa, MasterCard, Amex, PayPal or other acceptance point. On this basis Wirecard is comparable to companies such as Worldpay or Global Payments, with the key differentiation being that Wirecard has a much stronger internet focus. Additionally, at the majority of its innovative issuing products including prepaid cards, Wirecard is providing its solutions on a white label basis to large telecom operators, retailers and financial institutions. Again, Wirecard is not a consumer facing brand (such as PayPal which is an online wallet and is competing on this basis with the big credit card schemes).

It also said it is one of the largest issuers of pre-paid cards in Europe, mainly a portfolio of “white labeled” cards absent the Wirecard brand.

JCap’s accounting mistake

Wirecard has some of the biggest margins of the listed payment companies. An ongoing matter of debate is why such a profitable company converts a comparatively low proportion of profits into cash flow. Comparing sets of accounts between payment companies is complicated however by different presentations and, in Wirecard’s case, because it owns a bank.

JCap undermines the impact of its report with a basic mistake. After downloading the historic financials from Bloomberg, it used the data provider’s definition of raw material costs, without checking Wirecard’s definition in the annual report. The result is a large section of analysis based upon a wrong assumption, that point of sale devices form a major part of the company’s sales.

Three people and a dog

JCap is a small operation, one whose independence Wirecard questioned, pointing to a statement on the research house’s website that “Clients who prefer exclusivity may retain J Cap to write reports on particular companies or issues, whether on a wholly exclusive basis or on a limited-use license”. JCap said it had no economic interest in the shares of Wirecard, and had not been paid or commissioned to write the report.

At minimum, the report it is an example of the on-the-ground attempts to conduct due-diligence few investors and analysts have the time, inclination or resources to undertake. It also suggests a potential itinerary for a future shareholder tour to see the 901 Asia employees in action.

Given the importance of Asia to Wirecard’s growth, and to its identity as a fast growing and highly valued company, greater clarity on what types of business it conducts in the various countries in the region, and how these contribute to its overall business, would no doubt be welcome.

* Update:

Contrary to the assertion by JCap that Worldpay never mentions Wirecard, an eagle eyed reader alerts us to two mentions in the prospectus, including in the following extract:

The Directors believe that global payments partners, such as Worldpay, compete with other payment providers on two primary axes: (i) their geographic and technological reach, and (ii) their ability to deliver superior business outcomes. Worldpay encounters a number of other global payment partners with varying intensity across different products, channels and geographies. Certain of the Group’s larger competitors (in particular Global Payments, First Data, Ingenico Payment Services and Elavon) compete with the Group on a global basis and across multiple customer segments, while most of the Group’s other competitors compete with it primarily in specific geographies or customer segments.

In the Global eCommerce market,Worldpay also encounters a number of niche specialists, which are typically gateway-led and offer specific vertical, channel, geographic and/or segment solutions and compete on specific expertise and partnership coverage. These include companies such as Stripe, Adyen and Braintree. Worldpay also encounters a number of global payments partners in the eCommerce market, including Ingenico, Wirecard, and Elavon, as well as with some regionally focused domestic bank- heritage payment processors, including Cielo in Brazil and Chase Paymentech in the United States

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