ANALYSIS: Yunji Files For $200 Million U.S. IPO

Chinese social e-commerce company Yunji aims to raise $200 million in a U.S. IPO as it seeks to continue growth in an intensely competitive market.

Author: Donovan Jones   


In Brief


Yunji (YJ) intends to raise gross proceeds of $200 million from a U.S. IPO, according to an F-1 registration statement.

The firm operates a subscription-based social e-commerce platform in China.

YJ has grown revenue and gross profit quickly, is strongly cash flow positive but has significant competition in the Chinese market.

Company

Hangzhou-based Yunji was founded in 2015 to develop a social e-commerce platform in China with a focus on the various daily product needs of its users and their households.

Management is headed by co-founder, chairman and CEO Shanglue Xiao, who previously founded Xiaoye Perfume.

Yunji has developed an app that provides its users access to a selection of products, exclusive membership benefits and features as well as discounted prices, and incentivizes them to share the company's platform and products with their friends.

The company's platform was used by 2.5 million buyers in 2016, about 16.9 million in 2017 and up to approximately 23.2 million in 2018.

Yunji claims to have had accumulated 7.4 million members as of Dec. 31, 2018, of which 6.1 million transacted in 2018.

Customers

Yunji markets its products by rewarding its users to share the platform and its offerings with their friends and family. Additionally, the firm holds offline events such as an annual promotion campaign for the November 11 shopping festival in China.

Moreover, the company intends to increase brand awareness through the placement of various advertisements outdoors near high-traffic locations in major cities.

Sales and marketing expenses as a percentage of revenue have been uneven in recent years but lower in 2018, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

2018

7.3%

2017

11.0%

2016

10.7%


(Sources: Company registration statement)

Average Revenue per Buyer has been uneven in recent years but increased in 2018, per the table below:

Average Revenue Per

Buyer


Period

ARPB

Variance

2018

$81.59

41.2%

2017

$57.77

-25.8%

2016

$77.85



(Sources: Company registration statement)

Market & Competition

According to a 2018 market research report by Forrester, the China e-commerce market was valued at $1.1 trillion in 2018 and is projected to reach $1.8 trillion by 2022, growing at a CAGR of 8.5 percent between 2018 and 2022.

Major competitors that operate a Chinese e-commerce platform include:

  • Alibaba (BABA)

  • Tencent (TCEHY)

  • JD.com (JD)

  • Pinduoduo (PDD)

  • Xiaohongshu

(Source: Sentieo)

Financial Results

YJ's recent financial results can be summarized as follows:

  • High topline revenue growth

  • Growing gross profit

  • Reduced gross margin

  • Negative EBITDA and slightly negative EBITDA margin

  • Increasing positive cash flow from operations

As of Dec. 31, 2018, the company had $221 million in cash and $453.1 million in total liabilities.

Free cash flow during the 12 months ended Dec. 31, 2018, was $124.3 million.

IPO Details

YJ intends to raise $200 million in gross proceeds from an IPO of ADSs representing underlying Class A shares, not including the sale of customary underwriter options.

Class A shareholders will be entitled to one vote per share. The sole Class B shareholder, Chairman and CEO Shanglue Xiao, will be entitled to 10 votes per share.

This structure is a way for the founder to retain voting control of the company even after losing economic control.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Per the firm's latest filing, it plans to use the net proceeds from the IPO as described below:

  • to enhance and expand our business operations;

  • to enhance our technological capabilities, including our technology infrastructure;

  • to expand and improve our fulfillment facilities; and

  • the balance for general corporate purposes, which may include funding working capital needs and potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities at this time.

Management's presentation of the company roadshow isn't available yet.

Listed underwriters of the IPO are Morgan Stanley, Credit Suisse, J.P. Morgan, and CICC.

Commentary

YJ is seeking U.S. public capital to fuel its expansion ambitions as it seeks to compete with much larger Chinese e-commerce sites such as Pinduoduo and others.

The company's financial results show extremely strong growth but at a cost of lower gross margin.

Notably, the firm hasn't partnered with a major Chinese Internat firm but has still achieved very high growth rates.

Gross marketplace volume [GMV] has grown sharply in the past three calendar years, as management stated:

"During the same period [2016 - 2018], our GMV increased by 428.1% from RMB1.8 billion in 2016 to RMB9.6 billion in 2017 and by 134.4% from RMB9.6 billion in 2017 to RMB22.7 billion in 2018. In 2018, 66.4% of our GMV were from purchases made by our members and the remaining were from purchases made by non-members."

Sales and marketing expenses and average revenue per buyer have fluctuated but are trending in the right direction, with expenses dropping and average revenue per buyer increasing in 2018.

The market opportunity for Yunji's type of membership/social commerce is significant and growing quickly.

Competition is intense, though. Social buying site Pinduoduo (Nasdaq: PDD), which went public in the U.S. in July 2018, raised $1.6 billion in a much larger transaction. However, PDD's stock price hasn't changed much from its IPO to the latest price quote at press time, so it hasn't been a big winner for investors who have been long the stock from the IPO date.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity.

U.S. investors would only have an interest in an offshore firm with contractual rights to the firm's operational results but would not own the underlying assets.

Morgan Stanley is the lead left underwriter for the IPO. IPOs led by the firm over the last 12-month period have generated an average return of 12.7 percent since their IPO. This is a mid-tier performance for all major underwriters during the period.

Expected IPO Pricing Date:  To be announced.


(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)


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