ANALYSIS: Ecmoho Begins U.S. IPO Effort but Produces Low Margins

Ecmoho has filed to raise $150 million in a U.S. IPO but the firm has low operating margins and the U.S. IPO market is facing a challenging environment.

Author: Donovan Jones   

Short Take

Ecmoho Ltd. (MOHO) has filed to raise gross proceeds of $150 million from a U.S. IPO, according to an F-1 registration statement.

The firm sources and markets health products and related services in China.

As a brand distributor, MOHO is growing quickly but producing low operating margins and is dependent on Alibaba's (NYSE: BABA) Tmall for a large portion of its revenue.

Company & Technology

Shanghai, China-based Ecmoho was founded in 2002 to source and market health supplements and foods, mother, child and personal care products, household healthcare equipment, as well as other health and wellness solutions.

Management is headed by co-founder, CEO and director Zoe Wang, who previously served in the marketing and e-commerce segment of the Shanghai Pingchengjingjie Advertising Co. and Shanghai Yiheng Advertising Co.

The company offers its brand partners value-added services, such as designing and operating online stores as well as organizing online and offline marketing campaigns to help them reach new customers.

MOHO additionally has two in-house brands, KGC and HST, which are focused on addressing the underserved demand for household healthcare equipment and traditional Chinese herbal tonics.

In April 2019, the firm launched the XG Health integrated family health management and service platform which provides individuals with health management plans, prepared by doctors and nutritionists, as well as health and wellness products.

Customer Acquisition

The company primarily markets its offerings through multiple online and offline channels, including major e-commerce platforms, such as Tmall and JD.com (Nasdaq: JD), social e-commerce platforms, including Pinduoduo (Nasdaq: PDD), Yunji (Nasdaq: YJ) and Little Red Book, as well as other online and offline retailers.

Additionally, the firm attracts customers through healthcare and wellness-related, online and offline articles, for which the company has partnered with more than 1,100 healthcare experts and ‘key opinion leaders' [KOLs] to generate content, combined with product recommendations.

Sales and marketing expenses as a percentage of revenue have been dropping as revenue has increased.

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, has risen to 4.2x in the most recent six-month period.

Market

According to a 2014 market research report by the Boston Consulting Group, the Chinese health and wellness market is projected to reach $70 billion by 2020.

The over-the-counter treatment sector as well as vitamins, minerals and supplements sector were estimated at $18 billion in 2014 and are projected to grow at a CAGR of about 11% between 2014 and 2020.

The forecasted market growth can be mainly attributed to the increasing health and wellness awareness of Chinese consumers who seek a variety of products to treat common complaints, provide an energy boost and strengthen their immune systems.

Among 2,600 surveyed middle and upper income consumers in China aged between 18 and 65, from a number of large, medium and small cities across the country, 73% "noted they would be willing to pay a premium for products deemed to be healthier."

The e-commerce sector accounted for about 2% of the China health and wellness market in 2013 as Chinese citizens distrust the internet when buying healthcare items.

Financial Performance

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

  • Sharply growing topline revenue, at an accelerating rate

  • Increasing gross profit but reduced gross margin

  • Uneven operating profit and operating margin

  • Fluctuating cash used in operations

As of June 30, 2019, the company had $16.2 million in cash and $95.5 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was a negative ($51.4 million).

IPO Details

MOHO has filed to raise $150 million in gross proceeds from an IPO of ADSs representing underlying Class A shares.

Class A shareholders will be entitled to one vote per share, and Class B shareholders, the company co-founders, will be entitled to ten votes per share and conversion rights. The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

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

Listed underwriters of the IPO are UBS Investment Bank and CICC.

Commentary

MOHO is a fast-growing company operating in the somewhat nebulous "health and wellness" industry.

The company's financials show strong and accelerating growth but low operating margins.

While the firm has a few in-house brands, they contribute only a small amount of revenue; MOHO is primarily an online distributor for brands, so its low operating margin is no surprise.

Sales and marketing expenses as a percentage of revenue have been dropping as the firm scales.

MOHO is significantly dependent on Alibaba's Tmall for its sales, accounting for 34% of its net revenues for 2018 and 21% of its net revenues in the first half of 2019.

The market opportunity for health and wellness products in China is large and forecast to grow substantially due to the aging population and increasing awareness of the need for healthier products.

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.

UBS Investment Bank is the lead left underwriter and there is no data on IPOs led by the firm over the last 12-month period.

While MOHO is growing quickly, its profitability upside may be sharply limited to its middleman, distribution strategy.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any 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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