Yunji Changes Business Model Focus to Marketplace
Consumer product e-commerce firm Yunji has retrenched in 2019 as it seeks to change its focus to its marketplace offering.
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Donovan Jones
Apr 17,2020,17:18

Quick Take

Yunji (YJ) went public in May 2019, selling 11 million ADSs for $11.00 each for gross proceeds of $121 million.

The firm operates a social e-commerce site for consumers purchasing products online in China.

In 2019, YJ changed its business model to focus on marketplace revenue instead of on membership revenue, creating a large reduction in revenue in the short-term, but providing a basis for growth in the future.

Company

Hangzhou, China-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.

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% between 2018 and 2022.

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

  • Alibaba (BABA)

  • Tencent (OTCPK:TCEHY)

  • JD.com (JD)

  • Pinduoduo (PDD)

  • Xiaohongshu

Recent Performance

YJ’s topline revenue by quarter has been contracting consistently and significantly over the past five quarters, as the chart shows here:

Gross profit by quarter has similarly dropped, although Q4 2019 saw an uptick:

Operating income by quarter has worsened sharply:

Earnings per share (Diluted) have achieved breakeven in Q4 2019:

Source for chart data: Seeking Alpha

Since its IPO in May 2019, YJ’s stock price has dropped 78 percent vs. the U.S. Online Retail index’ rise of 4.1 percent and the overall U.S. market’s drop of 10.0 percent, as the chart below indicates:

Source: Simply Wall Street

Commentary

In its last earnings call for Q4 and full-year 2019, management highlighted its 2019 initiatives for focusing on increased brand screening and curation, providing brands with marketing support, increased private labeling while upgrading its logistics and distribution facilities.

Additionally, YJ has noted that apparel ‘has been one of the highest GMV (Gross Merchandise Volume) generating categories...after successfully increasing apparel’s percentage contribution to our overall merchandising mix.’

The company has also been adapting to varied consumption habits by different geographies within China.

As to its financial and operational results, the firm increased its GMV by 36.1% in 2019 versus 2018 and the number of members who transacted during 2019 increased by 57.4% over 2018.

Management touted its ‘extensive enterprise and business know-how’ that have served to insulate them from various supply disruptions for major essential goods as a result of the Covid-19 pandemic.

However, management warned that ‘during the first quarter of 2020, our GMV may suffer temporarily as a result of our endeavor to ensure supply availability...for daily essential items and outbreak containment.’

Revenue has dropped markedly through 2019 as a result of a business model shift away from its membership revenue model to generate more revenues from its marketplace segment, which recognizes revenue on a net basis.

On January 1st, 2020, the firm moved to offer memberships for free to encourage growth, along with spending more on new member incentives by providing them with initial free coupons and other promotions that also increase GMV and get users in the habit of using the service.

Users who spend a minimum amount during the year are able to retain their free membership for the next year.

As of the end of 2019, YJ had $250 million in cash and equivalents but did not provide cash flow information, so we don’t know what kind of runway the firm has as it shifts its business model from membership revenue to marketplace revenue.

YJ has worked admirably to stand up its marketplace segment, growing it from zero to $24.3 million, but that amount doesn’t come close to offsetting the membership revenue drop during the year.

Given the uncertainty surrounding YJ’s ability to grow its marketplace revenue stream to equal or exceed its fallen membership revenue stream, the market has been right to sell the stock down to its current level.

My bias is Neutral until management begins to post significant revenue growth numbers indicating it can create a revenue trajectory supportive of a higher stock price.

(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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