The central theses:
- Zhubajie’s sales and gross profit plummeted last year as its customers, typically small and medium-sized businesses, struggled during the Covid downturn
- The company could sink into losses as it ramps up R&D spending to leverage AI and big data
By KenLo
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For a market leader in business efficiency, Zhubajie Co.Ltd. has taken a rather winding road to a stock listing.
In 2015, the Chinese provider of e-commerce and enterprise services for business customers decided against a US listing and instead sought a mainland IPO. However, the first documents were not submitted to the supervisory authorities until four years later. With an uncertain listing schedule, no formal IPO application was made in the end. Last October, the company shifted focus to the Hong Kong Stock Exchange. The preliminary IPO prospectus expired in April but was quickly updated and resubmitted with the latest earnings numbers.
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The company offers an e-commerce platform and a wide range of business services for businesses and local governments. It was founded in 2006 with funds of just 500 yuan (US$73) by Zhu Mingyue, who used to work in the media. The company’s business covers four main areas: enterprise platform services, enterprise intelligent services such as tax and technical support, industrial services and government agency collaboration services.
The company’s activities range from building trading platforms, helping companies find the right talent or service providers, to providing adaptable office space or working with local authorities to attract companies to business parks. In some ways, it has blazed the trail of a tech company. However, it can also be categorized as providing Software-as-a-Service (SaaS).
At the end of last year, the company had 33.6 million registered users, including 26.3 million employers and 7.4 million service providers. According to a report by iResearch, the company is a market leader in providing a full range of customized services to corporate clients, ranking first in this segment of the market with a 25% share based on Gross Merchandise Value (GMV) in 2021. However, the broader market for customized enterprise e-commerce services is more fragmented. Zhubajie controls only 2% of this market, although it ranks second according to the report.
Pandemic toll for business customers
The company’s revenue has grown steadily over the years, with GMV doubling from 5.48 billion yuan in 2020 to 11.39 billion yuan last year. Customer numbers were 260,000 in 2020, 330,000 a year later, and 257,000 in 2022. The average transaction value per customer rose from 21,097 yuan to 44,328 yuan over the same period.
The company’s AI-powered matching services help small and medium-sized enterprises (SMEs) find service providers, but each transaction brings in a meager tens of thousands of yuan. However, with their tight budgets, this customer group is responsible for more than half of the company’s operating sales. For example, the Enterprise Service Platform and Smart Enterprise Services business accounted for almost 63% of total sales last year.
Dependence on SMEs has proven to be a double-edged sword. During the Covid pandemic, major cities like Shanghai have faced prolonged lockdowns that have hit smaller businesses hard and eaten a bite out of Zhubajie’s revenue. The number of active customers collapsed and the increased value per transaction could not compensate for the damage. The company’s revenue fell about 30% to 541 million yuan last year, and gross profit fell 32% to 319 million yuan.
In addition, selling, administrative and R&D expenses relative to operating revenue have remained high in recent years. Last year, for example, these costs represented 96% of revenue. As a result, the company remains in the red and has accumulated losses of 862 million yuan over the past three years. Even after adjusting for non-operating items, the loss still amounted to 154 million yuan.
However, the company said it now expects to reap the benefits of its development spend as efficiencies in marketing and management help lower its spend-to-total revenue ratio.
Continued R&D drive
However, the company will likely need to further increase its R&D spending to remain competitive as AI and big data play an increasing role in enterprise services. The cumulative R&D spending for the past three years reached 243 million yuan, and last year’s R&D spending wiped out about 15% of revenue, compared with 10% in the previous two years.
The company has vowed to further expand R&D in the future and at least 10% of revenue for projects like improving the platform’s matching efficiency, developing SaaS tools, improving AI and big data analytics and to gain insights into customer needs.
At the end of last year, the company’s R&D team numbered 316 people. About 17% of them were involved in software development, computer science and information security, with about 77% of them having a college degree or higher. This signals an intention to sustain significant R&D investments, but the company could take longer to wipe the red ink off its books as a result.
Like many startups, Zhubajie relies heavily on debt financing to keep the business afloat. The company has reportedly raised around 2.6 billion yuan since 2015, with capital injections from companies including IDG Capital, Chongqing Bo En Technology, Beijing Zhirong Zhuoxin Investment and Jiujiang Zhike Technology. The company has issued 362.4 million shares and is valued at around 11 billion yuan based on a price of 30.56 yuan per share in last November’s financing round.
Based on last year’s sales of 541 million yuan, the price-to-sales (P/E) ratio is 20.3 times, well above that of its peers Mingyuan cloud (0909.HK) and weimob (2013.HK), at 3.8x and 3.6x, respectively. The company is benefiting from an upturn in SME business after the Covid pandemic abated. But unless it delivers explosive sales growth this year or is willing to compromise on its listing price, its ultra-high valuation could turn some investors off.
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