De Well Files for Hong Kong IPO, Flush With New Ties to Cainiao

Key Takeaways:

•      Global logistics services provider De Well has filed for a Hong Kong IPO, aiming to boost its footprint on booming demand for cross-border e-commerce

•      Filing comes eight months after company sold 29.5% of its shares to Alibaba’s Cainiao logistics arm for $67 million

By Carol Yang

When it comes to logistics, China-focused investors already have plenty to choose from in a crowded field filled with names like S.F. Holding (002352.SZ), ZTO ZTO and JD Logistics (2618.HK). But all of those are domestically focused, even as e-commerce names like Alibaba BABA and Amazon AMZN China aggressively build up their cross-border business that requires corresponding international logistics services.

That could soon change, however, with a new IPO application from De Well Holdings Ltd., a Chinese provider of end-to-end cross-border services backed by Alibaba’s Cainiao logistics unit. The company filed last week for a Hong Kong listing, seeking new funds to expand its worldwide network in the highly fragmented and competitive world of cross-border services.

The deal is being underwritten by big-name sponsors Citi and CICC, though no fundraising target was given. But based on its value following a major investment from Cainiao last fall, we can calculate the company is likely to raise a relatively modest sum of around $50 million. Using a price-to-earnings (P/E) ratio of about 30, which is currently a rough industry average, the company might achieve a valuation of about $300 million after the listing.

Unlike its younger domestically-focused peers, De Well’s history dates back to its founding in Shanghai in the 1990s, giving it time to build up its base from China’s most international city to become the largest in its class for logistics services in Asia-North America trade lanes, according to its prospectus filed last Wednesday. It’s also among the fastest-growing China-based suppliers of cross border services in terms of its revenue growth from 2019 to 2021, according to Frost & Sullivan data quoted in the document.

The company’s husband-wife founders both came from the logistics sector before starting their company. Yang Shi worked for the Shanghai branch of state-owned giant Cosco Shipping Co., while his wife Cheng Fang came from a freight forwarding unit of state-owned giant Sinotrans. They pooled their resources to start De Well, whose offerings include ocean and air logistics, as well as fulfillment services.

Different from the big domestic names, De Well has been focused on Asia-North America trade lanes, which are among the largest and fastest-growing in the world in terms of shipping volume. It entered the U.S. as early as 1993 and established its first U.S. subsidiary in New York in 1996. It currently serves Canada and Mexico as well, and is also one of the earliest companies of its kind to set up shop in the Southeast Asian countries of Vietnam, Malaysia, and Thailand.

Europe is also on its roadmap, with the company opening an office in Frankfurt in 2018. In all, De Well now serves over 50 countries.

Cainiao tie-up

The company’s strong global footprint attracted the attention of Cainiao, which paid $67 million for 29.5% of De Well last September. That valued De Well at roughly $230 million – far smaller than its domestic peers like ZTO and S.F. Holding, which are valued in the tens of billions of dollars. Cainiao has similar investments in many of China’s other logistics operators, which help to deliver the millions of parcels shipped by Alibaba’s popular Tmall and Taobao e-commerce platforms. Alibaba has also aggressively promoted cross border e-commerce on both of those platforms, as well as its more internationally-focused AliExpress, which could provide new growth opportunities for De Well.

Even after Cainiao’s investment, De Well’s founders still hold 64.09% of the company’s pre-IPO shares, meaning they will continue to call most of the shots.

Despite its long history, De Wells is still relatively small in terms of revenue compared with its domestically focused peers who compete fiercely with Chinese rivals but are largely protected from vying with big global names like UPS UPS and FedEx FDX. But its revenues have risen sharply in recent years, nearly quadrupling from $291.8 million in 2019 to $1.13 billion last year, according to the prospectus. Its profits have grown similarly over that period, rising from $1.8 million in 2019 to $9.7 million last year.

Reflecting the more competitive global landscape for logistics services, De Well’s margins were once sharply below its domestic rivals. But the gap has narrowed and even reversed over the last three years, partly due to soaring global shipping prices and also intensifying competition in China. As recently as 2019, S.F. Holding had a gross profit margin 17.42% for the year, nearly double the 9.6% for De Well. But by last year the situation had reversed, and De Well’s 20% margin for the year was well above the 12.37% for S.F.

The pandemic negatively affected De Well’s operations when it began in early 2020, and many global transport links to China slowed or were even cut off temporarily as other countries tried to halt the spread of a virus from China. But it substantially resumed all of its China business by March of that year, and gradually resumed its overseas operations afterward. What’s more, pandemic-induced growing use of e-commerce by people both in China and abroad could work to De Well’s advantage by accelerating the demand for delivery and other logistics services in coming years.

All that said, China’s current “zero Covid” policy is taking a toll on both domestic and international logistics firms like De Wells, whose hometown of Shanghai has been in a state of partial or complete lockdown for more than a month. As the nation struggles with the Omicron variant, De Well’s South China operations were temporarily interrupted due to an outbreak that led to a citywide lockdown in Shenzhen in early March, before the city gradually reopened.

The currently Shanghai lockdown has forced the company to use alternative ports for shipping to the one it typically uses in its home base. The company says it expects demand for its services to rebound as the outbreak gradually comes under control. But it also acknowledged that the outbreak of any severe communicable disease, if uncontrolled, could adversely affect its performance.