Webus Rides Bumpy Road To IPO Even As Travel In China Returns

Key Takeaways:

• Webus aims to raise up to $24 million in a New York IPO by selling 4 million shares at $4 to $6 apiece
• The company’s latest annual revenue was only about 130 million yuan, as efforts to gain market share in the highly competitive business undermined its margins

By Warren Yang

On paper at least, the case for investing in Webus International Ltd. WETO, which provides group transportation services online, seems like a no-brainer in the post-Covid era. With most travel and other restrictions in China now clearly in the rear-view mirror, the company should be in prime position to ride a revival of travel demand across the country.

But there’s just one hitch: Many others are vying for the same pie as Webus in a market with relatively low barriers to entry. That could put the brakes on the company’s most important goal of operating profitably, which will ultimately determine its long-term sustainability. In the current competitive environment, it’s far from certain it can reach that goal.

As it rapidly burns through cash in hopes of someday reaching the profit tollgate, Webus is turning to Wall Street for some extra fuel.

The company aims to raise as much as $24 million by selling 4 million shares at $4 to $6 apiece, according to an update filed last Tuesday to its original prospectus filed in February. The company plans to spend some of the funds on setting up a new subsidiary or representative office in the U.S., where it already has some operations, and will use the rest as working capital.

Founded in 2019, Webus provides bus-based services of all types, including commuter shuttle buses, customized chartered buses and package tours, through its platforms. Its users comprise institutions like companies, schools and nursing homes, as well as individuals.

The company was a direct casualty of Beijing’s strict Covid-control measures over the last three years that squashed demand for travel through frequent lockdowns and other restrictions that were only lifted at the end of last year. In its fiscal year through June 2021, the company recorded revenue of just 10.7 million yuan ($1.5 million) as travel and other group activities came to a virtual standstill during the first year of the pandemic.

Its business recovered the following year, though its revenue still remained at a relatively unimpressive 130 million yuan. It improved further still to 94 million yuan for the six months to last December, which looks relatively strong when one considers that travel throughout China came to a near-halt in the last three months of the year.

That rebound looks set to continue as China’s travel market finally starts to recover. While the overall market for automobile travel services in China is projected to grow about 6.5% annually from 2022 to 2026, the segment for collective mobility services that are Webus’ specialty is forecast to grow at more than twice that pace, according to third-party market data cited in the prospectus.

Collective mobility refers to group travel using a private vehicle with at least seven seats. And there’s a pretty good force behind its growth in China: A government push. The country is encouraging people to travel in groups to reduce the number of cars on the road, as part of efforts to reduce pollution, save energy and ease congestion.

Crowded Field

But that’s where the positive spin pretty much ends for Webus. The company’s biggest challenge is stiff competition from the roughly 100 rival online platforms providing similar services. Webus touts that it was the industry’s No. 2 in terms of revenue in the six months to last June. But it didn’t even hit $10 million in revenue in dollar terms during that period, which hints at a high degree of market fragmentation.

The overheated state of the market has taken a toll on Webus’ margins, which are razor-thin. Most of its revenue is eroded by costs to generate sales like vehicle rental fees, barely leaving it with any gross profit. In the six months to last December, the first half of the company’s current fiscal year, its gross margin was less than 5%.

A major factor behind the poor margins is Webus’ recent strategic shift away from commuter shuttle services to a bigger focus on customized chartered bus and package tour businesses, which involves higher costs as the company tries to gain market share. But even before the realignment, the company’s gross margin in the year to June 2021 was just about 14%, better than the latest 5%, but still remarkably low for a company billing itself as a high-tech online services provider.

All that suggests Webus fundamentally operates in a low-margin business. One positive thing about that model is that its operating expenses for marketing, administrative work and R&D seem relatively light. In the six months to December, for example, such costs amounted to about 10% of the company’s revenue. That means it could drive into the profit zone if it can pass its rivals and push up its gross margin into double-digit range.

In the face of stiff competition at home, Webus is also starting to extend its reach overseas. It began offering customized tour services in North America under the Wetour brand in March last year, and is now targeting Chinese tourists as they start to travel internationally again.

If the IPO goes ahead, despite the company’s unimpressive financials, the cash it generates will provide welcome fuel as Webus ramps up its business in the post-Covid era. The company had the equivalent of just $1.4 million in cash in its coffers at the end of last year, with its liquid assets barely covering its liabilities coming due soon, including bank loans.

But it’s far from certain if investors will find the company attractive at the valuation it’s seeking. At $5 per share, the midpoint of its range, Webus would have a market capitalization of $175 million, translating to a price-to-sales (P/S) ratio of more than 9, based on revenue for its last fiscal year. That ratio is almost certain to come down as business returns to more normal levels this year, though it would still be relatively high at more than 4 even if revenue doubles.

That seems quite ambitious compared with other similar companies that are far larger and have longer operating history. For instance, shares of ride-hailing giant Uber Technologies UBER, which has far better margins on a much larger revenue base, trade at a P/S ratio of less than 2. But Full Truck Alliance YMM, a Chinese operator of a service connecting truckers with shippers, trades at a similar P/S ratio of nearly 8.

At the end of the day, tourism and other forms of group travel in China may soon return in full force with the end of the pandemic. But Webus’ IPO plan may face a more difficult ride to market.