Retail Slowdown Takes Wind Out Of Dmall's Advancing IPO

Key Takeaways:

• Dmall’s revenue growth slowed sharply in the first quarter, and probably would have contracted without its founder’s strong business ties
• The provider of cloud-based services for traditional retailers and e-commerce companies said it expects to break even next year

By Doug Young

The clock is ticking on retail cloud services provider Dmall Inc., which revealed in an updated prospectus for its planned Hong Kong IPO that it is quickly exhausting its limited cash pile. The company, which is closely tied to domestic retailing giant Wumei, also known as Wumart, estimated its current financial resources are sufficient to fund its operations for just the next 12 months.

That makes the completion of its IPO that much more crucial, since the new listing could significantly boost its cash reserves that stood at just 477 million yuan ($66 million) at the end of March, according to the updated prospectus filed last Thursday. There’s just one problem, namely, that Dmall’s business isn’t going anywhere fast, slowing sharply in the six months since it filed its original prospectus last December.

But Dmall says it has the situation under control, and is improving its performance by focusing on its highest margin businesses and also controlling costs. As a result, it forecast it would break even by next year, which should theoretically stabilize its cash position.

We’ll look shortly at Dmall’s latest financials, which don’t look too encouraging due to a sharp business slowdown in this year’s first quarter. But first we’ll examine the company’s valuation, which looks set for a major downward adjustment if and when it finally completes its listing.

Dmall was reportedly worth 21.3 billion yuan as recently as last November when it completed a new financing round. That figure, combined with its latest revenue of 1.5 billion yuan for 2022, would give it a hefty price-to-sales (P/S) of 14.2, which perhaps could be justified if the company’s revenue was still doubling each year like it did between 2019 and 2021.

But those days of heady growth could be in the past, at least based on the company’s anemic 1.6% year-on-year revenue growth in this year’s first quarter, which saw the figure increase to 390 million yuan from 384 million yuan a year earlier.

By comparison, rival Kingdee International (0268.HK), which has a slightly higher market value at HK$36 billion ($4.6 billion), currently trades at a P/S ratio of 6.7, or about half of what Dmall would trade at based on its valuation last November. The smaller Weimob (2013.HK), with a market cap of HK$10.7 billion, trades at an even lower P/S of 4.8.

Thus, a ratio between Kingdee and Weimob seems appropriate, perhaps around 5.5, which would give Dmall a market value of about 8.25 billion yuan – or a little more than a third of what it was reportedly worth last November. The company is also likely to raise far less cash than the $500 million it was reportedly seeking when it first weighed a New York IPO in days of headier growth back in 2021. Then again, much has changed since then.

Perhaps reflecting the smaller size and reduced hype around the latest IPO plan, Dmall has named just two underwriters for the listing, Credit Suisse, and China’s CMB International. By comparison, it attracted the much higher-profile trio of Goldman Sachs, JPMorgan and Bank of America for its original listing plan in 2021, according to a media report at the time.

All this shows that the road ahead for Dmall’s IPO plan could be anything but smooth, and is almost certain to end in a sharply lower valuation.

Business Slowdown

All that said, we’ll spend the second half of this review looking at Dmall’s latest finances, which show how much its performance has deteriorated lately. The company is hardly alone, with many other retail-related companies also reporting similar slowdowns due to growing caution among Chinese consumers in the current sluggish economy.

As we’ve previously noted, the company’s overall revenue grew just 1.6% in the first quarter year-on-year, marking a sharp slowdown from the 44% growth in 2022.

Dmall derives its revenue from three major sources: cloud-based software as a service (SaaS) for traditional brick-and-mortar retailers; similar services for e-commerce companies; and advertising and marketing services.

Services for traditional retailers is easily the biggest slice of its revenue pie, accounting for about 60% of the total last year. That part of its business doubled in 2022 to 881 million yuan from 439 million a year earlier. But the growth slowed sharply to just 25% in this year’s first quarter, reaching 267 million yuan versus 214 million yuan a year earlier.

But that was still far better than e-commerce services, which contracted 31% in this year’s first quarter to just 83 million yuan, after growing around 10% in all of 2022. Advertising and marketing services also contracted about 18% in the first quarter to 40 million yuan, making up the smallest piece of the company’s revenue pie.

Dmall’s ability to maintain growth for its core traditional retail business comes as no surprise, since four of its top five customers – including the Wumei chain of grocery stores – are all controlled by Wumei founder Zhang Wenzhong, who also holds 58% of Dmall’s shares. The sharp drop in its e-commerce business probably reflects the fact that those customers have no similar ties to Dmall, and are simply dropping the company’s services as a cost-saving measure.

Despite the worsening economic environment, Dmall’s gross margin improved notably to 46% in the first quarter from 40.6% a year earlier as it reined in promotional spending and lost smaller customers that are typically less profitable and more likely to drop this kind of service as a cost-saving measure.

Despite that improvement, Dmall’s net loss grew to 342 million yuan in the first quarter from 247 million yuan a year earlier, mostly due to an increase in value for its convertible preferred shares. And as we’ve previously noted, the company said in its prospectus it expects to break even next year.

While the overall picture doesn’t look that encouraging, one potential bright spot for the company is its international operation, which grew rapidly in its recently entered markets of Poland and Cambodia. But the international portion of its business accounted for just 6.7% of revenue in the first quarter, with the big majority of that coming from Hong Kong.

At the end of the day, Dmall looks like an interesting bet due to its position in the highly scalable market for cloud-based services for retailers. But weakness in China’s retail market, combined with the company’s heavy reliance on its founder’s connections, will more than offset any positive factors, probably leading to weak demand for its shares if it completes the IPO.