'Ruff' Ride For Pet-focused Boqii, as Slide Triggers Risk of Wall Street Delisting

Key takeaways:

• Boqii said its shares have traded below the $1 threshold for 30 consecutive trading days, triggering an automatic delisting notification from the New York Stock Exchange
• Pet community operator has failed to excite investors with its continued losses and growth that only outpaces the overall industry by a small margin

By Doug Young

It’s pretty “ruff” being a pet owner in China these days.

That’s the main message coming from pet community operator Boqii Holding Ltd. BQ, which informed shareholders just before the recent Lunar New Year that its shares were in danger of being delisted. The company’s stock fell below the critical $1 threshold on Dec. 20 and has traded below that level for 30 consecutive days, which automatically triggers the delisting notice.

As of Jan. 26, the day it received the notice, the company has six months to bring the stock back up above $1, according to the announcement dated Jan. 29. Otherwise, it risks getting kicked off the New York Stock Exchange, where it sold American depositary shares (ADSs) in a September 2020 IPO when Chinese tech stocks were still all the rage. 

At the company’s latest close of about $0.70 on Friday, the stock has lost about 93% of its value since the listing, dropping its market value from $500 million to the latest figure of just $63 million over that period. What’s slightly strange is that the company’s story hasn’t really changed all that much over the last two years, at least in terms of its business.

Perhaps that’s part of the problem.

And while Boqii itself hasn’t changed, Wall Street sentiment towards Chinese tech companies has undergone a huge transformation over the past year. Much of that is due to a huge wave of new regulation by Beijing towards U.S.-listed China tech firms. At the same time the U.S. securities regulator has expressed its own concerns. But much of those concerns from both sides appear to be nearing resolution now.

Honestly speaking, Boqii is far too small anyhow to be noticed by Chinese regulators, who are chasing much bigger fish like internet giants Alibaba, Tencent and Meituan. But it’s still in the dog house with investors.

From their perspective, one of Boqii’s biggest issues could be its inability to make a profit. It’s not losing massive money, posting a net loss of 44.5 million yuan ($7 million) in its latest fiscal quarter through last September, widening from a 27.5 million yuan loss a year earlier, according to its most recent financial report issued in November.

But losses are losses, and some investors might be worried that the company’s coffers aren’t full enough, with just 339 million yuan in cash at the end of last June. That its loss widened also probably doesn’t look too reassuring. In addition, Chinese loss-making companies have generally also fallen out of favor with investors versus profitable ones.

Things were far different at the time of the company’s IPO, when investors were more focused on the huge growth potential for China’s pet market. Pet care in the country remains a fragmented niche business, putting Boqii in a strong position to emerge as a consolidator. The sector – consisting mostly of food and services – was expected to post compounded annual growth of 17% between 2019 and 2024, by which time it was expected to be worth 449.5 billion yuan annually, according to third-party data provided in Boqii’s 2020 IPO prospectus.

Unimpressive growth

If we believe the projections in its prospectus, then Boqii is growing more quickly than China’s overall market – but barely. The company posted 282 million yuan in revenue in its latest reporting quarter, up 23% year-on-year, beating the 17% overall market growth rate by just 6 percentage points. Some might say that beating the market is the most important thing, though many were probably hoping Boqii might grow more quickly.

In fact, the company did report stronger 34% revenue growth in its fiscal quarter through September 2020, meaning the latest growth represented a marked slowdown from a year earlier.

Another element that may have disappointed investors is the company’s continued heavy reliance on product sales, rather than a diversification into services that typically carry higher margins. The vast majority of its revenue – 94% – came from such product sales in its latest report quarter.

One of the lone bright spots in that report was revenue from online marketing and information services, which jumped more than tenfold to 16 million yuan from 1.3 million yuan a year earlier. If it can maintain similar growth in that area – which now accounts for about 6% of its total – perhaps Boqii can offer investors some catnip to get excited about.

Founded in 2009 as an online encyclopedia for pet lovers, Boqii has since grown into China’s largest pet-focused online retailer, delivering food, vitamins, treats, shampoo, clothing and beds, among its many offerings. The company supplies many of China’s independent pet stores, and has also made a few acquisitions and strategic partnerships to extend its reach.

It announced one such tie-up last October to provide pet-friendly stays in Yongle Huazhu’s Blossom House hotels. One problem in the current climate of China’s slowing economy may be growing reluctance among China’s millions of pet owners to spend lavishly on their furry friends for things like such pet-friendly hotel stays and other extravagances like shampoos and special pet clothing.

With all those factors working against it, Boqii’s shares look decidedly undervalued at the moment. It currently trades at a price-to-sales (P/S) ratio of just 0.47, a fraction of the 2.8 ratio for domestic peer China Pet Foods Co.(002891.SZ) and a P/S of 2 for U.S. giant Chewy CHWY. Things look a little better in terms of price-to-book (P/B) ratios, with Boqii’s P/B of 4.06 roughly comparable to China Pet Foods’ P/B of 4.08.

Only one analyst currently covers the company on Yahoo Finance, Roth Capital, which has a “buy” rating on Boqii. Roth has a price target of $5.95 on the company, which looks almost laughable compared with the latest close of $0.70. But a quick look at Boqii’s prospectus shows that Roth was one of the main underwriters for the company’s IPO, suggesting the investment bank may not exactly be the most objective source.

The bottom line seems to be that Boqii has lost nearly all its support from the investment community, with only its underwriter still a fan. Whether it deserves such a cold shoulder is another matter, and it’s quite possible the company may seize on the current frigid sentiment to mount a privatization bid similar to what a growing number of U.S.-listed Chinese firms are doing.