Lemo massages its way to Hong Kong listing

The company's Lemobar-brand intelligent chairs have taken nearly 40% of China's growing market for automated massages

Key Takeaways:

• Lemo has applied to list in Hong Kong, luring investors with its status as China's top massage chair maker for three consecutive years
• The company's revenue grew nearly 40% in the first nine months of 2024, but its net profit was roughly flat over that time

Hong Kong's IPO market has come to life with a vengeance lately, with companies lining up to list after a prolonged winter. While big names like CATL (300750.SZ) are serving up some of the biggest listings, likely to raise $1 billion or more, plenty of niche players in high-growth areas are piling in as well, many with interesting stories to tell.

One such company muscling its way into the queue is Fujian Lemo IoT Technology Co. Ltd., aiming to sell investors on its signature high-tech massage chairs that are finding their way into shopping malls and other entertainment venues around China.

Lemo was founded in May 2014, and purchased two years later by Xie Zhonghui, who has used the company to develop the intelligent massage business. He launched its Lemobar brand shortly afterwards to officially kick off his vision of building an intelligent massages service business.

Ancient roots

Massage is an ancient form of medical treatment in China, done by applying pressure, friction or vibrations to different parts of the body to relieve pain and improve circulation. The market for such services in China is huge, worth 518.3 billion yuan ($71 billion) in 2024, and expected to grow 16.4% annually to 644.2 billion yuan in 2028, according to third-party market data in Lemo's listing document filed earlier this month.

The entire massage market can be broadly divided into two categories, massage products and services. The services part is divided into therapists and automated massage machines. Automated systems are most common, especially in leisure venues where consumers go to relax and can find massage chairs in idle areas, food courts, and other resting places.

Such chairs are often placed in independent, quieter spaces to bring consumers a more relaxing and pleasant experience as they seek down time in these busy commercial spaces. Prices for using such chairs are usually far more affordable than traditional masseurs, costing less than $10 for an hour.

Traffic hubs, including airports and train stations, are also hotspots for such chairs. Travelers, especially people transiting at airports, often have time to kill and are relatively high earners with disposal income to spare on such small pleasures.

As a provider of intelligent massage services, Lemo says it focuses on integrating advanced technology to enhance the massage experience, especially through the application of cloud services and Internet of Things (IoT) technology, to provide intelligent, stable and customized services.

Unlike many Chinese consumer industries, the nation's intelligent massage services market is highly concentrated in just a handful of companies. Among those, Lemo was the largest by transaction value for three consecutive years from 2021 to 2023. In 2023, the company's roughly 900 million yuan in transaction value gave it 37.3% of the market, more than double the runner-up's 15.5% share, according to the listing document.

The intelligent massage service market has two main revenue sources. One is providing massage services on a per-use basis, with consumers paying using QR codes or apps. The other is revenue from value-added services, such as ads and short videos placed for third-parties on the chairs, or other forms of similar business collaboration.

Potent partners

Revenue from users for its massage services is Lemo's main cash spinner, supplying over 95% of the company's revenue. Its total revenue for the first nine months of last year totaled 615 million yuan, up 39% year-on-year, exceeding its full-year revenue for all of 2023.

Lemo's revenue comes mainly from China's largest cities, called first-tier and new first-tier cities, which make up about 40% of its total. Intelligent massage service revenue totaled 603 million yuan in the first nine months of last year, equaling 98% of total revenue. Digital advertising services made up the rest at 10.93 million yuan.

Lemo provides its services both directly and through partners. Revenue from the former is the biggest source, accounting for 84% of the total in the first nine months of last year, while 14.2% came through partnerships.

The direct model puts Lemo in charge of all operations, while the partner model sees it provides service solutions with mutually agreed-upon service rates and fees with its partners. With its lower operating costs, the partner model, while smaller in terms of revenue contribution, has a far higher gross margin of 74.4% than the direct model's 34.2%.

Third quarter high season

Lemo's 39% revenue growth in the first nine months of 2024 looked relatively impressive, but the same wasn't true for its net profit, which rose just 0.4% to 93.1 million yuan during the period. The disconnect may owe to a 66% increase in marketing expenses to 84.67 million yuan. Much of that is linked to a 90% surge in employee welfare costs, which account for more than half of the marketing expenses.

It's also worth noting that Lemo's business is highly seasonal. The third quarter is its typical peak season due to higher traffic in commercial complexes and airports during the summer school holidays. Conversely, the fourth quarter is its off-season, since heavy clothing worn by many in the winter months often affects the massage experience, and some consumers may find it inconvenient to take off their coats in public places.

China's economic downturn has had a broader chilly effect on most consumer stocks, especially food and beverage, as cautious consumers rein in their spending. Lemo looks like an exception, perhaps benefiting from people downgrading visits to pricier traditional massage spas to the company's more affordable options. Now, Lemo just needs to massage its way to better profits, possibly by expanding its higher-margin partner-based services, to sell investors on its stock.