Keep Finally Crosses IPO Finish Line, But Fails To Pump Up Investors

Key Takeaways:

• Fitness app operator Keep’s IPO shares debuted with a small gain after pricing at the bottom of an unusually wide range
• The company’s revenue growth has slowed over the last four years as it reins in promotional spending to try to become profitable

By Warren Yang

Keep Inc.’s (3650.HK) fitness app may help people to stay in shape using its recorded workouts and other products for the health-minded set. But investors seem far less invigorated by its suite of gym-like offerings, perhaps impatient for the company to turn a profit.

Last Tuesday, the popular fitness app’s Hong Kong IPO finally made it past the finish line after two false starts, raising a relatively modest HK$313.5 million ($40 million). Its shares priced at HK$28.92 apiece, the very bottom of an unusually wide range going as high as HK$61.46, reflecting a relatively high degree of uncertainty about investor appetite.

While the outcome suggests investors weren’t exactly sprinting to snatch up Keep shares, the event did mark a win of sorts for the company after years in training. Keep initially wanted to go public in New York, but eventually scrapped the idea as circumstances turned adverse due to growing unease among U.S. regulators toward Chinese companies, according to media reports.

In the face of such headwinds, the fitness startup, founded by millennial Wang Ning in 2014, took a jog instead back to Hong Kong, where Chinese listings have gotten a warmer reception. But its IPO plan still didn’t advance for quite some time, stuck on a sort of fundraising treadmill.

Keep first filed for its Hong Kong IPO in February last year, but that application expired after it didn’t take further steps for six months. It renewed its application last September, but again another half year passed without any follow-up action. The third filing in March this year was finally the charm, ending with last week’s trading debut.

Backed by Japan’s SoftBank, Keep probably decided to sit tight for so long due to market volatility created by surging inflation, and subsequent rising interest rates, that dampened global investor sentiment. That made it difficult for the company to attract the type of valuation it wanted. But in the end, it probably decided it couldn’t wait any longer.

Keep shares rose slightly on their first trading day, and have held their value since then. They last closed on Tuesday just a tad below the IPO price at HK$28.90, their fourth trading day, giving the company a market value of nearly $2 billion.

In the prospectus with its first IPO application last year, Keep boasted that it was the biggest online fitness platform in both China and the world, as measured by its average monthly users and the time of exercise they completed. It said as many as 70% of Chinese consumers of fitness products and services knew about Keep, reflecting the company’s strong brand awareness.

It made its IPO into a Chinese market filled with potential, since fitness is still a relatively new concept for many of the country’s growing middle class. That means many people are only starting to consider the importance of leading healthier lifestyles and how to achieve that goal.

Cool Reception

But investors seem less enthused, and it’s not hard to see why. At the end of the day, Keep is one of many young Chinese companies with interesting business concepts but no profits. Its revenue more than tripled to about 2.2 billion yuan ($307 million) last year from 2019, according to its latest IPO prospectus. But the pace of its growth slowed sharply to about 37% from 67% over the three years. Keep has also struggled to improve its gross profit margin, which stood at about 41% last year.

To counter slowing revenue growth, Keep has followed the lead of many other Chinese companies these days and tried to reach profitability by controlling costs. Like other tech startups, the company inevitably needs to continue spending heavily on R&D, which makes cutting that expenditure infeasible. Easier to manage are marketing costs, which alone amounted to a whopping 59% of Keep’s total revenue in 2021 as it aggressively promoted its products and services. The company slashed that ratio to 29% last year, helping it to almost break even.

But reining in promotional spending came with its own cost in the form of slowing revenue growth, highlighting a typical conundrum for startups. To address this dilemma, the company is trying to shift its focus to higher-margin products.

Its biggest revenue source is currently sales of self-branded fitness products like smart devices, yoga mats and dumbbells. But such items carry relatively high costs for materials, manufacturing and other elements, meaning the costs of making the products equaled more than 70% of the revenue they ultimately generated last year. The means the gross profit margin for such self-branded products was less than 30%.

By comparison, the gross margins for memberships and paid online content like workout tutorials is much higher, at more than 50%, since the costs of such products for Keep, including fees to payment-service providers and third-party app stores, are far lower.

Most of the popular pre-recorded workout courses on Keep’s platform are open to all users for free. But some content, such as livestreaming classes and AI-assisted personalized curriculums, is only for paid subscribers. Non-subscribers can also pay a higher charge than members for fee-based individual courses.

Self-branded products have been gradually decreasing as a proportion of Keep’s overall revenue, falling from nearly 60% in 2019 to a little more than 50% last year. Meantime, the more profitable proportion from memberships and paid online content grew from about 23% to 40% over that time.

To boost memberships and paid content sales, Keep plans to offer more fitness categories, such as dancing and martial arts, and increase partnerships with fitness content providers, among other things.

Following the slight movements of its shares in their first trading days, Keep currently trades at a price-to-sale (P/S) ratio of about 6.5, which looks rather modest for a tech startup. But it’s ahead of the 4.2 ratio for older wearable device maker Garmin GRMN, and light years ahead of the paltry 0.1 for Zepp Health ZEPP, which makes wearable fitness bands.

Despite the rocky road leading up to its listing and beyond, Keep’s current valuation may represent a vote of confidence in its shift away from the hardware business into more profitable services. But to boost its share price, it will need to keep finding ways to turn user traffic into revenue and show it can turn some sustainable profits.