Boqii Barks With Latest Earnings Report, But Investors Beg for Profits

Key Takeaways:

• Boqii’s revenue dropped slightly in the three months to June, though business for its self-operated mall rose by 20%
• Company could face delisting if it can’t bring its market value above $50 million – more than double the current level – by early 2024

By Doug Young

If there’s one group that suffered the most during China’s ongoing Covid lockdowns, it’s arguably the thousands of pets that call major cities like Shanghai, Chengdu and Shenzhen home. Many of those were locked up for weeks or even months at a time, which can be especially difficult for dogs that are used to daily walks and doing their “business” outside.

Against that backdrop, online pet community operator Boqii Holding Ltd. BQ did surprisingly well during its latest three-month reporting period, which included the months of April and May when the major metropolis of Shanghai was completely locked down.

Perhaps its strong performance owed partly to the fact that Boqii seems to be falling back on its online strategy these days, after trumpeting its intent to move to a more hybrid online-offline strategy last year. Online retailers did far better during the lockdowns than traditional brick-and-mortar stores, many of which were closed for weeks or even months during the period.

There was no mention of Boqii’s offline initiative in its latest results announced last Thursday, which probably indicates that effort made little or no contribution during the period. That’s not surprising, since all stores in Shanghai, home to both the company and also its first brick-and-mortar outlet announced last year, were completely closed for the two months during the period.

All that said, the company still faces a highly skeptical crowd on Wall Street, where investors don’t seem to believe it has strong profit potential despite the huge size of China’s pet market. The company also faces a challenge from the New York Stock Exchange, which has threatened it with delisting if it can’t bring its market cap back above its minimum $50 million threshold.

We’ll return to the delisting threat later, but first we’ll begin with our look at the latest report that actually looks quite upbeat despite the miserable environment for pets and the Chinese economy in general during the three months through June. Most tantalizingly, Boqii held out the prospect for becoming profitable in the not-too-distant future as its loss fell sharply on strongly improving margins.

On its post-earnings conference call, which was attended by a lone analyst, recently installed CFO Tang Yingzhi said the company’s improving performance in the latest quarter, despite all the external headwinds, “shows our potential to reach profitability.”

Boqii’s top-line revenue was actually nothing to bark about, dipping 2% year-on-year to 315.1 million yuan ($45 million), according to the latest report. But that big-picture number hides the fact that the company’s less-profitable business from third-party users of its platform was the major reason for the decline, while its more profitable direct business actually posted strong growth.

More precisely, revenue from the company’s own Boqii Mall actually rose 20% during the quarter year on year, while revenue from third-party e-commerce fell 14.8%. As a result of that split, Boqii Mall accounted for 43% of the company’s total revenue during the quarter, up from 35% a year earlier. The company’s information and marketing services also posted 14.7% growth for the quarter, though that figure still makes up just a very small 3% of its total revenue.

Premium products

Like many of China’s other companies that rely heavily on e-commerce, Boqii is quickly discovering that margins are much better in premium products rather than generic ones. Accordingly, the company is shifting more of its focus to such higher-end products, which seems like a no-brainer in a country where many people are famous for sparing no expense to spoil their furry friends.

In addition to private label pet food, the company is also finding fatter margins in products like pet supplies and pet health care products.

At the same time, Boqii was able to reduce its costs, with operating expenses down 17.7% during the quarter year-on-year to 80.6 million yuan. That combination of higher margin products, combined with lower costs, fueled a big rise in the company’s gross profit margin to 22.4% from 17.9% a year earlier. On the earnings call, Tang said she believed there was room for further improvement to as much as 30%, hence the potential for profitability in the not-too-distant future.

As most of its metrics improved, Boqii shaved its net loss to 12.4 million yuan for the quarter, narrower by about two-thirds from its 37.4 million yuan loss a year earlier. The company does need to become more focused on its bottom line going forward, since its current cash now stands at 247 million yuan – not low enough to worry about an imminent cash crunch, though still down a bit from the 290 million yuan three months earlier.

Investors seemed to like the report, with Boqii’s shares rising 7.7% the day of the announcement. But they gave back all of that and more in the next two trading days, showing the market remains concerned about the company.

One of their biggest concerns could be Boqii’s potential delisting if it can’t bring its market cap above the $50 million threshold required by the New York Stock Exchange. The company announced it had fallen below that threshold in April, and its current market cap now stands at just $20.5 million, less than half of the required amount.

The company said in its latest annual report in July that it had given the NYSE a plan for returning to compliance over the next 18 months, which means it still has plenty of time to get its shares back above the minimum threshold. Now it’s up to investors to do their part by showing more interest in the stock – something that could happen if Boqii can post a profit.

The weak sentiment towards Boqii’s shares is reflected in the company’s latest price-to-sales (P/S) ratio, which stands at a “ruff” level of just 0.13 times. By comparison, Yantai China Pet Foods (002891.SZ) and U.S. player Chewy CHWY stand at much healthier P/S levels of 2.5 and 1.56 times, respectively. Honestly speaking, there’s really no reason that Boqii shouldn’t be able to command a similar ratio, given its strong position in China and improving finances. Perhaps investors might sit up and take more notice if and when the company can finally post a profit.