Cross-Border E-commerce Trader Zibuyu Files for IPO Despite Sinking Profits

Key Takeaways:

• Cross-border e-commerce company Zibuyu has filed for a Hong Kong IPO, but could be undermined by its heavy reliance on Amazon and the U.S. market
• The company’s first-half profit plunged 46% as its merchandise return rates and costs both rose sharply

By Stone Shek

Making it big in the U.S. may be one thing, especially when you’re a made-in-China company trying to build a business far from home. But cross-border e-commerce trader Zibuyu Group Ltd. is quickly learning that staying on top in the huge but fiercely competitive market is another matter.

One of the largest cross-border e-commerce companies in China, Zibuyu is also trying to make it big in Hong Kong by listing its shares in the city, but has found the going rough so far. It filed for an IPO in June last year and March this year, but those attempts went nowhere. Now the company is hoping the third time is the charm with its latest listing application on Sept. 28, with Huatai International and ABC International as joint sponsors.

According to third-party data cited in its preliminary prospectus, Zibuyu ranked third in 2021 among China’s cross-border B2C e-commerce sellers of apparel and footwear in terms of gross merchandise value (GMV). It ranked first in terms of GMV generated in North America that year. Despite that, it accounted for just 0.4% of the total market for all cross-border apparel and footwear e-commerce sales, reflecting the market’s high degree of fragmentation.

But unlike major e-commerce platforms such as Alibaba’s BABA Taobaoand JD.com JD, Zibuyu designs most of its products on its own after conducting market research. It then has them made by third-party contract manufacturers, before selling them through its cross-border channels on platforms like Amazon AMZN.

Negative cash flow

Founded in 2011 by Hua Bingru and Wang Shijian in the eastern city of Hangzhou, Zibuyu started by selling women’s clothing from its Youchu store on Alibaba’s popular Tmall online mall. But it shifted focus in 2014 to cross-border e-commerce aimed at buyers in Europe and America. In addition to Amazon, the company’s main sales channels also include Wish, eBay EBAY and other third-party e-commerce platforms such as Alibaba’s AliExpress, as well as Zibuyu’s own website.

As it concentrated on Amazon starting in 2018, Zibuyu’s revenue from the U.S. giant’s platform surged from 31.5% of its total in 2019 to 71.2% last year. That helped the company’s revenue grow by 64.2% from 1.43 billion yuan ($200 million) to 2.35 billion yuan over the same period, as its profit more than doubled to from 81.1 million yuan to over 200 million yuan.

But while its revenue and profit were climbing, one of its key operating metrics began to turn sour. That metric was cash flow from operating activities, which turned from a net inflow of 81.96 million yuan in 2019 to a net outflow of 207 million yuan in 2021. That reversal was mostly due to a 430 million yuan splurge last year to build up its inventory, a massive year-over-year increase of more than three times.

That led the company’s inventory to more than triple last year to 664 million from 178 million yuan in 2019. But long times required to ship its products from China to the U.S. caught the company flat-footed, since trends often change quickly in the current era of fast fashion. That can leave a company like Zibuyu sitting on piles of obsolete goods that it can’t move quickly enough, crippling its profitability when the inventory becomes obsolete, and even forcing it to take inventory impairment provisions.

The company’s rising revenue may have helped to mask its deteriorating cash flow between 2019 to 2021. But a clearer picture came out in Zibuyu’s financials for the first half of 2022. The company’s revenue growth slowed to just 16% year-on-year to 1.28 billion yuan during the period. And after factoring in a nearly 32% jump in selling expenses and distribution costs to 838 million yuan, the company’s profit plunged 46% to 61.31 million yuan.

Increasing conservatism among U.S. consumers due to high inflation and a series of interest rate hikes resulted in a significant increase in return of goods for Zibuyu’s Amazon business, which accounted for 90.6% of its revenue in the first half of the year. By the end of June, the company’s return rate soared to 25.5%, up nearly six percentage points from 19.8% at the end of last year, meaning one of every four products sold was returned. Part of that was due to Amazon’s flexible return policy, which allows for unconditional returns within 30 days after delivery.

Zibuyu’s profit is also being undermined by higher marketing and advertising expenses due to rising advertising charges on Amazon, and a nearly 83% jump in shipping and insurance expenses, which are included in selling expenses and distribution costs. Rising employee costs also played a part, as the company’s design team of 344 at the end of June was more than twice the 155 at the end of 2019.

Blessing and curse

So, it seems that Amazon has been both a blessing and a curse to Zibuyu, providing big business but at an increasingly high cost. The company’s growing reliance on Amazon and the U.S. are reflected in its business mix, with the U.S. share of its revenue rising to 95% in the first half of this year from just 58.8% in 2019.

Zibuyu expects continued high inflation in the U.S. for the rest of the year and subsequent interest rate hikes to continue curbing consumption and further push up the rate for returned merchandise. At the same time, the company has no plans to reduce spending on marketing and advertising due to stiff competition, prompting it to state its profit will fall for all 2022.

Zibuyu has chosen now to go public in part to fund its self-hosted website to reduce its dependence on Amazon. In May 2021, the company issued preferred shares to Aloe Tower at a post-investment valuation of about 3.7 billion yuan. Rival Anker Innovations (300866.SZ) currently trades at a price-to-earnings (P/E) ratio of just at 19.6 times. Zibuyu would trade much higher at 30.2 times, based on doubling its half-year profit to get a full-year estimate. That would put it in the same class as e-commerce giants Alibabaand Pinduoduo PDD, which trade at 33.6 times and 29.5 times, respectively.

But its smaller scale and large operational risks could force Zibuyu to price its shares at a lower valuation to attract investors – if its latest listing attempt moves ahead.