AuGroup Looks For Home On Hong Kong Stock Exchange

Key Takeaways:

• AuGroup has filed an updated application for a Hong Kong IPO, after previous listing attempts on Shanghai’s STAR Market and Shenzhen’s ChiNext failed
• The company’s revenue rose 17% in the first four months of this year, as it continues to recover from a major business setback three years ago

By Doug Young

Its specialty may be home furnishings, but AuGroup Technology Co. Ltd. looks increasingly like a company desperately in search of its own home.

The e-commerce company has led an unsettled life these past few years, at least in terms of listing its stock, including an abandoned listing on an over-the-counter style market in Beijing, followed by failed listing attempts in Shanghai and Shenzhen. It thought it had finally found a home on Hong Kong’s stock exchange when it filed an application to list in April.

But that application lapsed after it failed to complete the IPO within the required six-month period, leading AuGroup to make a second listing application last week. The latest application contains fresh data from the first four months of this year, mostly showing a continuation of trends from the company’s earlier April filing.

Among other things, AuGroup continues to recover from a devastating period that it calls “the Amazon incident” that saw it and several other companies temporarily banned from the U.S. e-commerce giant’s marketplace in 2021 for posting fake reviews to boost their images. The company also continued to diversify its revenue geographically, probably in response to the Amazon incident, though it still remains heavily dependent on North America.

The biggest thing AuGroup has going for it with this latest filing is something beyond its control, namely the huge rally in Chinese stocks over the last month. That rally has seen Hong Kong’s benchmark Hang Seng Index soar by more than 30% since Sept. 11, though even after the rally many stocks still trade at multiples well below their global peers.

The rally has spurred IPO candidates to rush to get to market in Hong Kong, with 13 companies submitting new listing applications in the last two weeks alone. The two companies lucky enough to debut during the rally have done well, including a 57% gain for kitchenware maker Carote (2549.HK) since its Oct. 2 trading debut, and a 73% rise for home appliance maker Midea (0300.HK; 000333.SZ) since its shares debuted in mid-September.

It seems unlikely that AuGroup will make it to market to take advantage of the rally, since its latest filing is simply an update after its original application lapsed.

Broadly speaking, the company looks relatively well positioned due to its status as a cross-border e-commerce seller of Chinese furniture and electronics to Western markets. That should protect it from the economic downturn now dampening consumer demand in its home China market.

But AuGroup could also suffer some impact from plans to close a loophole in U.S. tax law that previously exempted cross-border shipments from having to pay import duties if their value was below $800. A look at its listing document shows that nearly all of AuGroup’s products from its various brands carry average selling prices (ASPs) of 1,200 yuan ($170) or less, which is well below the $800 threshold. The company currently gets about 70% of its revenue from North America, while Europe supplies 8% and China provides the rest.

The prospectus contains a section on U.S. trade law and associated risks, including from potential protective tariffs. But it doesn’t specifically mention the $800 loophole, often referred to as “de minimis,” and it’s not clear if any of AuGroup’s cross-border shipments from China to the U.S. take advantage of the loophole.

Looking For A Home

All that said, we’ll quickly retrace AuGroup’s history on financial markets, which includes many lessons on the benefits and drawbacks of listing on various stock exchanges in China and Hong Kong. The company originally listed on Beijing’s over-the-counter style National Equities Exchange and Quotations (NEEQ) market in 2016. But it withdrew in 2019, following many other companies that took similar action due to very thin trading volumes.

From the NEEQ, the company attempted to list on Shanghai’s Nasdaq-style STAR Market in 2019. But it quickly found out that market wasn’t interested in its style of low-tech e-commerce, preferring instead to nurture high-growth companies in emerging areas like semiconductors and new energy.

“Due to the difference between our core business and the positioning of the STAR Market, in April 2020, we voluntarily withdrew the A Share listing application on the STAR Market,” it said in its listing document.

From the STAR Market, it attempted to list again in 2021 on Shenzhen’s similar ChiNext market that also focuses on high-growth startups. But that listing was derailed by the Amazon incident, which caused the company’s revenue to tumble 22% to 7.1 billion yuan in 2022. Its revenue has gradually recovered since then, including a 22% gain to 8.68 billion yuan last year, and 17% growth to 2.83 billion yuan in the first four months of this year compared with the year-ago period.

About the only destination where the company hasn’t tried to list yet is New York, which is home to its closest listed rival, another cross-border furniture seller called GigaCloud GCT. Then again, GigaCloud hasn’t done too well since its U.S. listing two years ago, and currently trades at a price-to-earnings (P/E) ratio of just 10 despite a stellar second-quarter earnings report that showed triple-digit revenue growth and strong double-digit profit growth.

AuGroup’s revenue isn’t growing quite as fast but is still respectable. Its profit growth also looks quite decent, roughly doubling to 189 million yuan in the first four months of this year from 96 million yuan a year earlier. At least some of that big rise was probably due to one-time factors, including a clearing of inventory left over from the Amazon incident. In this case its gross profit might be a better indicator of how the company is faring, with that figure up by a smaller 19% to 977 million in the first four months of this year from 821 million yuan year-on-year.

At the end of the day, AuGroup’s latest application is likely to be one of just many by companies scrambling to list while the market is hot. Thus, it may have trouble attracting attention due to the relatively mundane nature of its business. But its cross-border e-commerce story could still have some appeal for investors looking to buy into China while keeping down their exposure to the country’s economic slowdown.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.