Dmall Shops For Investors, Even As Business Remains Mostly A Family Affair

Key Takeaways:

• In its recent application for a Hong Kong IPO, Dmall revealed that its top five customers account for nearly 90% of its revenue
• Pre-IPO backers of the provider of software as a service for retailers include Tencent and Industrial Bank, as the company continues to report big losses

By Bai Xinrui

Its bread and butter is providing ordinary products to consumers. But these days, retailing major Weimei Group is courting a different group of buyers, namely investors, hoping to seize on recent stock market rallies in Hong Kong and on the Chinese Mainland.

First, Wumei founder and supermarket tycoon Zhang Wenzhong offered up his MDL Wholesale business for a Hong Kong IPO on July 12. Now, a recent stock market rally may be motivating him to also offer Dmall Inc., Weimei’s subsidiary that provides software as a service (SaaS) digital solutions to retailers.

Dmall submitted its IPO application at the end of October, and saw it approved by the Hong Kong Stock Exchange last week. The company previously applied to list in 2022 and 2023, which may explain why its latest application moved ahead so quickly.

Dmall was founded in 2015 and launched its core Dmall operating system in 2018, according to its latest public filing. The platform offers SaaS solutions including online and offline as well as artificial intelligence of things (AIoT) services to customers such as Wumei Group, as well as the operator of Germany’s Metro brand in China and Yinchuan Xinhua Commercial Group (600785.SH).

In 2020, the company took a big step forward with its establishment of Retail Technology Asia, a 50-50 joint venture with DFI Retail, a major Hong Kong retailer whose chains include Wellcome, Mannings and Giant. That venture provides technology solutions and services to retailers outside of China. Subsequently Dmall also partnered with the Metro China operator to expand Dmall’s business into Europe.

By the end of June this year Dmall had 444 core customers, up by 31 from a year earlier, ranging from convenience stores to department stores, supermarkets and specialty retailers. In addition to counting Zhang as its majority shareholder, the company’s other backers include IDG, Industrial Bank (601166.SH) and Tencent (0700.HK).

In terms of its business, the company has been on a solid growth track in recent years. Its revenue rose 20% from 1.33 billion yuan ($187 million) in 2022 to 1.59 billion yuan last year, and the 940 million yuan it reported in the first half of this year was up by a similar 22.9% from the year-ago period.

But it continues to lose money, reporting losses of 810 million yuan and 590 million yuan in 2022 and 2023, respectively, and 230 million yuan in the first half of this year. The company stressed that its business was growing rapidly and losses narrowing, with previous investments likely to lay a sound foundation for future development and profitability.

The company’s retail core service cloud is its main revenue source, which it breaks down into operating system and AloT solutions. That pair accounted for 44.7% and 54.7% of the company’s revenue in the first half of 2024, respectively, or 420 million yuan and 510 million yuan.

Gross Margin Gap

While Dmall’s AloT solutions bring in more revenue than the operating system business, the latter is much more profitable. In the first half of 2024, AloT solutions eked out a gross margin of just 9% and gross profit of 46.33 million yuan. By comparison, the operating system business reported a far higher gross margin of 76.8%, yielding 320 million yuan in gross profit.

The operating system business helps customers process their gross merchandise volume (GMV) and generates money by charging a certain percentage of the transaction value as fees. It also charges a fixed subscription fee to customers based on their individual needs or financial situation. The service is relatively asset-light, contributing to its relatively high gross margin.

The opposite is true for AIoT solutions, which deploy tools such as cameras and software-based automatic stock replenishment, intelligent package sorting, intelligent cashier, intelligent cleaning and intelligent delivery services to help retailers establish digital sales scenarios. The company charges retailers either one-off or fixed monthly subscription fees for those services. The needs for more outsourcing services and labor contribute to the business’ higher cost structure, resulting in the relatively lower gross margin.

Its continual losses notwithstanding, Dmall is positioned in an industry with bright growth prospects, especially in China and Asia where the digitalization rate is still relatively low. According to third-party data in its listing document, China’s and Asia’s local retail digitalization rates stood at 3.1% and 4.5% last year, respectively, much lower than the 13.3% in the U.S., implying big growth potential.

Confined to China

Asia’s retail cloud solution market looks particularly promising, reaching 1.4 trillion yuan in value last year and expected to grow 22.4% annually to 3.9 trillion yuan by 2028, according to the prospectus. Dmall is not only the largest retail cloud solution services provider in China with 13.3% of the market last year, it has also broken into other Asian markets in Hong Kong and Macau, Cambodia, Singapore, Malaysia, Indonesia, the Philippines and Brunei.

That said, a heavy reliance on business from members of the Wumei family remains one of its biggest Achilles heels. Most of its current customers are Wumei affiliates, and its top five customers accounted for about 90% of its revenue in the first half of the year. Losing business from any one of those customers would obviously deal Dmall a major blow.

And despite boasting customers in a range of Asian markets, Wumei’s business remains squarely focused in its home market, with 92% of its revenue coming from Mainland China and another 6% from adjacent Hong Kong. That doesn’t look so encouraging as both the Hong Kong and Mainland Chinese retail markets are slumping right now.

Beijing is trying to improve consumer sentiment with its recent series of major policy stimulus measures. Despite that, Hong Kong stocks are unlikely to see much more upside as long as the Mainland property market remains weak and China-U.S. tensions look likely to continue under a new Donald Trump administration. Those clouds on the horizon, combined with Dmall’s inability to operate profitably just yet, may give investors pause and could pressure the stock once it makes its trading debut.

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