2128.HK
EDA shares jump in trading debut

Shares of the e-commerce logistics services provider jumped 84% on their first trading day last week, though they later gave back some of the gains

Key Takeaways:

  • EDA’s revenue rose 71% last year on strong demand for its logistics services for Chinese cross-border e-commerce merchants
  • The company’s “pre-sale stocking model” could give it an advantage as the direct-shipping model used by rivals Temu and Shein comes under fire in the U.S.

  

By Doug Young

Temu and Shein may be getting all the attention these days, with their rock-bottom prices for trendy clothing and other e-commerce knickknacks that are mailed directly from factories in China to Western consumers. But newly listed EDA Holdings Ltd. (2505.HK) is offering a compelling alternative for cross-border e-commerce, especially as Temu and Shein come under fire from U.S. politicians.

EDA shares made their Hong Kong trading debut last week, jumping more than 80% on their first day as it raised a relatively modest HK$223 million ($28.5 million) by selling 97.6 million shares for HK$2.28 apiece. The share price has retreated since those first-day gains, but was still 51% ahead of their IPO price at their latest close of HK$3.44 last Friday.

EDA operates a suite of cloud-based services providing logistics to cross-border Chinese e-commerce merchants selling to the U.S., Europe and Australia. Such services run the range from first-mile international freight services inside China, to last-mile fulfillment services in destination countries for products sold via e-commerce.

At their latest level, the company, commands a respectable – but not overly exciting – price-to-earnings (P/E) ratio of 20, with a similarly respectable but not eye-popping price-to-sales (P/S) ratio of 1.16. The P/S trails the 1.65 for Weimob (2013.HK) but is well ahead of the 0.13 for Baozun (BZUN.US; 9991.HK), both providers of services for domestic Chinese e-commerce merchants. U.S. giants Shopify (SHOP.US) and Salesforce (CRM.US) both trade much higher with P/S ratios of 10 and 6.5, respectively.

EDA’s lower multiples compared with the global giants probably owe at least partly to its relatively small size. Even after the big post-IPO gains, the company’s market cap still stands at a relatively modest HK$1.5 billion, or just under $200 million. According to its prospectus, first filed in February, the company isn’t exactly at the head of its class, ranked as the seventh-largest provider of export e-commerce supply chain solutions based on 2022 revenue.

The business of selling Chinese goods overseas via e-commerce has been growing rapidly in recent years, as Beijing encourages its manufacturers to sell their wares directly to consumers abroad. The B2C market for such e-commerce exports grew 28.4% annually in terms of gross merchandise value (GMV) between 2017 and 2022 to reach 3.22 trillion yuan ($445 billion) in 2022, according to third-party data in the prospectus. That growth is expected to slow somewhat to 13.4% annually over the next few years, reaching 6 trillion yuan by 2027.

The rapid explosion has led to a concurrent boom in demand for related services like EDA’s. The B2C export e-commerce supply chain solutions market grew 28.8% annually between 2017 and 2022, reaching 402 billion yuan in 2022. EDA said that rapid growth was partly due to the pandemic, as people turned to online buying as many shops closed. It added the growth is expected to slow to about 9.1% annually from 2022 to 2027.

Pre-sale stocking model

Founded in 2014 in the Southern boomtown of Shenzhen, EDA spent most of its life as an independent company controlled by founder Liu Yong before being taken over by the larger China Lesso Group Holdings Ltd. (2128.HK) in 2021. Lesso, which provides logistics services for goods being shipped from China to Southeast Asia, decided to spin off EDA to give it more flexibility to conduct its own business, including its own fundraising.

EDA differs from big names like Temu and Shein in its use of a business model that stocks its customers’ goods in locally based warehouses in the countries where those goods will ultimately be sold. Such a “pre-sale stocking model” allows for quick deliveries once an order is placed. To facilitate that model, EDA works with 40 local warehouse operators in the U.S., six in Canada and another seven combined in Germany, Britian and Australia.

By comparison, companies like Temu and Shein use a system of directly shipping products from China to the countries where buyers are located. Such a system carries less risk of accumulating unsold inventory, but takes far more time for deliveries to reach their destination, and is also less practical for returned items.

More recently, the direct shipment model has also faced a new type of risk, as the U.S. explores closing a loophole that allows Shein and Temu to sell their cross-border e-commerce goods in the U.S. without paying any import tariffs. The closing of that loophole would instantly make those products much more expensive, eliminating one of the key advantages they enjoy. Such a move would work to the advantage of EDA and others who use the pre-sale stocking model, since all of their goods already pay import tariffs.

In terms of financials, EDA’s growth looks quite strong in the last two years, which partly explains why its latest P/E and P/S look relatively low. The company’s revenue jumped 71% last year to 1.21 billion yuan from 709 million yuan, though the growth rate was quite a bit slower at 21% the previous year.

Unlike many newly listed companies we write about that rely on a handful of customers, EDA also looks relatively attractive for its high degree of diversification. Of the company’s 850 customers over the last three years, the top five accounted for just a third of its revenue. Its top customer each year accounted for about 12% of revenue.

The company’s gross margin has stood between 15% and 16% over the last three years, which looks comparable to what you’d expect from a logistics operator, even though EDA likes to point out it uses an “asset-light” model that relies on third parties to supply most of its logistics. The company is relatively profitable, posting a profit of 69.4 million yuan last year, and doesn’t appear to have any cash problems, with positive cash flow in each of the last three years.

At the end of the day, the company looks fairly solid in terms of its market position and focus on a few key markets. It could also benefit as Temu, Shein and other companies using the direct shipment model come under fire. Its smaller size could be a drawback for investors, though some may argue it might deserve a higher valuation due to its solid growth potential.

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