The company has lost $860 million over the last three years, but may be making an IPO now under pressure from early investors eager to cash out

Key takeaways:

  • Eight years after its founding, fitness platform Keep Inc. has filed for a Hong Kong IPO
  • Company says listing will empower it to turn a profit by providing funds to launch premium fitness packages and attract more subscribers

By Tina Yip

As the Covid-19 pandemic drags on into its third year, people have become more cautious about visiting offline gyms. That’s provided some muscle-building fodder for online fitness products, including Keep Inc., operator of a Chinese fitness-oriented platform that has just filed for a Hong Kong IPO.

Founded by millennial Wang Ning, Keep is hoping to thrive off increasingly affluent Chinese looking to live healthier lifestyles, even as many limit their time in public places each time the Covid-19 virus makes a new flare-up. The company has arrived at the final stretch in its listing marathon, submitting its IPO application to the Hong Kong Stock Exchange (0388.HK) on Feb. 25 after nine earlier fundraising rounds.

Its path to becoming a publicly listed company has been far from free of care for a company whose mantra is “disciplines brings freedom.”

Keep was founded in 2014 and launched its online fitness platform a year later by offering structured fitness courses. China’s fitness market started to generate an outpouring of investor interest that same year. Keep quickly built up a base of more than 2 million users, which helped it attract $5 million in series-A funding in June 2015 and another $10 million in series-B three months later as its user base soared to 10 million. With those kinds of numbers, the company was fast becoming a champion of its class at a very early age.

Chinese tech companies typically furiously burn through cash to achieve quick visibility, telling investors that profits will come eventually. Keep certainly has numbers that would make many envious, averaging 34.4 million monthly active users in 2021 and a total of 1.7 billion user interactions within its online community.

According to data cited in its prospectus, Keep is the biggest online fitness platform in both China and the world, as measured by number of average monthly users and the time of exercise completed by those users. As much as 70% Chinese consumers of fitness products and services know about Keep’s app, an indicator of the company’s strong branding. Its member penetration rate grew from 6.4% in 2020 to 9.5% last year, higher than the industry average, 4.8%, the prospectus showed.

But like many of its online peers, the company’s biggest challenge has been turning user traffic into cash flow and ultimately a profit. It has been trying to increase its touch-points with consumers, aiming to provide four types of essential products and services in the areas of food, clothing, other necessities and exercises. But the effort hasn’t exactly panned out.

In 2018, the company unveiled some smart hardware devices including treadmills, yoga mats and smart watches. The move helped financially by bringing in more revenue, but lacked long-term competitiveness as it vied in that space with giants like Xiaomi (1810.HK) and Huawei.

As it was getting into smart hardware, the company also tried to establish a physical presence in the offline market, opening more than a dozen gyms in Beijing and Shanghai. But cutthroat competition, high operating costs, and finally the pandemic that forced the temporary closure of most gyms in early 2020, forced it to close all the facilities in Shanghai and maintain just a few in Beijing. The company also tried its hand in related markets like fitness diets and sports gear, including its launch of a service offering takeout salads in 2019. But most of those also quickly ran out of juice.

The company’s IPO application shows it has three main revenue sources: sales of its own products on its own and third-party e-commerce platforms; subscription and other paid online content; and advertising and other services. They yielded 639 million yuan ($101 million), 380 million yuan and 140 million yuan, respectively, in the first three quarters of last year, up anywhere from 33.6% to 52.4%.

Lavish spending

Keep’s healthy revenue growth is still mainly driven by its lavish spending. In the first three quarters of last year, its sales and marketing expenses surged by 3.4 times to 818 million yuan, equal to more than 70% of total revenue. Keep explained by citing a strategic need to spend more to acquire users and promote its brand. From a more cynical perspective, one might see that as another way of saying it’s trying to beef up its financials to ensure a successful IPO.

The spending spree has come at a cost. Keep lost a total of 2.46 billion yuan in the first nine months of last year, up 68.2% from the same period a year earlier. Combined with the 2.24 billion yuan it lost in 2020 and 730 million yuan in 2019, it has lost a hefty 5.43 billion yuan ($860 million) in the course of just the past two years and nine months.

The company’s money-burning ways haven’t hurt its attractiveness to big-shot investors. All told, it has secured a total of $650 million in nine rounds of fundraising from investors like Tencent (0700.HK), Hillhouse Capital and 5Y Capital, an investment firm owned by Hong Kong real-estate tycoon Ronnie Chan. Softbank’s Vision Fund also led its series-F funding at the end of 2020, helping the company raise $356 million and obtain a $2 billion valuation. Its valuation rose further still to $2.49 billion after a series-F-1 round at the end of last year.

The company was sitting on 1.67 billion yuan in cash and cash equivalents at the end of last September, so it’s not about to lose its mojo at any moment. But it is feeling pressure from early investors who are looking to exit. Venture capital investors usually wait five to seven years to cash out of their investments, and it has now been seven years since Keep closed its first funding round. So the company may be eager to go public now to give those investors a chance to cash out while tech stocks are still relatively hot. 

Discipline to bring freedom?

For comparisons to show how Keep might fare, we can look at U.S.-listed online fitness platform Peloton Interactive (PTON.US), a former superstar that has recently fallen on hard times, and whose business operation resembles Keep’s. Its valuation in 2019 when it went public was $8.1 billion. That later soared to $30 billion as demand surged during the pandemic. But with tech stocks losing momentum now and the company facing its own issues, its shares have tumbled from a high of $169 to just $29, reducing its market value to just $9.6 billion. If Peloton is any gage, Keep may have difficulty securing a high valuation in the current climate.

The pandemic has changed every aspect of people’s lives and created great opportunities for some companies. Keep is certainly one of those, taking off as online fitness products experience great demand. But like any healthy company, it must ultimately find a way to make profits and identify a business model that can help it deliver returns to investors.

The company also notes in its prospectus that it will explore new revenue channels to complement existing ones. Aside from offering online fitness courses, either pre-recorded or livestreaming, it also plans to create premium fitness packages for high-end users. And it hopes to convert more users into subscribers with exclusive perks and products.

Such endeavors, if successful, could help to improve its gross margins. But its future trajectory is not without its hurdles. First, it faces tough competition from companies like Xiaohongshu and Douyin, the Chinese version of TikTok. And as a major online fitness platform in China, it will inevitably be subject to close regulatory scrutiny for potential monopolistic practices and possession of sensitive user data. The company hinted at such risks in its application.

All in all, it’s really quite up in the air just now whether, at the end of the day, “discipline will bring freedom” for Keep.

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