The cross-border e-commerce company has applied to list its shares in Hong Kong after unsuccessfully shopping around mainland exchanges.

The cross-border e-commerce company has applied to list its shares in Hong Kong after unsuccessfully shopping around mainland exchanges  

Key Takeaways:

  • Augroup Technology’s profits more than doubled last year to 520 million yuan
  • The company has scaled back its reliance on Amazon in recent years, as the platform’s contribution to gross revenue fell to 53.8% last year from 83.9% in 2021

 

By A. Au

China’s Augroup Technology Co. Ltd., an e-commerce firm selling furniture and household goods on global online platforms, is trying to make a home on the Hong Kong Stock Exchange after struggling to find the right setting for its shares.

The cross-border e-commerce company has already tried several equity options. After delisting from Beijing’s National Equities Exchange and Quotations (NEEQ) market in 2019, the online retailer sought to place its shares on Shanghai’s Nasdaq-like STAR Market and Shenzhen’s ChiNext board. Both listing attempts failed.

Now Hong Kong investors are being offered the chance to take a stake in the company, which sells to consumers through major third-party sites such as Amazon (AMZN.US), Walmart (WMT.US) and homewares site Wayfair. This time the company has enlisted Huatai International as the sole sponsor for the proposed listing.

The Augroup prospectus has the look of a furniture catalogue, displaying a product portfolio with plush sofas, luxury upholstered beds, sleek sideboards and vanity cabinets. The document describes how the company supplies furniture from brands such as Allewie, Ironck, Likimio, Sha Cerlin, Hostack and Fotosok, as well as selling consumer electronics and sports products.

According to Frost & Sullivan, Augroup topped the sales charts last year on Amazon’s U.S. site in six product categories including bed frames, food cabinets, vanity tables and vanity benches, while 11 of its brands each generated more than 100 million yuan ($13.8 million) in gross merchandise volume (GMV). In 10 product categories, including bed frames, beds, refrigerators, dressers and chests of drawers, the company held more than a 10% market share on Amazon’s U.S. site. The prospectus also said the average return rate for its products on third-party e-commerce platforms was only 3.5%, well below the industry average.

However, the company’s financial performance over the past three years has been volatile. Revenues reached 9.07 billion yuan in 2021, falling to 7.1 billion yuan in 2022, and rising again to 8.68 billion yuan last year. The bottom line has also been bumpy. The company reported a loss of 590 million yuan in 2021, then swung to a profit of 223 million yuan in 2022. Last year, profits surged 133% to 520 million yuan from the previous year. Gross margin improved from 20.9% in 2021 to 34.5% last year.

The loss in 2021 mostly resulted from the company being blocked by Amazon. The online retail titan suspended numerous accounts of fast-growing Chinese e-commerce enterprises, including Augroup, Patozon, Tomtop and Youkeshu, cutting off sales of their most popular items and decimating cash flows. Some of the companies were forced to sell off assets to stay afloat.

At the time, Amazon cited abuse of the site’s comment function, implying that some sellers had been posting fake reviews to boost product rankings. Amazon later restored the accounts, but the episode acted as a powerful deterrent for Chinese sellers operating on its website.

Augroup addressed the crackdown in its prospectus, saying it had swiftly ordered an end to such practices in May 2021 after finding that some staff had given unofficial promotion ratings or comments on Amazon. The company said it carried out an internal review of online operations and took remedial actions.

The incident exposed the risks of dependence on a single platform, prompting Augroup to reduce Amazon’s share of its GMV from 83.9% in 2021 to 53.8% last year. Meanwhile, the revenue share from Walmart increased from 3% in 2021 to 9.8% last year, and Wayfair’s grew from 1.7% to 10%. Other platforms including eBay saw their combined share rise from 2.2% to 3.1%. The company is also working on boosting sales through its own website.

But the data still shows a heavy reliance on Amazon.

Aside from online sales, Augroup has also been growing its logistics business, serving more than 700 e-commerce companies through a multi-tiered international warehouse network. By the end of last year, the company was operating 27 warehousing facilities in major port cities in the United States and Europe.

Monetizing logistics

In 2021, revenue from logistics solutions amounted to 490 million yuan, just 5.4% of total revenue. By 2022, the figure had jumped to 775 million yuan, taking the revenue share to 10.9%. Last year, income from logistics more than doubled to 1.65 billion yuan, boosting the revenue contribution to 19%.

The IPO proceeds are earmarked for a business expansion and logistics upgrade, according to the prospectus. Augroup aims to build global prototyping centers to achieve faster standardization, optimize product development and cut associated costs. Funds would also be put towards digitizing and improving information management systems, enabling potential investment and acquisition activities, and supporting general operations, the company said.

But simmering tensions between China and the United States threaten to throw a spanner in the works. Chinese companies selling into the U.S. are unsure which sector could be next in line for punitive action. Augroup, with its dependence on big-name platforms, warned investors in the prospectus that it could not rule out being affected by any deterioration in China-U.S. relations.

The company also states clearly in the prospectus that the U.S. government could introduce measures that will hurt its industry or cause third-party e-commerce platforms to change their policies, potentially affecting U.S. access for its products.

The company has conducted four financing rounds and eight equity transfers, attracting investors such as Shanghai Greenwoods Asset Management, Shenzhen Capital Group and Sequoia Capital. Meanwhile its price has rocketed from 0.66 yuan per share to 16.8 yuan. The company was last valued at 6.47 billion yuan, based on the sales price of 16.8 yuan per share secured at the last financing round. But the general slump in the Hong Kong stock market might prove to be a handicap. E-commerce stocks such as Alibaba (9988.HK; BABA.US) and JD.com (9618.HK; JD.US) have all declined in the year to date. If Augroup wants to achieve an impressive launch on the Hong Kong market, it might have to come up with a strong sales pitch.

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