Youlife chases SPAC listing after death of Hong Kong IPO

The provider of services for blue-collar workers is nearing completion of a Nasdaq SPAC listing to raise a modest amount of cash

Key Takeways:

• Youlife was approved by China’s securities regulator for a SPAC listing more than two years after abandoning its attempt to go public in Hong Kong
• The company may be desperate for cash due to an unprofitable business model revealed in its Hong Kong IPO prospectus two years ago

By Warren Yang

Desperation can surely be powerful fuel for getting things done, for better or worse.

That’s a lesson coming from the story of Youlife International Holdings Inc., which provides recruitment and vocational education services for blue-collar workers, as it falls back on a less-than-ideal Plan B on its journey to becoming a listed company. That plan took an important step forward last week, as China’s securities regulator approved Youlife’s listing on the Nasdaq using a special purpose acquisition company (SPAC).

The backdoor SPAC route was hardly Youlife’s original plan. The company tried its hand at a traditional IPO in Hong Kong at the end of 2022, submitting an application to the city’s bourse. But that plan lapsed after six months passed without any progress, and the company hasn’t provided any update since then.

Instead, last May, Youlife announced it agreed to merge with Distoken Acquisition Corp. (DIST.US), a SPAC already traded on the Nasdaq. SPACs like Distoken are shell entities that serve as vehicles for real companies to go public through reverse mergers, bypassing many of the cumbersome requirements for traditional IPOs.

Last Thursday, the China Securities Regulatory Commission finally approved the deal, clearing a key regulatory requirement for Youlife after China started requiring such approval for its companies seeking overseas listings in early 2023.

Youlife reportedly sought to raise at least $100 million in its original Hong Kong IPO attempt, according to reports at that time. That looked realistic back then given the valuations it fetched in pre-IPO fundraising, as investors bought into its growth story fueled by booming demand for services catering to Chinese blue-collar workers.

Prior to its IPO filing, the company raised about 1.3 billion yuan ($178 million) in six financing rounds, with investors including Hangzhou Electronic Soul, a subsidiary of Hangzhou Electronic Soul Network Technology (603258.SH); Anhui Shangqu Play, a subsidiary of 37 Interactive Entertainment Network (002555.SZ); Haining Zhongnan and New Oriental Fund. Its last fundraising at that time valued Youlife at as much as 3.3 billion yuan.

It’s not clear why Youlife’s Hong Kong IPO has never materialized, though it’s quite common for companies – especially first-time applicants – to abandon such listings after failing to satisfy the Hong Kong Stock Exchange and the city’s securities regulator. After its application lapsed, Youlife fell off stock investor radars before the Distoken deal surfaced.

One thing that’s clear is that Youlife is likely to get a far smaller valuation through the SPAC listing – assuming it gets completed. The SPAC raised just $69 million in gross proceeds from its own February 2023 IPO, and its market capitalization has shrunk to only about $37.4 million from what already was a modest amount to begin with. The falling valuation seems related to redemptions of shares worth about $32 million in November 2023 under revised terms to give the SPAC more time to complete a merger. That seems to signal slipping confidence from its original investors that the SPAC could complete its merger on time.

Distoken’s sponsor investor lent some funds to make up for part of the lost cash, but the SPAC’s war chest still decreased substantially. At the end of 2023, it held about $41 million in its trust account, the pool of money that will become available to its merger target. That means Youlife will receive far less cash from the backdoor listing through Distoken than what it was reportedly aiming for through the Hong Kong IPO.

Struggle for profit

All this suggests that Youlife’s valuation may have slipped since its original Hong Kong listing application. The company is most likely struggling to boost its profit, if it’s profitable at all, and may be desperate for cash. Distoken has yet to disclose any Youlife financials in its filings. But Youlife’s earlier Hong Kong IPO prospectus offers some hints about the company’s financial health.

Youlife racked up net losses of more than 540 million yuan in three and a half years through the first half of 2022. And those weren’t just accounting losses that are often non-cash in nature, such as depreciation costs. The company actually burned through quite a bit of cash, with cash and cash equivalents of just about 442 million yuan at the end of June 2022 after years of negative cashflow.

Youlife’s business model relies on demand from China’s blue-collar job market. The country needs such labor to achieve the high-quality economic development it is seeking, as well as for the modernization of its manufacturing and service sectors. Such workers are generally in short supply, as many young people gravitate towards college degrees that lead to better-paying and less physically demanding jobs.

That mismatch was supposed to be a bonanza for Youlife, which portrays itself as a “leading lifelong service provider for blue-collar workers in China.” The company’s offerings cover a whole spectrum of services that blue collar employees may need, from recruitment to vocational training. Youlife even acquired a vocational college in Hefei, capital of Eastern China’s Anhui province, in 2021.

But Youlife is hardly the only company chasing blue-collar demand. This field is highly fragmented and competitive, making it difficult for any single service provider to grow revenue fast or carve out a meaningful market share.

Worse yet, Youlife incurs high costs because it relies on outsourcing for key functions. Because of that, in 2019, the company’s gross profit margin was less than 0.5%. It improved to a bit more than 20% by 2021, but that’s still not too inspiring for a company that says it’s banking on the “empowerment of advanced technology.”

Given its pivot to a small SPAC listing, one can reasonably speculate that life hasn’t become much better for Youlife since its Hong Kong IPO attempt. Time was running out for Distoken as well, given that a U.S. SPAC typically has up to two years to complete a merger after its IPO, a deadline that would have fallen this month. Distoken extended that deadline to November this year after reaching its merger agreement with Youlife, giving it another nine months to complete the deal.

Still, the desperation to get this deal done is palpable on both sides.

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