Key takeaways:
- Gogox has been approved to list in Hong Kong despite operating in the red for years and seeing no potential profits for at least the next two years
- Company derives lion’s share of its revenue from mainland China, but may be losing ground to a new rival operated by DiDi Global
By Jony Ho
Gogox Holdings Ltd. may be a massively money-losing online logistics platform, but that doesn’t mean it’s not going places. Despite losing 2.3 billion yuan ($360 million) over the past three years, the Alibaba-backed (NYSE:BABA) operator of a trucking service-for-hire met market capitalization and revenue requirements for a listing in Hong Kong, which normally frowns on IPOs for money-losing companies.
Having reached those milestones, Gogox has received the official green light to move ahead with a listing on the city’s main board. Its IPO application was approved and uploaded on Sunday to the Hong Kong Stock Exchange website.
Gogox was established in 2013 and operates China’s second largest online intra-city logistics platform. It plans to raise up to $500 million through the listing, according to financial news publication IFR.
The company’s prospectus shows that it posted losses attributable to shareholders of 1.07 billion yuan, 184 million yuan and 658 million yuan in 2018, 2019 and 2020, respectively. It lost another 393 million yuan in the first three quarters of last year, and doesn’t see itself breaking even in the next two years. So, how can such a sea of red ink convince investors to cough up big bucks for its IPO?
The company’s journey dates back to July 2013 when three young Hong Kongers, Lam Hoi Yuen, Kwan Chun Man and Tang Kuen Wai, returned from their overseas studies in the U.S. and set up their venture with two friends experienced in computer programming and design. They founded GoGoVan, the predecessor of Gogox, becoming the first smartphone app in Asia that could instantly locate truck drivers to provide delivery services.
Its edgy business model breathed new life into the logistics industry and the company secured $370 million in its first three fundraising rounds. In 2016 it broadened its footprint to the Chinese mainland, Taiwan, India, Singapore and South Korea.
A year later GoGoVan merged with mainland logistics company 58 Freight, creating a company worth more than $1 billion, making it one of Hong Kong’s earliest unicorn startups. It changed its name to Gogox the following year. Its Chinese name, “Fast Dog,” conveys its aim to provide fast service with the same devotion as man’s best friend. It now has operations in more than 340 cities with more than 4.9 million drivers in its network.
Gogox has conducted five fundraising rounds to date, giving it a pre-IPO valuation of $2 billion. Its largest shareholder 58 Daojia, part of the online ad group often called the “Craig’s List of China,” holds 51.2% of its shares. Alibaba holds 15.99% of its shares, and the three founders hold 17.58%.
Gogox’s biggest market is mainland China, which has supplied 50% to 70% of its revenue over the past three years. Its income comes mostly from commissions, which it takes in the form of membership fees and a cut from its drivers’ earnings.
The company has faced a formidable new kid on the block since DiDi Freight, a similar platform operated by the Uber-like DiDi Global (NYSE:DIDI), entered the market in June 2020 and has expanded rapidly. Effects from the new competition are reflected all over its latest business performance.
The impact is most obvious in its plunging commission rates, which fell from 6.6% in and 8.3% in 2019 and 2020, respectively, to just 2.7% in the first three quarters of 2021. Put differently, the company now only earns $2.70 in commission for every $100 order, or about a third of what it was getting in 2020.
More red flags appear in declines for other indicators, such as monthly active users (MAU), its number of shipment orders and the total value of its transactions. All of those have been falling since early 2020, hinting at weakening momentum for the company in its biggest market.
Slipping in China
Market research cited in Gogox’s prospectus shows it was the second largest intra-city logistics platform in China in 2020 with 5.5% of the market, followed by DiDi Freight at third with 3.1%. But by September 2021, it had lost its No. 2 position by falling to 3.4% of the market, while DiDi Freight’s share rose to 3.9%, hardly a reassuring situation.
Gogox has personal data from over 1 million users, but has not been classified as “a critical information infrastructure operator” by Chinese regulators, which should lower its regulatory risk. However, its decision to go public in Hong Kong almost certainly reflects its realization that cross-border data flow is a touchy subject for Beijing, especially given the current political frictions between China and the U.S.
Gogox might have also learned a lesson or two from the tale of DiDi’s (NYSE:DIDI) controversial IPO in the U.S. last July. DiDi became the target of China’s internet regulator shortly after the IPO due to its data security risk, and the company announced it would leave the New York Stock Exchange just five months after the IPO. In that context, Hong Kong represents a safer place to list, reducing potential policy risks Gogox will face. Hong Kong is also closer to Chinese investors, many of whom are more familiar with the company, which could help its valuation.
While DiDi Freight is part of the much larger DiDi Global, Gogox’s other two big rivals, Lalamove and Huitouche, are not currently listed. To estimate its valuation, we can use an emerging player, Full Truck Alliance (NYSE:YMM), which entered the intra-city trucking market in 2020 and is currently listed in the U.S. as reference. Its current price-to-sales (P/S) ratio is 13.6 times.
Gogox’s prospectus shows its revenue has been quite stable in recent years, hovering around 453 million yuan to 548 million yuan from 2018 to 2020. Its figure for the first three quarters of last year was 470 million yuan. Assuming that holds steady into the fourth quarter and using Full Truck Alliance’s P/S ratio as a reference, Gogox might expect a valuation of HK$10.4 billion ($1.33 billion) – well below the $2 billion at the time of its last funding.
An IPO now makes sense while the company is still a market leader in China. Since it meets Hong Kong’s thresholds of a HK$4 billion ($513 million) valuation and HK$500 million in annual revenue despite still running at a deficit, why not avail itself of this opportunity to raise money through an IPO that could help it expand into new markets?
Given the sorry state for U.S.-listed Chinese stocks over the past year, the decision to list in Hong Kong also looks wise, and could help Gogox to pump up its valuation. But investors are still likely to expect a roadmap to profitability before they’ll be fully convinced of the company’s longer-term potential.
