Key takeaways:
- Ubox has filed for a Hong Kong IPO despite reporting losses in the past two years due to pandemic-related disruptions to its core vending machine business
- The company’s backers include Alibaba’s Ant Financial, which led a 1.6 billion yuan investment in the company in 2019
By Ken Lo
Perhaps it hoped a star-studded investor lineup and use of a germ-safe non-contact automated retail concept would spare it from the worst of the pandemic. But if high-tech vending machine maker Beijing Ubox Online Technology Corp. believed it was safe, it has been sorely mistaken as it heads toward a Hong Kong IPO pocked with hardships.
This isn’t the first time going to market for Ubox. The company first listed in February 2016 on the thinly-traded National Equities Exchange and Quotations in Beijing. It later planned a backdoor listing on the A-share market in Shenzhen using New Huadu Supercenter (002264.SZ) as a vehicle, only to see the deal collapse over pricing. It found funds and a big-name backer in August 2019, when Alibaba’s (NYSE:BABA) Ant Financial affiliate led a 1.6 billion yuan ($240 million) funding round for the company.
Now it’s trying the IPO market again, though its latest listing plan is being dogged by a “black swan” event in the ongoing pandemic. Its IPO prospects are also further clouded by Ant Financial’s own IPO fiasco with the 11th hour collapse of its plan to list simultaneously in Hong Kong and Shanghai in late 2020. Concerns that the odds might play against any Alibaba-affiliated company in China’s domestic A-share market might explain why Ubox is now trying to cater to more international investors with its Hong Kong plan.
Diving into the red
Ubox’s retail business has generated steady cash over the years, including a profit of 40 million yuan on 613 million yuan in revenue from its operations as recently as 2019. Thus, the funding from Ant that year was probably more strategic than a sign of desperation more often seen from money-losing companies raising fresh funds.
But pandemic-related containment measures have put a major damper on Ubox’s business lately, since many of the public establishments that host its vending machines and mini-KTVs have been shut. That has pushed the company deeply into the red, with Ubox registering losses of 1.18 billion yuan and 190 million yuan in 2019 and last year, respectively.
According to its prospectus, Ubox’s revenues reached about 2.7 billion yuan in 2019, only to drop to 1.9 billion yuan in 2020 when the pandemic began, before rebounding back to 2.7 billion yuan as the situation in China stabilized. Most of that revenue came from its smart retail business, also Ubox’s most profitable business with gross margins in excess of 40%.
To better shield itself from the pandemic’s impact, Ubox has sharply cut back its reliance on directly-operated vending machines. It got just 22.8% of its business from such machines last year, down significantly from 83.7% in 2019, as it offloaded responsibility for machine operation to its business partners. That, combined with effective cost-control measures, helped it to substantially reduce its losses last year.
By the end of 2021, the company had more than 102,700 vending machines in 31 provinces and 288 cities across China, 80% of those in major affluent hubs. As many as 320 million identifiable users had made transactions using its machines by the end of last year, with more than 4.6 billion transactions closed. The company is China’s biggest operator of automatic vending machines with 7.4% of the market in terms of merchandise transaction value, according to third-party data cited in its prospectus.
Eye on M&A
Ubox’s dominance in automated retailing is being gradually challenged as competition heats up during the pandemic. Non-contact consumption has taken off in the last two years due to its hygienic nature, fueled by demand for machines that can distribute products with minimal contact that could potentially spread diseases.
The big demand has sparked a stampeded of competition to the space, resulting in lower prices for machines. Despite that, Ubox has benefited from its market-leading position that gives it greater economies of scale and lower operating costs.
For Ubox, the good news is that even though the pandemic will be over someday, the shift to low- or no-contact consumption is here to stay and will drive the future development of automated retailing. That market in China is expected to grow from 27.1 billion yuan in 2021 to 79.9 billion yuan in 2026, representing a compound annual growth rate of 24%, according to third-party data in the prospectus.
Ubox hopes to stay ahead of the competition by continually investing in product development to improve its core technologies. But its R&D spending is relatively small, accounting for just 1.4% to 2.2% of its revenues in the last three years – much lower than the 12% for industry peer New Beiyang (002376.SZ).
Instead, Ubox appears to believe it can get more bang for its buck from M&A. It spent heavily to acquire several software developers and smart vending machine operators before the pandemic, with its cash outflow on investments reaching 717 million yuan in 2019. The company’s prospectus also points out that it intends to use some of the funds from the listing to purchase or invest in promising automated retail companies.
In addition to New Beiyang, Ubox’s other peers include Aucma (600336.SH), which also dabbles in automated retailing, and Hong Kong-listed Pop Mart (9992.HK), which sells collectible toys from vending machines. New Beiyang has a price-to-sales (P/S) ratio of 1.79 times, compared with just 0.66 times for Aucma. Pop Mart leads the group with a lofty P/S ratio of 8.45 times. Using the average of around 3.63 times to calculate what Ubox might expect, the company could be valued at around 10 billion yuan if it completes the listing.
