Key points to remember:
- Boqii’s revenue fell slightly in the three months to June, although business at its stand-alone mall grew 20%
- The company could face debarment if it cannot raise its market value above $50 million – more than double the current level – by early 2024
By Doug Young
If there’s one group that has suffered the most during China’s ongoing Covid lockdowns, it’s arguably the thousands of pets that inhabit major cities like Shanghai, Chengdu and Shenzhen. Many of them have been locked up for weeks or even months, which can be especially difficult for dogs accustomed to daily walks and doing their “business” outside.
In this context, the online pet community operator Boqii Holding Ltd. QB did surprisingly well during its last three-month reporting period, which included the months of April and May when the greater metropolis of Shanghai was completely shut down.
Perhaps its strong performance is partly due to the fact that Boqii seems to be falling back on its online strategy these days, having trumpeted its intention to move to a more hybrid online and offline strategy last year. Online retailers have done much better during the shutdowns than traditional brick-and-mortar stores, many of which were shuttered for weeks or even months during the period.
There was no mention of Boqii’s offline initiative in its latest earnings report last Thursday, likely indicating that the effort made little or no contribution during the period. This is not surprising, since all stores in Shanghai, which house both the company and its first physical outlet announced last year, were completely closed for the two months of the period.
That said, the company still faces a very skeptical crowd on Wall Street, where investors don’t seem to believe it has strong profit potential despite the enormous size of the Chinese pet market. The company also faces a challenge from the New York Stock Exchange, which has threatened it with delisting if it cannot bring its market capitalization above its minimum threshold of $50 million.
We’ll come back to the delisting threat later, but we’ll start by looking at the latest report which actually seems quite optimistic despite the miserable environment for pets and China’s economy in general in the three months to June. . Even more temptingly, Boqii hinted at the prospect of becoming profitable in the not-too-distant future as its loss fell sharply on the back of sharply improving margins.
On his post-earnings conference call, attended by only one analyst, recently installed CFO Tang Yingzhi said the company’s improved performance over the past quarter, despite all the external headwinds , “shows our potential to achieve profitability”.
According to the latest report, Boqii’s revenue was actually nothing to worry about, dropping 2% year-on-year to 315.1 million yuan ($45 million). But that headline figure hides the fact that the company’s less profitable business with third-party users of its platform was the main reason for the decline, while its more profitable direct business actually saw strong growth.
Specifically, the company’s Boqii Mall revenue actually increased 20% in the quarter year-over-year, while third-party e-commerce revenue fell 14.8%. As a result of the split, Boqii Mall accounted for 43% of the company’s total revenue in the quarter, up from 35% a year earlier. The company’s information and marketing services also posted 14.7% growth for the quarter, although that figure still represents a mere 3% of its total revenue.
Like many other Chinese companies that rely heavily on e-commerce, Boqii quickly discovers that margins are much better on premium products than on generic products. As a result, the company is focusing more on these premium products, which seems like a no-brainer in a country where many people are known to spare no expense in spoiling their furry friends.
In addition to private label pet foods, the company is also seeing higher margins in products such as pet supplies and pet health care products.
At the same time, Boqii was able to cut costs, with operating expenses down 17.7% in the year-on-year quarter to 80.6 million yuan. This combination of higher-margin products, combined with lower costs, fueled a sharp increase in the company’s gross profit margin to 22.4% from 17.9% a year earlier. On the earnings call, Tang said she believes there is room for further improvement of up to 30%, hence the potential for profitability in the not too distant future.
While most of its metrics have improved, Boqii narrowed its net loss to 12.4 million yuan for the quarter, about two-thirds of its loss of 37.4 million yuan a year earlier. The company needs to focus more on its bottom line going forward, as its current cash position now stands at 247 million yuan – not low enough to worry about a looming cash crunch, though still a little down. down from 290 million yuan three months earlier. .
Investors seemed to like the report, with shares of Boqii rising 7.7% on the day of the announcement. But they returned all that and more over the next two trading days, showing that the market remains concerned about the company.
One of their biggest concerns could be Boqii’s potential delisting if it can’t raise its market capitalization above the $50 million threshold required by the New York Stock Exchange. The company announced that it fell below that threshold in April, and its current market capitalization now stands at just $20.5 million, less than half of the required amount.
The company said in its last annual report in July that it gave the NYSE a plan to return to compliance over the next 18 months, meaning it still has plenty of time to get its shares back above. of the minimum threshold. It is now up to investors to do their part by showing more interest in the stock, which could happen if Boqii can turn a profit.
Weak sentiment towards Boqii shares is reflected in the company’s latest price-to-sales (P/S) ratio, which sits at a “ruff” level of just 0.13 times. By comparing, Yantai China Pet Foods (002891.SZ) and American player Soft CHWY hold at much healthier P/S levels of 2.5 and 1.56 times, respectively. Honestly, there’s really no reason why Boqii couldn’t achieve a similar ratio, given its strong position in China and improving financials. Perhaps investors could sit up and take more notice if and when the company can finally post a profit.