Analysis of New US Stocks | After expanding against the trend, is Tangtang Jia already in a desperate situation?

WeWork's "Waterloo" has left the capital market "cold" towards the shared office service industry.

During its peak, WeWork's business once spanned over 700 communities in approximately 40 countries worldwide. With a valuation of $47 billion, it became the second largest unicorn company in the United States, second only to Uber, and was once referred to as one of the three giants of the sharing economy alongside Uber and Airbnb.

However, since its move towards the capital market, WeWork has been gradually "slipping". As early as September 2019, due to the market valuation being much lower than the valuation during private financing, WeWork withdrew its listing application in the United States. Little did they know, this was just the beginning of a "disaster".

With the global spread of the COVID-19 pandemic starting in 2020, WeWork's business operations suffered a major blow, leading to a rapid deterioration of its financial statements. This forced WeWork to go public through a SPAC merger in 2021, but by then, WeWork's valuation had dropped to $9 billion.

Furthermore, WeWork's performance after going public through this route was not satisfactory. Its business operations did not improve against the backdrop of a global economic downturn, high debt, and continuous losses leading to a cash flow crisis. The stock price quickly fell below $1 in April 2023, and by August 2023, WeWork officially delisted from the NYSE and applied for bankruptcy liquidation, with its market value at that time being less than $300 million.

In just 4 years, the $47 billion valuation evaporated, leaving people feeling regretful, and the capital market's attitude towards the shared office industry gradually turned "cold". However, WeWork's downfall did not deter other players in the shared office sector from heading to the capital market. For example, the Chinese office space operation service platform, TangTangJia (AGII.US), is sprinting towards the NASDAQ.

As early as September 16, 2022, TangTangJia submitted its public version of the prospectus (F-1 document) to the SEC for the first time. Since then, it has updated the prospectus 9 times, but has not yet been listed. During this period, TangTangJia has been "active".

Firstly, it sold approximately 5.0567 million shares of the company at a price of $3-3.8 per share, raising $15.4763 million to alleviate the company's urgent funding needs, and these shares will be handed over to the investors after this IPO.

At the same time, TangTangJia has lowered its fundraising amount multiple times. Initially, in the IPO terms set in November 2022, it planned to issue 8.7 million shares of common stock at a price of $4-5 per share, raising up to $43.5 million. By March 2023, TangTangJia adjusted its issuance plan to issue 4.5 to 6 million shares of common stock at a price of $4.5 to $6 per share, raising up to $27 million. Earlier this year, TangTangJia once again lowered its fundraising amount, intending to issue 2 million shares of common stock at a price of $5 to $6 per share, raising up to $12 million. In the prospectus updated on June 25, TangTangJia plans to issue 1.4 million shares of common stock at a price of $6-7 per share, raising up to $9.8 million Urgent financing at a low price before listing and consecutive reductions in fundraising amounts can indicate a significant shortage of funds for TangTangJia and the company's clear cold reception in the IPO. Can TangTangJia overcome this predicament? Will it replay the WeWork drama? Perhaps the most fundamental factor lies in the company's fundamentals.

"Survival by Cutting Off One's Arm" after Counter-trend Expansion

Looking at TangTangJia's development since 2020 from a retrospective perspective, there are clear strategic mistakes, namely aggressive expansion. According to the prospectus, by 2020, TangTangJia's business had covered 6 cities in China, with 48 working areas, a management area of 203,600 square meters, and approximately 28,900 operating workstations. Including pre-opening workstations, TangTangJia had a total of about 32,900 workstations in 2020, with an occupancy rate of mature office spaces reaching 87%.

By 2020, the COVID-19 pandemic had begun to spread nationwide, significantly impacting commercial economic activities and affecting TangTangJia's business operations. However, TangTangJia did not halt its expansion. In 2021, it expanded its business to 7 cities, increased the total number of working areas to 61, added over 50,000 square meters of management area within a year, and significantly increased the number of operating workstations and total workstations.

The expansion trend continued into 2022. Although the management area of working areas did not expand in that year, the additional management area from 2021 continued to be converted into new workstations, leading to a continuous increase in the number of operating workstations and the total number of workstations, which were 41,900 and 44,400 respectively.

Clearly, the management of TangTangJia aimed to accelerate expansion by leveraging the "black swan" of the COVID-19 pandemic to outpace other competitors in adversity. In reality, there are numerous examples of counter-trend expansion during industry downturns to achieve faster growth in favorable periods, indicating the viability of this development strategy.

Unfortunately, TangTangJia underestimated the duration and extent of the impact of the COVID-19 pandemic on commercial economic activities. By 2022, although the number of operating workstations and total workstations continued to grow, the occupancy rate of mature office spaces had dropped to 80%, a 7 percentage point decrease from 87% in 2020.

On one hand, new workstations are continuously increasing, while on the other hand, the occupancy rate of mature office spaces is declining, indicating increasing ineffective investments. The continuous losses have intensified the pressure on TangTangJia.

According to the prospectus, thanks to TangTangJia's counter-trend expansion, its revenue from 2020 to 2022 was RMB 357 million, RMB 459 million, and RMB 506 million, showing continuous growth. However, the net losses did not exhibit a scale effect of reducing losses with the expansion of scale. The net losses during the period were RMB 228 million, With losses of 293 million and 244 million, the total loss over three years amounted to 765 million RMB.

Due to continuous expansion and increasing losses, the situation for TangTangJia has gone from bad to worse, with its debt ratio continuously rising from 113% in 2020 to 125.64% in 2022, an increase of over 12 percentage points in two years.

Entering 2023, the immense financial pressure forced TangTangJia to make a drastic change by significantly reducing leased space to alleviate operational pressure. According to the prospectus, in 2023, the total number of workspaces at TangTangJia decreased from 65 to 8, total management area sharply reduced from 253,900 square meters to 26,100 square meters, a nearly 90% reduction in managed area. The number of workstations also decreased to 4540, a decrease of nearly 40,000 compared to 2022, leaving only a fraction remaining.

Following this major downsizing, TangTangJia's financial statements underwent corresponding changes. In 2023, TangTangJia's revenue was 319 million RMB, a year-on-year decrease of 36.9%. Gross losses surged to 184 million RMB, compared to a loss of 48 million RMB in the same period in 2022; however, net losses narrowed significantly from 244 million RMB in 2022 to 48 million RMB. The narrowing of net losses was attributed to an increase in other income, with revenue of approximately 400 million RMB recorded under other income due to lease terminations, while property and equipment disposal losses of 136 million RMB were incurred as a result of lease contract terminations.

In the first half of 2024, as TangTangJia's downsizing came to an end and commercial activities returned to normal, the company resumed slight expansion. Although it focused on 4 cities, the number of workspaces increased to 9, management area expanded to 50,600 square meters, and the total number of workstations rose to 8212, an 80.88% year-on-year increase. However, the scale was still significantly smaller than in the previous two years, with the occupancy rate of mature office spaces remaining at around 80%, reflecting relatively weak market demand in a sluggish economy.

After the "major downsizing," liabilities far exceed assets

From the analysis above, it is evident that TangTangJia's operations have been overly aggressive since 2020, with substantial ongoing losses, an asset-liability ratio exceeding 100%, and facing the uncertain factor of the pandemic, yet still choosing to expand against the trend, indicating a lack of risk control. While it is understandable for companies to take risks in the face of uncertainty, unfortunately, TangTangJia's gamble did not pay off Although TangTangJia underwent a "survival by cutting off one's own arm" in 2023 and resumed expansion in the first half of 2024, the future development of TangTangJia will still be very difficult for the following reasons:

Firstly, TangTangJia's balance sheet has deteriorated significantly.

According to the prospectus, as of December 31, 2023, TangTangJia's total assets after the "major slimming down" had dropped significantly to 227 million RMB, compared to 2.849 billion RMB in the same period in 2022, a year-on-year plunge of 92%. This is because the net amount of operating lease assets decreased from 2.322 billion RMB in 2022 to 73 million RMB in 2023, a typical "fire sale" of assets.

With the sale of assets, TangTangJia's total liabilities also decreased, from 3.579 billion RMB in 2022 to 1.067 billion RMB in 2023, but this is still 4.7 times the total assets in 2023. More importantly, TangTangJia's current liabilities in 2023 were 896 million RMB, including 140 million RMB in tenant rental retention and less than 90 million RMB in contract liabilities. Excluding these two items, TangTangJia's current liabilities in 2023 were still 666 million RMB, while the current assets in 2023 were only 55.55 million RMB.

It can be seen that TangTangJia faces enormous pressure to repay debts in the future, as the company has essentially entered a state of insolvency. This is also the reason why TangTangJia sold 5.0567 million shares at a low price before the IPO to raise 15.4763 million USD.

Secondly, the ongoing issue of continuous losses is difficult to resolve in the short term and will continue to affect the balance sheet.

The difficulty of achieving profitability in shared offices is a common challenge faced by the entire industry, and the reasons for this situation are multifaceted, including a single profit model, intense market competition, unstable occupancy rates, and high operating costs. Although TangTangJia underwent a "major slimming down" in 2023, resulting in a significant narrowing of net losses during the period, this was mainly due to the "fire sale" of usage rights assets that boosted profitability during the period, which is unsustainable.

Although TangTangJia resumed expansion in 2024, the key issue is that a profitable business model has not been established. The faster the expansion, the more losses will be incurred, as seen in the expansion from 2021 to 2022. Therefore, even if TangTangJia is currently expanding more rapidly, it will only make the company's situation more precarious, with losses continuing to increase and further raising the debt level.

In summary, TangTangJia, which misjudged the situation and accelerated its expansion from 2020 to 2022, has entered a very difficult situation. Although the company underwent a "survival by cutting off one's own arm" in 2023, it clearly did not reverse the situation but rather bought the company a breathing space. With the company's continued losses and total liabilities several times higher than total assets, it is still unknown whether it can successfully go public. Even if it does go public successfully, a significant reduction in the fundraising amount may not be enough to rescue TangTangJia from its predicament. Whether it can "turn the tide" remains to be seen