E-commerce melee, feeding Cainiao

Huang Zheng really has guts.

By proactively exposing risks and astonishingly stating at the performance meeting that there will be no return to shareholders in the next few years, this can be said to be unprecedented among Chinese concept stocks. Investors who were scared stiff have voted with their feet, causing Pinduoduo's stock price to plummet by over 30% on the day of the performance meeting.

Behind this bold expectation management behavior, Pinduoduo has its own concerns.

In the past two years, whether to defend its own territory or to gain incremental market share, the "lowest price across the entire network" comparison system has become a standard feature for all e-commerce platforms. The battles against Pinduoduo, which has been maintaining contrarian growth, have gradually begun. These awakening opponents have shown signs of slowing growth for Pinduoduo, which has always maintained growth against the trend, prompting the management to be on alert.

Regardless of how capital is played, consumers are the ones who benefit the most from participating in the price war across all platforms, with not only insanely low prices for products, but also free return shipping.

While mainstream e-commerce platforms are gritting their teeth and subsidizing users at the expense of profits, recently, Hive Box, which had just submitted its listing application to the Hong Kong Stock Exchange, unexpectedly broke free from years of losses and turned a profit.

As a delivery service provider that shares the same fate with e-commerce platforms, Hive Box should not have been able to stand alone in the upstream battle for survival. How did it manage to turn the tide this time?

1. More favorable reverse services

Those who love shopping are probably familiar with the Hive Box cabinets downstairs in the apartment building. Every time after a shopping spree, when the cabinet doors open one after another to deliver a symphony to oneself, the emotional value provided by shopping is first satisfied. Hive Box's main business is this service of delivering the last 100 meters of express delivery through intelligent cabinets.

Because it can deliver purchased goods smoothly and efficiently, express delivery plays a crucial role in the e-commerce industry, and the rise of the e-commerce industry has also driven the development of the express delivery industry, with the two complementing each other.

However, as the growth rate of the e-commerce industry has slowed to single digits, growth has become a "demon" for many platforms. In order to attract consumers, in recent years, e-commerce platforms have begun to implement more aggressive policies. In addition to offering extreme discounts, some platforms even require sellers to provide free shipping insurance, covering return shipping costs for consumers.

This indulgent behavior by the platforms naturally does not go unnoticed by consumers. From 2021 to the first half of 2024, the return rate for brand stores has increased from 24% in 2021 to 35% in the first half of 2024, and the return rate for e-commerce platforms has even reached as high as 60% at one point.

This has directly led to a surge in reverse logistics demand (usually used for end-to-end logistics services for returns or exchanges). From 2019 to 2023, China's e-commerce reverse shipments grew rapidly at a compound annual growth rate of 22.7%.

As the largest owner of intelligent express cabinet network in the country, Hive Box has captured a significant increase in reverse logistics demand. The revenue from consumer intelligent delivery services launched by the company surged from 150 million yuan to 1.02 billion yuan at a compound annual growth rate of 161.32% from 2021 to 2023.

After three consecutive years of losses, the company also experienced a "rebirth" and turned losses into profits in the first five months of this year.

In addition to its abundant express cabinet resources, providing more favorable return services is another major advantage that has significantly improved Hive Box's performance.

With the expansion of the freight insurance compensation mechanism, the emergence of "wool party" who exploit the loopholes in the freight insurance rules to earn the price difference in freight has come. They usually choose merchants with freight insurance, place orders, and then return the goods. Because the freight insurance compensation is relatively fixed at 12 yuan, but the self-sent freight can be reduced to 5 yuan to some extent, returning one order can earn a price difference of 7 yuan, which is just the price of a good meal.

The centralized collection feature of Hive Box intelligent cabinets reduces the transportation costs for express delivery companies. This advantage allows the company to obtain more favorable logistics procurement prices, which in turn enables them to provide lower return shipping fees. Lower shipping fees mean more price difference, making Hive Box more favored by the "wool party".

Seizing the opportunity of the upstream growth in reverse logistics demand, Hive Box has won the favor of consumers and reversed its performance with its own advantages. However, the company believes that whether it is providing returns or storage services, it is essentially still focusing on the "narrow" aspect of express cabinets. In the current complex and unpredictable business environment, diversified development is the right path.

But having one more business means having one more cost, and the hope of stable profitability becomes increasingly distant as the costs generated by diversified development grow larger and larger.

II. Unbearable Costs

In the early days of its establishment, Hive Box mainly charged express delivery personnel for delivering packages and customers for overdue pickups. Not only is the profit model single, but the operating costs are also very high, with the cost of a set of cabinets reaching tens of thousands of yuan. As of the first five months of this year, 88.9% of the value of Hive Box's properties, factories, and equipment worth 17.3 billion yuan are intelligent cabinets. In 2021, 47.1% of the value of the right-to-use assets worth 37.1 billion yuan are also intelligent cabinets. The depreciation expenses of the right-to-use assets and properties, factories, and equipment in that year accounted for 74.9% of the total sales costs when combined The excessive initial investment in fixed assets is the main cost source that led to Fengchao's continuous loss in the early stage.

However, by the end of 2023, all Fengchao smart lockers that have been in operation for over five years have been fully depreciated. The depreciation expenses included in the cost of sales have correspondingly decreased, greatly enhancing the company's profitability, with a gross profit margin of 26.1%, nearly 16 percentage points higher than the same period last year.

In the first five months of this year, Fengchao's cost of sales was 1.41 billion yuan, of which depreciation of properties, factories, and equipment amounted to 460 million yuan, a significant decrease of 61.4% year-on-year. This proportion of total sales costs has also dropped to 5.7%. The depreciation of Fengchao lockers in the right-of-use assets has ended and no longer generates expenses.

The significant reduction in depreciation expenses, similar to the substantial increase in consumer payment income, has played a crucial role in turning the company's losses into profits. With the company's total revenue growing by 36%, the year-on-year increase in sales costs is only +2.4%, achieving a significant improvement in short-term profitability.

However, in order to break away from a single profit model, Fengchao has started to move away from express lockers and introduced new businesses such as service stations, laundry, and intelligent storage. But the expansion of new businesses is proving to be too costly. As of the first five months of this year, distribution costs have increased by 129.5% year-on-year, far exceeding the reduction in Fengchao locker depreciation.

The express lockers that have completed depreciation but are still in operation are generating revenue for Fengchao at zero cost. However, the cost savings from these lockers cannot keep up with the soaring costs of developing new businesses. The temporary profit boost from the end of depreciation is ultimately short-lived.

What is more alarming is that some income growth achieved through upstream competition is showing signs of unsustainability, as revealed in Pinduoduo's self-explosion.

III. Ambiguous Certainty

The fierce competition upstream has brought Fengchao considerable profits, but the industry phenomenon of mandatory low prices and mandatory freight insurance is somewhat abnormal. An industry where the entire supply chain is cutting prices to satisfy consumers is unhealthy, and the backlash will eventually be transmitted to end consumers, which is not conducive to long-term development.

Pinduoduo's open self-explosion behavior also indicates that its attitude towards merchants is beginning to oscillate between "continuing to tighten" and "slightly relaxing." However, excessive commercialization of traffic and increasing commission income will have a negative impact on long-term operations, a realization that Pinduoduo seems to have come to.

In July, Douyin significantly favored merchants, including but not limited to issuing product cards commission-free, reducing deposits, and lowering technical service fees; in August, Alibaba abandoned some of its low-price strategies for certain products. Although they have not completely abandoned low prices, mainstream e-commerce platforms are showing a trend of returning to pursuing GMV growth and maintaining industry health Upstream e-commerce battles show signs of easing, indicating a risk of lower coverage of platform shipping insurance and a possibility of reduced return rates for goods. This could potentially compress the growth rate for downstream Fengchao.

The road ahead has been dampened by the low single-digit growth rate in the e-commerce industry, leaving Fengchao without a clear and foreseeable growth direction. Moreover, the heavily indebted Fengchao currently faces challenges in long-term development.

As of the latest data, Fengchao's current liabilities exceed its current assets by more than two times. Most of the current liabilities are trade payables to maintenance providers for express cabinets and reverse logistics services. It turns out that Fengchao is also borrowing to provide consumers with more favorable services, not much different from upstream e-commerce platforms, essentially bleeding for growth.

Facing significant liquidity risks, Fengchao is eager for change as it seeks to go public.

According to the "2024 Global Unicorn List," Fengchao is currently valued at a high of 25 billion RMB. Given the unstable profit history, a PS valuation method is adopted. With a year-on-year revenue growth rate of 36% in the first half of the year and optimistic estimates of achieving a 30% year-on-year revenue growth for the whole year, reaching a revenue of 4.95 billion RMB. Calculated at a valuation of 25 billion RMB, Fengchao's pre-IPO PS ratio is 5 times, while the average PS ratio for the logistics and transportation industry in the Hong Kong stock market is only around 1 time.

Valuation is the expected value given by the market based on the company's development prospects. With no clear growth path for revenue and profit, how can Fengchao lacking long-term certainty convince the secondary market to pay a valuation significantly higher than the industry average? The risk of valuation contraction after the company goes public is not small.

Conclusion

Fengchao, indirectly nourished by the upstream e-commerce battles, has achieved remarkable results in the short term. However, when both the upstream parties realize that continuing this way will only lead to mutual harm and come to their senses, the benefits of the fisherman will also decrease one after another.

Long-termism requires adhering to compound thinking to bring about certain growth. When profits of companies in the industry are all growing, internal competition is good. However, when everyone deteriorates and performance starts to have negative feedback, it is necessary to quickly stop ineffective and low-quality internal competition. For the current e-commerce ecosystem, the higher growth rate of reverse logistics compared to forward logistics itself indicates that the actual demand is not as high as perceived. The high return rate is essentially a result of short-term demand caused by industry battles, and Fengchao built on this foundation may struggle to have a clear long-term outlook