Burning money for unlimited expansion? Express delivery industry's "disruptor" Gogovan plans HKEX IPO

Over the past three years, Jitu Express, which entered the Chinese market, hitched a ride on Pinduoduo's rise and successfully stirred up a pool of stagnant water.

Recently, Jitu Express submitted its prospectus to the Hong Kong Stock Exchange, attempting to obtain more capital to support its high-speed expansion.

According to Frost Sullivan data, by package volume, Jitu Express's market share in the Southeast Asian market reached 22.5% in 2022, ranking first and three times that of the second place; in the Chinese market, its market share reached 10.9%, ranking fifth.

From the prospectus, it can be seen that on the road to Jitu Express's rise, not only does it need the support of large orders from e-commerce platforms, but it also needs sufficient capital to support the price war that has not yet seen an end. As of now, Jitu Express has completed seven rounds of financing totaling about $5.5 billion, with a shareholder list that includes star institutions such as Tencent, Boyu, Hillhouse Capital, and Sequoia.

In 2022, due to the price war of burning money and subsidies in the industry, Jitu Express is in a loss-making state in the Chinese market and other overseas markets except for the Southeast Asian market. Its single ticket price in the Chinese market is only higher than that of ZTO Express, and it loses about 0.06 US dollars (about 0.43 yuan) per contract.

In 2022, Jitu Express's difficult turnaround from losses was not due to profitable business operations, but because the fair value gain and loss of financial liabilities reduced expenditures by $3.05 billion, and it recorded a net profit of $1.573 billion during the period.

It can be certain that the marginal effect of burning money for scale is decreasing. In 2021 and 2022, Jitu Express's revenue growth rate in the Chinese market was 355.6% and 87.8%, respectively, which has clearly slowed down.

However, Jitu Express has not yet found a balance between profitability and scale in the Chinese market. When and how to sustainably make a profit is the question that Jitu Express must answer to enter the capital market.

A "Disruptor" Emerges

In 2020, Jitu Express, which originated in Southeast Asia, entered the Chinese market and pushed the industry's price war to a climax.

At that time, the industry structure tended to be stable, and the three major express delivery companies were fighting for market share, but each had limited means, and price reduction was the most effective one.

The effect of the price war was obvious, and the profitability of the Tongda system was collectively damaged.

ZTO Express's (2057.HK) gross profit margin declined from 35.17% in 2016 to 29.95% in 2019; during the same period, STO (002468.SZ) dropped from 19.85% to 10.48%; YTO Express (600233.SH) dropped from 13.56% to 12.01%; and Yunda Express (002120.SZ) dropped from 31.16% to 13.15%.

Jitu Express, which had just entered the Chinese market, catalyzed this "battle" to become more intense. In 2020, STO's gross profit margin was only 3.37%, and YTO Express and Yunda Express were around 9%, even worse than the daily fresh vegetable seller Meiriyouxian during the same period. In 2021, in the main production areas of express delivery such as Yiwu, Jitu Express shouted the slogan of "8 cents express delivery to the whole country", and through burning money to subsidize merchants and outlets, it hoped to achieve coverage of the whole country by "riding the net" of Tongda system.

But this ultimately led to the collective blockade of the Tongda system. The Tongda system issued articles one after another prohibiting franchisees from representing Jitu's business, and prohibiting Jitu's express delivery from entering the Tongda system's transfer center.

For Jitu Express, which has just entered the Chinese market, the speed of building its own trunk network and transfer center is still too slow, and it cannot keep up with the growth rate of large customers such as Pinduoduo, which contributed 35.4% of Jitu Express's revenue in 2021.

So Jitu Express began to acquire multiple times to expand its scale quickly.

In October 2021, Jitu Express launched a bid to acquire Best Express, which gradually fell behind in the price war, at a price of US$715 million. This transaction also allowed Jitu Express to successfully obtain orders from Taobao merchants, enter the Taobao e-commerce ecosystem, and cross the "threshold" into the forefront of the industry.

In 2021, Jitu Express's asset scale soared from US$2.243 billion to US$6.544 billion, nearly tripled. According to Anxin Securities' research report, the daily average volume after the merger will reach 45 million orders. During the same period, the daily average volume of Yunda Express was about 50 million orders.

In May of this year, Jitu Express once again made a move, spending 1.183 billion yuan to acquire Fengwang Express, a subsidiary of SF Holdings (002352.SZ), which once reached a peak of 8 million orders per day.

Behind the frequent capital operations is the ammunition provided by the US$5.5 billion raised by Jitu Express in 7 rounds of financing. In 2021 and 2022, the net cash received from Jitu Express's financing activities was approximately US$3.47 billion and US$880 million, respectively. As of the end of 2022, Jitu Express still had cash and cash equivalents worth US$1.5 billion on its account.

Among the top five external institutional shareholders, Tencent, Boyu, ATM, D1, and GGV Capital bought the bill for Jitu Express, with shareholding ratios of 6.32%, 6.1%, 5.49%, 3.1%, and 2%, respectively. In the latest D-round financing of US$200 million opened in May this year, SAI Growth and CMB International entered and held 0.54% and 0.39% of the shares, respectively.

Burn Money for Scale

With about US$1.5 billion lying on the account and still going public for financing, Jitu Express, which has not yet demonstrated sustainable profitability, will continue to maintain a high level of capital expenditure in the future to seize a larger scale, achieve economies of scale, flatten the cost curve, and then make a profit.

For example, ZTO Express, which currently has the highest market share in the industry, earns more than the other three companies combined in a year, with a net profit margin of more than 18%, while the other three companies have less than 5% of the level.

Jitu Express's fundraising this time has the purpose of expanding infrastructure investment. Its fundraising scale is between US$500 million and US$1 billion, and the fundraising purposes include expanding logistics networks, upgrading infrastructure, and strengthening sorting, warehousing capacity, and capacity in Southeast Asia and other markets; opening up new markets and expanding service scope. R&D technology innovation; supplementing operating capital, etc.

It can be determined that a portion of the funds raised will flow into the mainland China market.

In 2022, the Chinese market became the largest market for Jitu Express, contributing approximately $4.1 billion in revenue, nearly twice that of the Southeast Asian market. The Chinese market, which expanded through subsidies, also contributed approximately $340 million in net losses. Jitu Express attributed this to fierce industry competition and increased capital expenditures during network expansion in its prospectus.

The main reason why Jitu Express can spend money in the Chinese market with peace of mind is that its origin in the Southeast Asian market can provide stable profit and cash flow performance.

In 2022, in the Southeast Asian market where Jitu Express has the highest market share, the single ticket price can reach $0.95, while the single ticket cost is $0.76, and the single ticket profit is about $0.19 (about RMB 1.36).

In contrast, Jitu Express's single ticket price in the Chinese market is about $0.34 (about RMB 2.43), but the single ticket cost is $0.4, and the single ticket net loss is about $0.06 (about RMB 0.43).

Comparing Jitu Express's single ticket price with that of Tongda, it is only higher than that of Zhongtong Express at RMB 1.34, far lower than the level of the other three companies at RMB 2.52-2.59. However, this is already the result after the price increase. In 2020, Jitu's single ticket price in China was only $0.26. In the prospectus, Jitu Express stated that the parcel volume increased from 8.3 billion in 2021 to 12 billion, which improved its bargaining power.

However, Jitu Express's scale advantage in the Chinese market is not yet obvious. The order volume of the industry leader Zhongtong Express in 2022 is 24.4 billion, and that of YTO Express is 17.8 billion, while STO, which sacrifices profits for scale, is at 13 billion, with the lowest net profit margin of only 0.81%.

Therefore, to achieve profitability in the Chinese market through scale advantages, Jitu Express's order volume of 12 billion is still far from enough. The listing fundraising may only be another beginning of Jitu Express's continued burning of money.