Chinese luxury e-tailer Secoo plans to raise roughly $100 million in its upcoming IPO, which will offer 8.5 million ADS (American depositary shares) between $11.50 and $13.50 per share. It plans to trade on the Nasdaq under the ticker SECO.
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The Hong Kong-based company was founded in 2008 and entered the online luxury e-commerce market in 2011. A recent report by Exane BNP Paribas lists Secoo as one of China's "local champions" of the luxury market alongside Alibaba's (NYSE: BABA) Tmall, JD.com (NASDAQ: JD), and Tencent's (NASDAQOTH: TCEHY) WeChat.
This makes Secoo a lucrative play on the high-end Chinese e-commerce market, which has benefited from the growing number of middle and upper class customers across the country. Investors who are interested in the IPO should consider these five things.
1. Registered members & active users
Secoo's number of registered members rose 42% annually to 15.1 million as of June 30, 2017. However, Secoo had only about 300,000 "active" customers in 2016.
The number of active customers rose about 11% from 2015 to 2016, but it's a tiny figure compared to its registered user base. Secoo defines an "active" customer as a person who makes at least one purchase during the specified period, so the disparity between registered users and active customers could be concerning.
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2. Average orders
Secoo reported that its total orders rose 25% to 953,700 in 2016. Based on an active customer base of 300,000, the average shopper placed 3.2 orders throughout the year.
Secoo's total orders, from 200,000 active customers in the first half of 2017, rose 38% to 515,300. Therefore, active customers placed roughly 2.6 orders each during the first half of the year -- up from about 2.3 orders during the comparable period in 2016, which were made by 160,000 active customers.
The total number of orders per customer (which excludes auto sales) seem low, but the average order size was 3,500 yuan ($536) -- which is a very high figure compared to the average monthly salary in China of 5,630 yuan ($862).
3. Gross merchandise volume and revenue
A key metric for grading e-tailers is GMV (gross merchandise volume), which measures the total value of all goods sold through the platform. Secoo's GMV rose 35% to 3.47 billion yuan ($512 million) last year, while its total revenues rose 49% to 2.59 billion yuan ($397 million).
For the first half of 2017, Secoo's GMV rose 51% annually to 1.92 billion yuan ($290 million), but its total revenues only rose 30%. This disparity indicates that although Secoo sold more items through its platform, its cut of the total revenues seems to be shrinking -- which could be a red flag for its future growth.
4. Full-year profit?
Secoo's net loss narrowed from 222 million yuan to 45 million yuan ($6.6 million) between 2015 and 2016. But for the first half of 2017, it reported a net profit of 52 million yuan ($7.7 million), indicating that it could finish this year with a full-year profit. It accomplished that by reducing operating expenses, with fell annually in 2016 and the first six months of 2017.
However, Secoo has also been burning through its cash. Its cash and equivalents plunged from 285 million yuan ($44 million) to just 56 million ($8 million) between 2015 and 2016, and fell to $5 million at the end of the second quarter. Therefore, it's unclear how long the $100 million that it hopes to raise from its IPO will actually last.
5. Tough competition
Secoo carries over 3,000 domestic and international brands on its site, and that list includes high-profile luxury brands like Versace and Salvatore Ferragamo. However, bigger rivals like Tmall, JD.com, and WeChat are also focusing on the online luxury market.
Tmall recently launched a "luxury pavilion" storefront which showcases top premium brands. JD bought a near-$400 million stake in luxury e-tailer Farfetch to expand its high-end offerings, while Tencent convinced companies like LVMH and Burberry to sell products within its WeChat ecosystem.
Those moves could all lure shoppers away from Secoo, forcing it to burn through its cash even faster with marketing blitzes and big promotions. But if Secoo defends its niche, it could become a lucrative buyout target for those larger companies -- since its app already accepts payments from Alibaba's Alipay and Tencent's WeChat Pay.
It's a speculative play for now
I recently placed a small conditional order for Secoo's IPO, because I like its niche appeal, revenue growth, and bottom-line improvements. But I only plan to invest a small amount, since it remains vulnerable to bigger players while its cash burn and low active customer numbers raise questions about its longevity.
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