Boqii Cuddles Up to Premium U.S. Pet Food Maker

Online pet community operator signals intent to make more strategic investments as it buys undisclosed stake in Better Choice

Key Points:

• Boqii’s investment in U.S. premium pet food maker Better Choice could signal start to strategic acquisition campaign
• Company is relatively cash-rich, with $70 million in its coffers following its U.S. listing last fall

By Doug Young

Regulatory concerns about user data protection have thrown a major spanner in the works at U.S.-listed Chinese companies these days, both those already trading in New York and those preparing to list. But one company that has managed to largely stay above the fray is Boqii Holding Ltd. (BQ.US), operator of China’s largest online pet community.

Perhaps that means data on furry four-legged friends isn’t quite so sensitive, including things like what foods they prefer and where they take their daily walks.

But joking aside, even Boqii, which has just announced an interesting new investment in a U.S. premium pet food maker, hasn’t been completely spared from the recent carnage for New York-listed Chinese stocks. The company’s shares have lost about 5% of their value since the shock announcement by the Uber-like DiDi Global that it was being investigated by China’s cybersecurity regulator for potential data security issues.

Boqii’s decline looks quite modest compared with the nearly 30% fall for DiDi over the same period. The truth is that Boqii’s stock probably didn’t need to drop because it was already quite undervalued, despite the company being well-placed to become a consolidator in China’s vast but highly fragmented pet supply market.

Boqii has made a few strategic acquisitions already over the last few years, including its latest investment in U.S. premium pet food maker Better Choice Co. (BTTR.US), announced last week. Boqii didn’t say how much of Better Choice it was acquiring, though it was probably worth $5 million or less due to Better Choice’s relatively small market value of $50 million.

The announcement makes it quite clear that Boqii sees the tie-up as a chance to cement its relationship with a partner that supplies it with premium pet food for the China market. That looks like a healthy niche, as China’s growing legions of pet owners look for the latest ways to pamper their dogs and cats with everything from high-end foods to pet clothing and other accessories.

Better Choice is also an interesting story, having recently upgraded from over-the-counter (OTC) status to trading on the lesser-known NYSE American Exchange operated by the parent of the New York Stock Exchange. Better Choice underwent quite a bit of retrenching before making the move, including the conversion of $23 million in debt to equity and the raising of $40 million in an IPO that was part of the upgrade.

Better Choice appears to be in a strong growth mode, with its 2020 sales roughly tripling to $42.6 million. The company is losing money, though its loss for 2020 fell by about two-thirds to $60 million. Anyone wanting to learn more can check out its IPO prospectus.

Its big losses and restructuring appear to show Better Choice was a company that was having some financial problems despite having good products. So perhaps the overhaul and new listing, combined with a closer Boqii partnership, will help it finally move into the profit column going forward. From our perspective, the more important thing is that Boqii sees a good opportunity in this tie-up to sell more premium pet food to Chinese dog and cat owners.

Cash Rich

All that said, we’ll spend the second half of this space looking at Boqii’s own latest financials, including its cash position that looks quite strong and could position it for more M&A and other strategic investments in China’s fragmented pet market. We’ll also look at its valuation, which seems relatively low compared with domestic and global peers.

The company was cash-rich at the end of its latest quarter through March 31, with 461 million yuan ($71 million) on hand, up sharply from just 88 million yuan a year earlier. Most of that gain came from the $70 million it raised in its IPO last fall, when it sold shares for $10 apiece.

The stock initially rose a bit after the listing, with the shares moving as high as $12.45 in February. But it has been pretty much downhill since then, with the stock now trading at $4.10, giving it a market value of about $370 million.

Boqii’s IPO prospectus contains quite a lot of details on just how big and also how fragmented China’s pet market is. The company said on its most recent earnings call that 99% of all pet shops in China are either standalones or part of small local chains with five or less stores. Boqii is already partner to many of those, distributing products to more than 15,000 pet stores and hospitals in 250 cities in China, its prospectus says.

The company’s small stable of investments to date includes a 7.2% stake in a pet food maker called Shuangan, and its 2019 acquisition of a 23.6% stake in PetDog, China’s largest pet store franchise by store count. But the company is letting investors know there’s more room for it to boost its position in China’s pet market with more such investments.

“Our total cash position gives us extra strength and the flexibility to further invest in our products, our strategy and expand our portfolio offering to address a broader user base and needs,” chief strategy officer Fang Kai said on the company’s investor call in late May to discuss its latest quarterly results.

The actual results look relatively encouraging, with the company’s revenue up 47% year-on-year in the quarter through March to 156.6 million yuan. Its active buyer base also rose by a healthy 31% to 1.3 million. Its loss widened to 41.5 million yuan from 28.2 million yuan a year earlier, though the latest figure was about half the loss from the previous quarter.

In terms of valuation, Boqii trades at a price-to-sales (P/S) ratio of 2.4 based on its latest annual sales. That’s far lower than the 4.6 for U.S. peer Chewy, which is also losing money; and the 4.8 for China-listed pet food seller Yantai China. Boqii’s latest Better Choice investment didn’t do much for its stock, which actually fell slightly after the announcement. A few more similar deals might help to raise the company’s profile, and of course a move to profitability would be the best tonic to move Boqii more firmly onto investors’ radar screens.

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