Rising Losses, Intensifying Regulations Hobble ‘Fast Dog’ Gogox

The intra-city logistics provider warns of ballooning losses less than two months after its Hong Kong IPO

Key Takeaways:

• Gogox warned that its loss grew sharply in the first half of the year, as its shares have lost more than two-thirds of their value since their June IPO
• China’s Transport Ministry’s clampdown on fierce competition among freight transport platforms could hinder Gogox’s business expansion that relies on user subsidies

By Lau Ming

Gogox Holdings Ltd. (2246.HK)sprinted out of the gate when the company, whose name means “quick dog,” became Hong Kong’s first publicly listed intra-city logistics platform in June. But just two months later, the company is quickly losing its wind after its shares fell into a downward spiral that saw them tumble as much as 80% from their IPO price.

Each new trouble seems to come fast on the heels of the last. Last week the company warned it expects to report a loss of between 1.02 billion yuan ($150 million) and 1.15 billion yuan in the first half of the year, more than triple its loss a year earlier. Even its non-GAAP loss, which excludes factors like employee stock incentives, was between 115 million yuan and 130 million yuan, up more than 30% from a year ago as it spent more on hiring and related expenses.

Despite the ballooning losses, investors can take some consolation in the 19% revenue growth Gogox logged in the first half of the year to 359 million yuan despite frequent closures that were part of China’s Covid-19 pandemic control measures. But investors should also look out for difficulties Gogox could face in its future expansions as China’s Transport Ministry clamps down on race-to-the-bottom competition in the sector.

Plunging share price

Gogox went public on June 24 at a price of HK$21.50, and saw its stock rise as high as HK$23.15 on its debut day. But then the stock quickly went into a tailspin and traded as low as HK$4.92 early this month, down nearly 80% from its IPO price. The shares have come back somewhat since then, including a nearly 50% cumulative rise over two trading days, though it is still down by more than two-thirds from its IPO price.

Observers believe the turnaround may have been sparked by aBOCI Securities report published on Aug. 8 pointing out that Gogox’s monthly active users (MAU) reached close to 1.4 million in June. If that data was correct, it would represent a more than doubling of the 620,000 MAUs that Gogox said it had in 2021, according to its prospectus.

But unfortunately for Gogox, BOCI’s data came from the finance big-data platform DataYes, and was not complied with the same metrics as data from the company itself, meaning it was a bit of an apples-to-oranges comparison. According to the same BOCI report, Gogox’s MAU base was growing for three months in a row after previously shrinking since last October, with June’s figure up more than 10% from May. But seasonal factors could be at play since historical MAUs have rallied somewhat during the second quarter of the last two years, meaning the rebound may be a fleeting thing.

The online intra-city logistics market in China and Asia has a low penetration rate and huge demand, leaving big room for strong growth in the years ahead. According to market research firm Frost & Sullivan, the market’s transaction value could grow by more than 50% annually between 2021 and 2026. Despite that, companies are likely to see their profit margins erode as everyone offers discounts and subsidies to build up market share and retain users.

Gogox also admits in its prospectus filed in June that it will use some of its IPO proceeds to keep user incentives this year and next year at 2021 levels or slightly higher. That continued big spending, combined with other business investments, mean the company is likely to continue reporting losses over the next two years.

The company will also need to steer clear of China’s Transport Ministry, which is trying to rein in overheated competition. Last November the ministry asked freight transportation operators to stop actions that would incentivize customers to demand lower freight fees or trucker drivers themselves to lower prices. In July, the ministry summoned executives from Lalamove, Full Truck Alliance (YMM.US), Didi Freight and Gogox to a meeting and ordered them to deal with irregular industry practices like price-cutting competition, duplicate charges and other operational improprieties.

Tapping the brakes on competition

Greater regulatory scrutiny can curb destructive competition and lead to healthier development for both individual companies and the entire industry. For Gogox, the regulator’s actions would reduce pressure from intense competition, but would also make doling out generous subsidies a less viable strategy to grab more market share.

Earlier this month a report from UBS, one of Gogox’s IPO sponsors, said the company’s efforts to expand geographically and obtain more corporate clients would help it post revenue growth of 34% annually between 2021 and 2025. The investment bank also noted the company would have to keep up its current level of user subsidies to avoid a major loss of market share, but was unlikely to achieve greater share in the next three to four years because of its cautious operating strategy and lower number of active drivers versus other market leaders.

That said, the company’s losses and its difficult situation are well known and reflected in the pressure on its stock. The company has discussed plans to expand into China’s smaller third- and fourth-tier cities and also to the wider Asia Pacific region, which could help to attract investors if such plans move ahead and bear fruit.

UBS sees the company’s revenue growing by 26.3% this year to 834 million yuan and by 42.9% next year to 1.19 billion yuan. Based on its Wednesday close of HK$5.55, its price-to-sales (P/S) ratio based on the bank’s estimated revenue for 2023 would be about 2.5 times.

That’s far lower than the 2023 estimated P/S ratio of 5.6 times for U.S.-listed Full Truck Alliance. But Full Truck’s sizable premium is backed up by robust fundamentals, including 262.3 billion yuan in annual transaction value, and 4.66 billion yuan in annual revenue, which is six times larger than Gogox’s.

So, where will Gogox go from here? UBS has set a target price of HK$6.70 for the stock, which is 20% higher than the current price. Everbright Securities expects the company to be admitted into two programs that allow mainland Chinese investors to buy Hong Kong stocks next month. Such a move, if it happens, could help to boost Gogox’s share price with an influx of money from mainland investors who are more familiar with the company’s name.

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