Wumart-backed Dmall Seeks IPO Boost, But Family Ties Can Also Bind

The provider of cloud services for retailers is looking to raise funds in a Hong Kong IPO after reporting losses totaling 4.23 billion yuan in recent years

Key Takeaways:

• Dmall posted a 1.83 billion yuan loss last year and its cash pile has fallen below 500 million yuan
• Most of its revenue comes from serving Wumart-related retailers, but the close ties hold back its potential for growth beyond the Wumart family

By Ken Lo

A company that provides cloud services for the Chinese retail powerhouse Wumart, and other well-known shopping chains, is looking to go public in Hong Kong. But its close ties with the leading store brand could be a mixed blessing for investors deciding whether to buy into the deal.

Dmall Inc.’s controlling shareholderis Zhang Wenzhong, a star of China’s retail industry. In 1994 Zhang founded Wumart Stores, Inc., a chain of megastores and supermarkets. And in 2015 he introduced digital solutions for the retail business by launching Dmall, a cloud services platform that is now gearing up for a share listing.

Dmall filed its preliminary prospectus with the Hong Kong Stock Exchange on Dec. 7 for a listing on the main board, with Credit Suisse and CMB International Securities as joint sponsors. Wumart founder Zhang holds 58.36% of Dmall shares, while big names such as Tencent (700.HK), Industrial Bank (601166.SH), the venture capital company IDG and the state-owned China Structural Reform Fund are smaller stakeholders.

Figures contained in the prospectus show a steep climb in Dmall’s revenue in recent years, with a four-fold rise from 265 million yuan ($38 million) in 2019 to 1.05 billion yuan last year. In the first three quarters of this year, the company’s revenue jumped 50% to 1.1 billion yuan from the same period a year earlier. But rising revenues have been accompanied by mounting net losses. The company has accumulated 4.23 billion yuan in losses over the past three and three quarter years. Last year alone it reported a loss of 1.83 billion yuan.

Cash crunch

Dmall’s cash flow situation is also troubling for investors. It held 369 million yuan in cash and cash equivalents by the end of December last year, 766 million yuan less than a year earlier. Although its cash position improved to 498 million yuan in late September, supported by financing activities, the firm’s liabilities totaled 677 million yuan, indicating a need to go public to raise funds.

In 2019, Wumart Stores moved from a traditional IT system to the Dmall OS, which can manage various operations from placing orders, receiving, sorting, delivering and displaying goods, as well as inventory management. It also provides these services to other retail companies under the Software-as-a-Service (SaaS) retail cloud model.

Business models vary between sectors, requiring customized solutions. Providers of SaaS cloud services need to constantly innovate to meet clients’ specialized needs, resulting in a business characterized by big upfront investment and low returns. Typically, providers of cloud services are unprofitable for many years before managing to pass the break-even point. Even the mighty Tencent and Alibaba (BABA.US; 9988.HK) only recently emerged into the black. Without the network of Wumart Stores, Dmall could be struggling to stay afloat under the weight of its losses.

It is worth noting that WM Tech, a flagship company in the Wumart family, also filed for a Hong Kong IPO last March. The company was reported to be seeking up to $1 billion in funding, but the prospectus expired after six months and the company did not proceed with its IPO plans.

In contrast to Dmall, WM Tech has a track record of turning a profit. Its net profit grew from 226 million yuan in 2018 to 394 million yuan a year later and climbed again to 726 million yuan in 2020, according to the prospectus.  While the company’s profit performance for this year has not been disclosed, Zhang’s decision to switch IPO ambitions from the thriving WM Tech to the financially struggling Dmall is certainly puzzling.

Co-dependence

The company’s cloud business comprises three elements:  retail services, e-commerce services and services for marketing and advertising. In revenue terms, the retail service cloud is a fast-growing business driver. It went from contributing 33.8% of total revenue in 2019 to 58.1% in the first nine months of this year, with 640 million yuan in revenues. Dmall’s marketing and advertising cloud has also generated a steady income stream, with its revenue share increasing from 1.7% in 2019 to 11.4% for the first nine months of this year.  By contrast, the revenue contribution from the e-commerce cloud plunged from 64.5% to 30.5% over the same timeframe.

In fact, Dmall has made most of its revenue from doing business with Wumart affiliates, with increasing dependence on family ties. Wumart-related activities accounted for between 44% and 59% of its revenues over the past three financial years. These revenues were 156 million yuan in 2019, rising to 266 million yuan in 2020 and 473 million yuan last year. In the first nine months of 2022, the figure was 490 million yuan. In the same period, the company’s top five clients generated around 78% of total revenue, with four of the five from the Wumart family. Aside from the Wumart Group, customers include Metro China, Chongqing Department Store (600729.SH) and Yinchuan Xinhua Commercial (600785.SH), which are also owned by Zhang Wenzhong.

Dmall can count on Wumart businesses as core customers and revenue drivers. But such close ties can act as a deterrent for Wumart competitors when they are seeking a digitization partner or a cloud platform to host sensitive business information. Worries about potential leakage of commercial intelligence could thus hamper Dmall’s expansion beyond its immediate family.

Dmall had launched a Series C financing round in November this year, producing a valuation of 21.3 billion yuan. If Dmall’s nine-month revenue is extrapolated to the whole year, the estimated annual sum of 1.47 billion yuan produces a price-to-sales (P/S) ratio of 14.5 times. That represents a significant premium over its peers Weimob (2013.HK) and Kingdee International (268.HK), with P/S ratios of 5.5 times and 10 times.

Faced with uncertain growth prospects, elusive profits and polarized investor attitudes towards SaaS companies, Dmall may get a lukewarm reception if it goes public at such a high valuation.

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