Recently, Fengchao Holdings, the leading smart locker company, officially submitted its prospectus to the Hong Kong Stock Exchange. If the listing is successful, Wang Wei, the actual controller, will secure his fifth IPO.

As the terminal business arm of SF Express, Fengchao has emerged victorious in the fiercely competitive market, securing the top position in the industry. Having achieved profitability for the first time, what new capital story will it unfold upon its IPO?

[First Turnaround to Profitability]

After nine years, Fengchao has finally turned a profit.

Fengchao is well-known to many, but as a logistics solution provider, its core business extends beyond the well-known last-mile delivery service. It also offers intelligent delivery and other value-added services such as laundry and home services.

In terms of performance, Fengchao has demonstrated steady revenue growth in recent years. From 2021 to the first five months of 2024, its revenue was 2.526 billion, 2.891 billion, 3.812 billion, and 1.904 billion yuan, respectively. Notably, revenue for the first five months of this year increased by 33.6% compared to the same period last year.

Due to the significant infrastructure investments and delivery costs associated with the smart locker industry, heavy asset characteristics are evident, and losses have been a persistent issue. However, Fengchao has shown a marked improvement.

Financial reports indicate that Fengchao's net profits for 2021-2023 were -2.071 billion, -1.166 billion, and -542 million yuan, respectively. For the first five months of this year, it achieved a net profit of 71.6 million yuan, marking a turnaround to profitability.

Amidst fierce competition and prevalent subsidies, Fengchao's profitability is primarily attributed to the recovery of gross margins in its primary last-mile delivery service. From 2021 to the first five months of 2024, Fengchao's gross margin for last-mile delivery services rebounded from -65.3% to 32.4%, with gross profits growing from -950 million to 252 million yuan.

The significant increase in Fengchao's profitability from last-mile delivery is mainly due to the depreciation of smart lockers that have been in operation for over five years, resulting in reduced depreciation expenses of fixed assets included in sales costs.

It is worth mentioning that since the depreciated Fengchao smart lockers are still in operation, the company plans to adjust its accounting policies in the future to extend the depreciation life of these lockers to align with their actual expected useful lives.

Furthermore, Fengchao's second largest business segment, intelligent delivery services, has also grown rapidly in recent years. Intelligent delivery services involve charging consumers or courier companies for storing packages in smart lockers. The rise of live streaming and short video e-commerce has significantly fueled the growth of this segment due to the increasing demand for reverse logistics (returns and exchanges).

In 2021, Fengchao's intelligent delivery revenue was only 15 million yuan, which grew to 1.02 billion yuan in 2023 and 692 million yuan in the first five months of 2024, representing a 107% increase from the same period in 2023. Its revenue contribution also increased from 5.9% in 2021 to 36.3% in 2024, approaching that of its primary last-mile delivery service.

By pressing the IPO button ahead of its competitors, Fengchao stands to reshape the currently fragmented smart locker market landscape.

[Reshaping the Landscape]

Currently, Fengchao is the largest smart locker network operator in China and globally, but competition remains intense. Strong competitors include JD.com's self-pickup lockers, Cainiao Post, YTO Express' Mama Post, STO Express' Miaokui, and Yunda Express' Mihuang, among others.

According to Fengchao's prospectus, the domestic last-mile logistics market is highly fragmented. In 2023, the top five players accounted for only 14.6% of the total market share based on revenue. Fengchao led with a 6.1% share, followed closely by the second and third players with 4% and 2.5%, respectively.

Moreover, after experiencing rapid growth in the past, the industry's future growth rate is expected to slow down. According to Zhuo Shi Consulting, the number of parcels handled by China's last-mile logistics solutions grew from 31.1 billion in 2019 to 94.3 billion in 2023, with a compound annual growth rate (CAGR) of 32%. This growth is projected to reach 166.4 billion parcels by 2028, with a reduced CAGR of 12%.

In recent years, the smart locker industry has faced significant challenges. The industry is still exploring profitable business models and grapples with substantial equipment investments and high maintenance costs. Additionally, regulatory policy changes can also impact the industry, as mentioned in Fengchao's prospectus.

For instance, a regulation introduced in March this year stipulates that unauthorized use of smart lockers or express service stations for delivery without user consent may result in fines ranging from 10,000 to 30,000 yuan for serious violations. As industry regulation tightens, compliance costs for enterprises are increasing.

In terms of market competition, as high-tier urban markets in China are becoming saturated, many players continue to attract users with free storage services, thereby exacerbating profitability pressures. Against this backdrop, Fengchao's achievement in profitability is commendable.

If Fengchao successfully goes public, leveraging its market-leading position and acquisition strategies, it could accelerate its market share growth and reshape the fragmented industry landscape.

It is worth noting that Fengchao has also been actively expanding its overseas business, with Southeast Asia as a key market. In the first five months of this year, it deployed approximately 2,000 smart lockers in Thailand, highlighting its global ambitions.

Given that Kerry Logistics, a subsidiary of SF Express, is one of the largest third-party logistics companies in Southeast Asia with a mature delivery network, it can facilitate Fengchao's international expansion. Listing on the Hong Kong stock exchange will also positively impact Fengchao's brand influence in the international market.

When discussing an IPO, valuation is a crucial aspect.

[New Story Behind the 25 Billion Yuan Valuation]

Fengchao's journey began with significant backing. Its founder, Xu Yubin, was once a deliveryman at SF Express. With Wang Wei's support, Fengchao secured 500 million yuan in investment from five logistics giants, including ZTO Express, Yunda Express, and GLP, upon its establishment in 2015.

As Fengchao expanded rapidly, it secured multiple rounds of funding. In January 2017, it completed a Series A funding round of 2.5 billion yuan, attracting investors such as CDH Investments, China Development Bank Capital, and Everbright Capital.

In early 2021, Fengchao received an additional investment of US$400 million from investors including Trustbridge Partners, Asia Investment Management, and Sequoia China, valuing the company at approximately US$3.4 billion (around 24 billion yuan).

In April this year, Hurun's 2024 Global Unicorn List revealed that Fengchao was valued at 25 billion yuan. Compared to the declining valuations of logistics companies in recent years, Fengchao's valuation increase underscores its growth potential.

The smart locker industry has passed its golden age of rapid growth, and maintaining valuation in the future will require new narratives.

One such narrative is sustained profitability.

This appears to be less of a concern. In fact, Fengchao's valuation is not solely based on its smart locker business. Beyond last-mile delivery and intelligent delivery services, it also encompasses value-added services such as interactive media, laundry, and home services.

Fengchao has evolved beyond being just a logistics service provider and is increasingly positioning itself as a lifestyle service provider.

Take the laundry service as an example. Fengchao has established a nationwide laundry factory network, including a self-operated laundry factory in Zhongshan, Guangdong, and 135 third-party laundry factories across 25 provinces. During the reporting period, it completed a cumulative total of 1.579 million orders.

In terms of profitability, value-added services have emerged as a new contributor to Fengchao's profits, boasting the highest gross margin among its three main businesses. In the first five months of 2024, its value-added services gross margin was 44.9%, higher than the 32.4% for last-mile delivery and 7.3% for intelligent delivery. These services contributed 195 million yuan in gross profit, which is not only significantly higher than the 51 million yuan from intelligent delivery but also comparable to the 252 million yuan from last-mile delivery.

More importantly, Fengchao's value-added services are built upon its nationwide smart locker network and SF Express's comprehensive logistics network, making the business more sticky and leveraging SF Express's vast customer base for significant market potential.

As the leading last-mile logistics service provider, Fengchao's profitable business model is now clear, and it has emerged from its loss-making phase. If it successfully goes public, leveraging its scale advantages to achieve long-term and stable profitability should not be difficult.

Disclaimer

The content related to listed companies in this article is based on the author's personal analysis and judgment using publicly disclosed information (including but not limited to interim announcements, periodic reports, and official interaction platforms) provided by the companies in accordance with legal disclosure requirements. The information or opinions presented herein do not constitute any investment or other business advice. Market Value Watch shall not be liable for any actions taken based on this article.

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