China's Miss Fresh brings in state backer at knock-down valuation
Chinese online grocery delivery platform Miss Fresh, which went public on NASDAQ 12 months ago with a market capitalisation of around USD 3bn, has sold a minority stake to a state-owned enterprise at a valuation of USD 90m.
The company has been struggling with an accounting scandal, concerns about a business model – pursued by many Chinese consumer internet companies – that prioritises scale before sustainability, and substantial price corrections in US-listed Chinese concept stocks.
Shanxi Donghui Group, a conglomerate best-known for its interests in coal mining and energy, has acquired 298.5m of Miss Fresh’s class B ordinary shares for CNY 200m (USD 30m), according to a filing. This equates to an approximately one-third stake in the company. The investment is described as part of a wider strategic partnership focused on agricultural supply chains.
Miss Fresh raised more than USD 1.6bn in private funding between its founding in 2015 by two former executives at Joyvio Group, an agribusiness unit of Legend Holdings, and its IPO. Investors include Tiger Global Management, Tencent Holdings, Jeneration Capital, Goldman Sachs, Davis Selected Advisors, Genesis Capital, Lenovo Capital, and GX Capital.
It secured USD 800m in the second half of 2020 alone from CICC Capital and several funds with ties to the government of Qingdao, which wanted to support expansion on China’s eastern seaboard.
The company raised USD 273m through its IPO, selling shares at USD 13.00 apiece. A group of existing investors contributed USD 90m to the offering. The stock fell on debut and never recovered, closing at USD 0.38 on July 15. Companies trading below USD 1.00 risk being delisted.
Miss Fresh recently announced downward adjustments to its 2021 revenue after an audit committee-led review identified questionable transactions involving the next-day delivery division. It uncovered undisclosed relationships between supplies and customers, different customers or suppliers sharing the same contact information, and a lack of supporting logistics information.
The company pursues a front-warehouse model, operating small warehouses in city centres instead of large suburban facilities, which is said to speed up fulfilment. It uses digital management systems and algorithm-based sales forecasting in warehouse location selection, product selection, and procurement, claiming this minimises the slow-moving inventory loss rate.
At the time of its IPO, Miss Fresh was operating 631 “distributed mini-warehouses” (DMWs) across 16 cities with 7.9m transacting users.
There is an emphasis on sourcing directly from farmers as a means of ensuring product quality and timely delivery and bringing greater efficiency to a highly fragmented upstream agricultural supply chain. There were 200 Miss Fresh farms as of last September and 350 Miss Fresh factories, with the latter underpinning a nascent private label business.
In addition, the company moved aggressively into software, supporting the digitisation of traditional wholesalers and retailers. It was contracted to operate 73 “intelligent fresh markets” in 18 cities as of September 2021, with 52 already in operation. On the retail side, 11 supermarkets had signed up for the Miss Fresh cloud-based software-as-a-service (SaaS) offering.
Gross merchandise value (GMV) was CNY 7.6bn in 2020, down slightly on 2019. Revenue rose from CNY 6bn in 2019 to CNY 6.1bn in 2020, while the net loss narrowed from CNY 2.9bn to CNY 1.6bn. Following its accounting problems, the company has yet to make an annual filing for 2021.
In the three months ended September 2021, GMV reached CNY 2.57bn, up 41% year-on-year, while revenue rose 29% to CNY 1.86bn. A total of 28.7m orders were fulfilled at an average price of CNY 88.40, up 34.4% and 5.2%, respectively. The net loss widened from CNY 616.2m to CNY 973.7m.
Recent filings do not disclose the number of DMWs. The company has reportedly exited at least nine cities in a bid to reduce costs. It also faces legal action from multiple suppliers over unpaid bills.
China's fresh produce market experienced explosive growth in 2020 as COVID-19 prompted lockdowns and social distancing. Competitors flooded into the space, including community group-buying platforms and leading consumer internet players like Alibaba Group, Meituan, JD.com, and Pinduoduo.
Dingdong Maicai, another PE-backed online grocery delivery platform, raised USD 95.7m on the New York Stock Exchange not long after Miss Fresh’s NASDAQ debut. The company is now trading at a 78% discount to its IPO price with a market capitalisation of around USD 1.1bn. Revenue grew 77% in 2021 but the net loss nearly doubled.
Recognising mounting investor discomfort with high-cash-burn business models, Dingdong has sought to rein in its losses. Last August, it switched to a strategy described as “efficiency first, with due consideration to scale.” The net loss for the first three months of 2022 was nearly one-third that of the same period in 2021.
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