After a lapse of 8 months, Zibuyu Group Co., Ltd. (hereinafter referred to as “Zifuyu”), one of the largest cross-border e-commerce businesses in China, submitted a prospectus to the Hong Kong Stock Exchange for the second time on March 7, applying for listing on the main board of Hong Kong stocks. Huatai International and Agricultural Bank International are co-sponsors.

In the new version of the prospectus, Zifu has updated the 2021 performance situation. Combining the previous and last two prospectus, you can have a more comprehensive understanding of the company's financial data. The Zhitong Finance App found that from 2018 to 2021, unspoken revenue was 1,318 billion, 1,429 million, 1,888 million, and 2,347 million respectively. This indicates that the company's revenue growth rates from 2019 to 2021 were 8.42%, 32.83%, and 23.66%, respectively, showing a trend of accelerating first and then decelerating, and continued to grow rapidly overall.

Compared with revenue, the net profit performance of unspoken shareholders was even more impressive. The net profit of shareholders from 2018 to 2021 was 8001 million, 81.109 million, 114 million yuan, and 201 million yuan respectively. The corresponding growth rates from 2019 to 2021 were 1.37%, 40.57%, and 76.32%, respectively, showing a clear acceleration trend, that is, the company's profitability continued to increase.

Obviously, there is a stark contrast between the slowdown in revenue in 2021 and the acceleration in shareholders' net profit. If we start from the above data, an in-depth analysis can reveal the changes in Zifu's management strategy and the efforts and trade-offs behind this.

Multi-dimensional analysis of business development

Zibuyu's development history can be traced back to 2011. At the beginning of its establishment, the company focused on selling various self-designed clothing, footwear and other products on a global scale. After ten years of accumulation, it has formed a product system with independent design and OEM suppliers, and then sold the products globally through third-party e-commerce platforms and self-operated websites.

According to the prospectus, from 2019 to 2021, more than 90% of Zibu's products were independently designed. The company has independently designed and cultivated more than 200 brands, 64 of which are popular brands with annual sales of more than 10 million yuan, and the total number of popular products designed and sold has exceeded 5,900. At the same time, in order to meet the diverse needs of users, Zibu also purchases some non-independently designed products from OEM suppliers.

Self-designed brands, of course, mainly produce products through OEM suppliers. As of February 27, 2022, the company's OEM suppliers included 677 clothing suppliers and 140 footwear suppliers. In order to maintain the stability of the supply chain, Zi also developed exclusive suppliers. From 2019 to 2021, there were 25, 31, and 46 exclusive suppliers, respectively.

From the perspective of product structure, Zizi is mainly clothing, supplemented by footwear products, and is gradually expanding into other products including electronic equipment, stationery, and sporting goods. According to the prospectus, in 2021, revenue from clothing, footwear, and other products accounted for 78.1%, 19.3%, and 2.5% respectively. Clothing revenue accounted for the absolute majority, while other products still accounted for a small share of revenue.

In terms of channels, Zifuyu has gradually moved from third-party e-commerce platforms to self-operated businesses. It launched its own website in 2018, but at present, third-party e-commerce platforms are still Zifuyu's core sales channel.

According to the prospectus, in 2021, the share of revenue from third-party e-commerce platforms including Amazon, Wish, eBay, and AliExpress reached 87.5%, of which revenue from Amazon accounted for 71.3%, an increase of nearly 40 percentage points over the previous year; while the share of revenue from self-operated websites fell to 11%.

Looking at customer regions, in 2021, 86.5% of revenue came from North America, 10.1% from Europe, and 2.1% from Asia. Seen separately, the US is its largest market. From 2018 to 2021, the share of revenue from the US was 50.3%, 58.8%, 69%, and 85.5%, respectively, and the market was increasingly concentrated in the US.

It is easy to see from the above introduction that independent design and construction of popular brands and products is an unspeakable core advantage, and the company has built a stable OEM supplier system. In order to open up new growth points, Zizi is working in three directions. One is expanding clothing and footwear products to other products; the second is building a self-operated website; and the third is expanding customer regions. However, at present, the results of these three areas are still not remarkable. In 2021 in particular, all three aspects seem to be regressing. Other products and self-operated websites all account for a lower share of revenue, while the concentration on the US market has increased markedly.

Product upgrades at a time of sluggish sales

A detailed comparison of product sales since 2018 reveals the secrets of the company's continued revenue growth. The Zhitong Finance App found that in 2019, Zitong's revenue increased by only 8.42% to 1,429 billion yuan, a growth rate of only units. This is mainly due to the fact that sales volume of clothing and footwear products hardly increased during the year, which was driven by an increase in product prices, which led to overall revenue growth.

After entering 2020, Zibuyu's overall revenue growth rate jumped above 30%, mainly due to the double breakthrough in product sales volume and price. According to the prospectus, in mid-2020, the three categories of unspeakable products all increased in terms of sales volume or average sales price of various products, which is in stark contrast to the decline in sales volume in 2019.

The reason for this contrast is directly related to the impact of the epidemic. In mid-2020, the effectiveness of domestic epidemic control far surpassed that of foreign countries. Under the situation where the local supply chain was broken due to the impact of the epidemic abroad, China continued to export various products to the world as a “world factory”, benefiting from this.

By 2021, sales of all kinds of products showed signs of fatigue again. Among them, clothing sales increased by only 1.5%, footwear sales increased by 5.79%, and sales of other products plummeted sharply by 86.89%. This was mainly due to the recovery of the local supply chain in overseas markets, and Zifu's benefits from the pandemic continued to weaken. However, the increase in the company's overall revenue was mainly due to a marked increase in the average sales price of various products. The average sales prices of clothing, footwear, and other products in 2021 increased by 35.71%, 7.11%, and 183.33%, respectively. However, due to weak sales, even though the price of the company's products has increased significantly, the revenue growth rate has declined compared to 2020.

Through the above analysis, Zibu's management ideas in recent years have surfaced. That is, while sales growth is slowing down, the company targets products to middle and high-end customers with strong consumption capacity and increases product prices, thereby driving the company's performance growth. Especially in 2021, when benefits from the pandemic continue to decline, this operating idea is reflected even more fully.

Precisely thanks to product upgrades and price increases, Zi's overall gross margin continued to increase steadily. Its gross margins from 2018 to 2021 were 66.5%, 69.8%, 72.6%, and 75.2%, respectively. In terms of net interest rates, the net interest rate remained stable at 6.1%, 5.7%, and 6% respectively from 2018 to 2020. In 2021, under stable operating efficiency, net interest rates increased to 8.5% along with the growth of gross margin. This is also the key reason for the significant increase in profits in 2021.

Management trade-offs and strategic planning

To further understand the actual situation of Zifuyu's development, it is necessary to thoroughly analyze why Zifuyu has adopted the business philosophy of targeting middle and high-end customers to upgrade products. The Zhitong Finance App believes that there are probably the following two major factors. One of these is the intensification of competition in the industry and product upgrades to new trends.

According to data from Frost & Sullivan, according to the GMV of apparel and footwear products sold in 2020, it also ranked third among all platform sellers in China's cross-border B2C e-commerce clothing and footwear market, but the market share was only 0.4%. As can be seen from this series of data, it is in a fiercely competitive and highly fragmented market, and since the company's market is currently mainly concentrated in the US, after the growth of the B2C e-commerce apparel and footwear market in the US tends to be saturated, high-end products are not only an industry trend, but also the need to break competition and return to the need for continuous growth.

Second, now that the company's listing is on the schedule, better looking financial statements are needed to support the valuation to raise more capital. In fact, Zibuyu has created a prototype for multi-dimensional growth. In terms of categories, the company has expanded from clothing and footwear to other products; geographically, the company's products have been sold to countries such as Europe and Asia other than the US; in terms of channels, the company has built its own website, and these three dimensions are expected to become a new growth curve for Zibuyu in the future.

However, in 2021, it is clear that the offensive in these three directions has narrowed. Perhaps this is a choice made based on better financial statements. As a new growth point in the future, if investment in such businesses is increased now, it may affect current profit performance. In order to seek better performance, high-end product upgrades have naturally become the best choice.

The implementation of any strategy will have corresponding benefits and costs. Although we achieved continuous revenue growth and a sharp rise in net profit in 2021, the cost is that our dependence on the US market and the Amazon platform continues to increase. In 2021, its revenue share in the US market will account for 85.5%, and its share of revenue on the Amazon platform will double to 71.3%. In the current international situation, this high level of concentration will inevitably increase the potential risks of unspoken operations. If there are adverse factors in the US or Amazon platforms, they will all have a clear impact on unspoken operations.

From a strategic point of view, there is nothing wrong with this choice. Although its potential business risks have risen in the short term, the company has achieved brighter financial statements. This helps to raise more capital from the market with higher valuations to lay a solid foundation for increasing investment in new growth points in the future, but the market should also recognize the following problems in cultivating new growth points:

First, it is still necessary to continue to observe whether the expansion of other categories can achieve greater results. Judging from the current revenue structure, Zifuyu is still a vertical platform for apparel and footwear. If the company wants to expand into other categories, it will inevitably develop into a comprehensive platform, but in the process, Zifuyu's existing advantages will be weakened to a certain extent.

The logic behind this is that one of Zi's major advantages in the apparel and footwear market is the company's strong independent design ability, but this advantage will disappear when expanding into other categories, especially electronic products. In order to successfully expand into other categories, we must find effective ways to operate products in other categories.

Second, it is still worth paying attention to whether self-operated stations can contribute greater benefits. The establishment of a self-operated website is mainly to increase the brand and accumulate private traffic, but in the early cultivation process, it required a large amount of money to draw users. Although the self-operated website achieved rapid growth from 2018 to 2020, it was still in the midst of losses. As of the first half of 2021, the company focused on cultivating self-operated websites with strong profitability and reduced sales and marketing investment in other self-operated websites. Only then did it achieve profit.

Moreover, as of February 27, 2022, out of 326 self-operated online stores, nearly 20.9% have been in business for two years, and only 2.1% have been in business for more than three years. This large closing rate means that if self-operated websites continue to expand, they will still invest more to train new online stores. At that time, self-operated websites may start losing money again.

As far as Zifuyu is concerned, the focus of development over the next two years is whether the company's product upgrade driving price increase strategy can continue to bring steady growth to Zibu's performance until the company's three new growth points are successfully transformed into performance growth engines. If the product upgrade strategy to boost performance growth starts to fail this year, then until a new growth curve is formed, the company's performance will be imaginable at that time.