The “ups and downs” is the most appropriate way to describe Youbao Online's (02429) stock price performance in the past month. Its stock price skyrocketed by 37.61% in the 6 trading days from January 19, but over the next 6 trading days, Youbao Online's stock price continued to recover, with a maximum retracement of 27.72%. This shows that after the stock price reached this position, the long and short sides have already started a fierce “war”, and the market is already clearly divided over the true value of Youbao Online.

In fact, as a sub-new stock, Youbao Online, known as the “first unmanned retail stock,” has had an extremely strong stock price performance since it was listed on November 3, 2023. The stock price fluctuated and rose by 40% on the first day of listing. After a wave of increases in January, the stock price reached a record high of HK$22.8 per share. It has risen more than 120% from the HK$10.35 issue price, showing a “stand out from the crowd” in the sluggish IPO market. Even though the current stock price has clearly recovered, the closing price of HK$19.22 per share as of February 14 is still 85.7% higher than the issue price.

Most investors probably didn't expect that this new stock, which had failed twice and had a cumulative loss of more than 1.8 billion yuan in three and a half years, could have such a strong performance after listing. Now, a new question has arisen for investors, namely why did Youbao Online's stock price soar after listing? After the current stock price is clearly divided between long and short, how will its future stock price perform?

The vending machine retail market ushered in accelerated development

Unmanned retail is a retail concept with no waiters or cashiers. It includes three main models: vending machines, unmanned stores, and unmanned shelves. Among them, vending machines also occupy an absolute majority of the unmanned retail market. According to Frost & Sullivan data, in 2022, the share of the vending machine market in mainland China accounted for 96.6% of the total unmanned retail market share.

The reason why vending machines can dominate the unmanned snack market is that they solve many pain points in the traditional offline FMCG market. Compared with physical stores, vending machines have lower initial investment and operation costs, and the requirements for business space and infrastructure are not high.

However, there are also certain barriers to the operation of the vending machine market. Among them, location, supply chain management, digitalization, and technology are the three most critical aspects. Specifically, the location of a vending machine is directly related to the operating efficiency of the vending machine. The number of high-quality locations the operator has accumulated will become its core competitiveness. This is also the key to whether it can operate on a large scale, and large-scale operation can also reduce revenue costs to a certain extent.

Supply chain management is also important for vending machine operations. In particular, players with locations across the country have high requirements for supply chain management capabilities. Efficient supply chain management capabilities can effectively reduce operating costs.

Furthermore, the application of digitalization and technology can also enable operators to form competitive barriers. By using point networks, data-driven operation systems, and supply chain networks, operators can digitize and automate FMCG retail, and explore new growth points for unmanned vending machines through advertising services, etc.

However, from the perspective of industrial development, China's vending machine retail market is still in a period of rapid growth. According to Frost & Sullivan data, from 2017 to 2022, the size of China's vending machine retail market increased from 13.126 billion yuan to 28.908 billion yuan in 2022, a five-year compound growth rate of 17.1%. In the future, with continuous technological innovation to improve the convenience of vending machines and the continuous increase in public acceptance of vending machines, the vending machine retail market development is expected to accelerate further. The scale will grow to 73.927 billion yuan in 2027, a compound growth rate of 20.7% over five years. Obviously, Frost & Sullivan expects the vending machine retail market to accelerate after the pandemic.

The number of points is rapidly expanding, and it is difficult to reverse the decline in losses

The accelerated development of the industry will surely benefit companies that have established competitive barriers or are already leading in the industry, and Youbao Online is one of the most promising targets in the market. This is because Youbao Online has established a clear first-mover advantage in terms of number of locations and revenue scale, and this is due to the fact that it started a partnership model in 2020.

Before 2020, Youbao Online mainly achieved point expansion through a direct management model, but after entering 2020, repeated epidemics made the business environment full of uncertainty. In order to reduce its own business risks and accelerate market expansion, Youbao Online launched a partner model. Unlike the direct management model, under the partner model, the partner is responsible for finding a site and is responsible for site development costs, site usage fees, and utility costs, while Youbao Online shares the total transaction products obtained by the partner after deducting the expenses and costs for which it is responsible.

According to Youbao's online prospectus, the number of points rapidly increased from about 27,700 in 2019 to about 85,000 in 2022. Among them, the number of points in the direct management model continued to be reduced by half to 13,659. This shows that during the pandemic, Youbao Online continued to reduce the scale of direct management to reduce business risks, while the number of partner model points increased from 813 in 2019 to 71,500 in 2022, which is an astonishing outbreak. By the first half of 2023, due to repeated effects of the epidemic, the number of points under the partner model was significantly reduced year on year. This reduced the company's number of Youbao points to 66,200 in the first half of 2023, but this is still ahead of its peers.

According to Frost & Sullivan data, judging from the number of points, the top five players in the mainland China market in 2022 had a total of 218,000 points, accounting for 24%. Among them, Youbao Online had 66,200 points (excluding non-Youbao points), accounting for 7.3%. The second and third places had 571,000 and 47,200 points respectively, accounting for 6.3% and 5.2% respectively.

In addition to the number of locations, Youbao Online is also clearly leading the industry in terms of product sales scale. According to the data, the market size of the top five vending machine operators in mainland China in 2022 was 4.9 billion yuan, accounting for 17%, while Youbao Online's total product sales in 2022 were 2.2 billion yuan, accounting for 7.6%, which is double that of 3.5% in second place.

By comparing data on product sales and number of points between Youbao Online and competitors, Youbao Online's leading position in product sales is significantly higher than the number of points. This is because Youbao Online's single-point sales efficiency is higher.

Through calculation, it can be seen that Youbao Online's average single-point sales in 2022 were about 33,200, while the other two strong competitors, Company A and Company B, had single-point sales of about 17,500 and 191,000 yuan respectively in 2022, which is a clear gap compared to Youbao Online.

The reason behind this may be due to the following aspects. One is that Youbao's online location is better. According to the prospectus, in the first half of 2023, Youbao Online's locations in first-tier cities, new first-tier cities, and second-tier cities were 31.7%, 34.5%, and 21.1% respectively; in terms of type, Youbao Online's locations were mainly in high-demand scenarios such as schools, factories, offices, and public places.

Second, vending machines are more efficient thanks to efficient supply chain management capabilities. According to the data, as of June 30, 2023, Youbao Online has operated 106 warehouses and 212 sorting centers, covering 121 cities and 28 provincial administrative districts in mainland China, and has developed strategic cooperation with 13 well-known international FMCG brands.

It is worth noting that in the face of the outbreak of the epidemic, Youbao Online resolutely adopted a partner model with lower operating risk, making it the unmanned vending machine operator with the highest number of locations in the market, but its performance was inevitably impacted by the pandemic.

From 2019 to 2022, Youbao Online's revenue was 2,727 billion yuan, 1,902 billion yuan, 2,676 billion yuan, and 2,519 billion yuan respectively. Adjusted net profit for the period was 39.649 million, -973 million, -170 million, and -260 million yuan, respectively. Losses have continued since the pandemic. As of the first half of 2023, as the impact of the epidemic abated, Youbao's business operations improved during the online period. Revenue increased by nearly 10% year-on-year, and adjusted net loss also narrowed to 91.281 million yuan, compared to a loss of 125 million yuan in the same period of 2022.

Multiple potential operating risks may have an impact on the release of results

From the above analysis, it is easy to see that the biggest factor affecting Youbao's online business operations in the past three years was the epidemic. However, with the improvement in its performance in the first half of 2023 and favorable expectations for future market demand recovery after the impact of the pandemic is eliminated, the market has high expectations for Youbao Online's business expansion in 2024. Furthermore, at the time of listing, Youbao Online said that it will use China's first-tier and second-tier cities as its strategic focus and use the partnership model to open 18,000 new locations two years after listing, an increase of 27.2% over 66,200 in the first half of 2023. The specific guidelines gave the market clear growth expectations, so under the combined effects of the above factors, Youbao Online's stock price rose as high as HK$22.8, which is 120% higher than the issue price.

However, the sharp rise in stock prices supported by expectations requires the fulfillment of performance before it can go further. Currently, Youbao Online has reached this stage. Excessive expectations have overdrawn the stock price, thus triggering a “long and short” war of capital. In fact, the business operation of Youbao Online did not “come to fruition” as expected by the market, and it still faces obvious potential operating risks, which may have an impact on the company's performance release.

Although the current vending machine retail market is still in a period of rapid development, competition in the entire market is intensifying due to relatively low entry barriers. Various types of capital, including traditional beverage and snack sellers, e-commerce platforms, and unmanned retail operators, have entered the market. This has also led to a fragmented market pattern, with players in the top five markets accounting for only 17% in terms of product sales. It is foreseeable that competition in the vending machine retail market will become more intense in the future. Even if industry leaders such as Youbao Online have formed a first-mover advantage, they may still affect their business operations as competition intensifies.

Second, it is difficult for vending machine retail to make clearly differentiated products and services. The most critical factor that determines the efficiency of vending machines is actually whether the location is high quality; this is the core point. However, the partner model is actually a double-edged sword. Under this model, although operators can achieve rapid point expansion at a lower cost, the most critical part of the entire business model — ownership of the point — is in the hands of the partner, which is significantly different from the direct management model.

According to the prospectus, as of the first half of 2023, the number of Youbao Online's branch partners was 1,922, or less than 2,000 people had mastered more than 60,000 points. Once market competition intensifies, partners who have a large number of high-quality points will have more initiative and can choose to cooperate with other operators that can have a greater share of profits.

Obviously, there is a clear difference between Youbao Online's partner model and partner models in other industries that are deeply tied to well-known brands to co-develop, because when consumers buy vending machine products, they don't look at the product brand, but only care about whether the vending machine is close to them and whether the purchase is convenient. Therefore, once market competition intensifies and large capital enters the market in the form of subsidies, then it may be a probable event for partners who have a large number of high-quality positions to “go back to war”.

Furthermore, whether advertising and system support services can develop into Youbao Online's second growth curve will play an important role in expanding its valuation level, but the current performance of this business is very sluggish. Youbao Online can provide digital advertising services through a huge point network. At the same time, it can connect the operating system to machines other than Youbao point operators to provide operation system support services. In 2019, advertising and system support services accounted for 19.8% of revenue, but due to the impact of the pandemic and changes in the company's business model starting in 2020, the revenue share of this business continued to decline, accounting for only 4.5% in the first half of 2023. If the business does not resume in the future and becomes a new growth curve, then there is a possibility that Youbao Online's valuation will be revised downwards.

Taken together, Youbao Online has formed a first-mover advantage in terms of number of locations and product sales scale through the partnership model, and under the two major logics of a recovery in market demand after the impact of the epidemic was eliminated and the expected point expansion over the next two years, Youbao Online achieved a sharp rise in stock prices after listing. However, at present, market expectations are clearly too high. Currently, Youbao Online is still facing various problems such as increased market competition, increased initiative of point partners, and sluggish performance in the second growth curve. If Youbao Online fails to prove to the market that it is capable of solving listing issues with outstanding performance, then Youbao Online's stock price may continue to rise and there will be great resistance.