WeWork's Waterloo has made the capital market cool about the shared office service industry.

At its peak, WeWork had operations in over 700 communities in about 40 countries worldwide, with a valuation of $47 billion, making it the second largest unicorn company in the United States after Uber, and it was once known as one of the three giants in the sharing economy along with Uber and Airbnb.

However, since going public, WeWork has been declining step by step. As early as September 2019, because the market valuation was much lower than the private financing valuation, WeWork withdrew its US listing application. Little did they know that this was just the beginning of the disaster.

Due to the impact of the COVID-19 pandemic since 2020, WeWork's business operations have been severely hit, and its financial statements have rapidly deteriorated. This forced WeWork to curve its way into the market in 2021 through a merger with a SPAC, but by then WeWork's valuation had fallen to $9 billion.

After the roundabout listing, WeWork's performance was not satisfactory. Its business operations did not improve in the context of a sluggish global economy. High debt and continuous losses led to a cash flow breakdown. Its stock price fell below $1 in April 2023. By August 2023, WeWork officially delisted from the New York Stock Exchange and applied for bankruptcy liquidation. By then, WeWork's market cap was less than $0.3 billion.

In just four years, the $47 billion valuation disappeared, leaving people emotional, and the attitude of the capital market towards the shared office industry gradually cooled. However, WeWork's failure did not prevent players in the shared office field from rushing to the capital market, such as China's office space operating service platform, Dangdangjia (AGII.US), which is sprinting toward the Nasdaq.

As early as September 16, 2022, Dangdangjia submitted its first public version of the prospectus (F-1 document) to the Securities and Exchange Commission (SEC), and subsequently updated the prospectus 9 times, but it has not yet been listed, and during this period, Dangdangjia has been "active".

First, it sold about 5.0567 million shares of the company at a price of $3-3.8 per share, raising $15.4763 million to ease the company's financial pressure, and the shares will be given to the investors after the IPO.

At the same time, Dangdangjia has lowered its fundraising amount several times. Initially in November 2022, it planned to issue 8.7 million common shares at a price of $4-5, raising up to $43.5 million. By March 2023, Dangdangjia adjusted its issuance plan to issue 4.5 million common shares at a price of $4.5 to $6, raising up to $27 million. Earlier this year, Dangdangjia once again lowered its targeted fundraising amount, planning to issue 2 million common shares at a price of $5 to $6, raising up to $12 million. In the prospectus updated on June 25th, Dangdangjia plans to issue 1.4 million common shares at a price of $6-7, raising up to $9.8 million.

The emergency financing and successive reductions in fundraising before the listing show Dangdangjia's shortage of funds and a clear cooling of interest toward its IPO. Will Dangdangjia be able to overcome this dilemma? Will it repeat WeWork's mistakes? Perhaps the most fundamental factor lies in the company's fundamentals.

"Survival by Buzzing" after Countertrend Expansion

From a "rearview mirror" perspective, Dangdangjia has made a strategic mistake in aggressive expansion since 2020. According to the prospectus, at the end of 2020, Dangdangjia's business had covered 6 cities in China, with 48 work areas, a total of 0.2036 million square meters under management, and about 0.0289 million operating stations. If the workstations before the opening are added, Dangdangjia had a total of about 0.0329 million workstations in 2020, and the occupancy rate of mature office spaces reached 87%.

By 2020, the COVID-19 pandemic had begun to spread nationwide, which had a significant impact on commercial economic activity, and Dangdangjia's business operations were also affected. However, Dangdangjia did not stop its expansion, and by 2021 it had increased its business coverage to 7 cities, with a total of 61 work areas, added more than 0.05 million square meters of management area in a year, and a substantial increase in the number of operating and total workstations.

And the expansion trend has continued into 2022. Although the management area of the work area has not expanded that year, the management area added in 2021 has continued to be converted into new workstations, which has led to a continuous growth in the number of operating and total workstations, with 0.0419 million and 0.0444 million respectively.

Obviously, Dangdangjia's management wanted to accelerate its expansion by taking advantage of the COVID-19 pandemic, and to outpace its competitors in adversity. In the case of real business examples, there are many examples of counter-trend expansion during a downturn in the industry, leading to faster development during a boom. This development strategy is clearly feasible.

Unfortunately, JiaLow underestimated the duration of the new coronavirus epidemic's impact on business economic activities and the breadth of its scope. As of 2022, although the operational workstations and the total number of workstations are still increasing, the occupancy rate of mature office spaces has fallen to 80%, a decrease of 7 percentage points compared to 87% in 2020.

On the one hand, new workstations are constantly increasing, while on the other hand, the occupancy rate of mature office spaces is continuously declining, which obviously leads to continued ineffective investment. And continued losses have put increased pressure on JiaLow.

According to the prospectus, thanks to JiaLow's counter-cyclical expansion, its revenues for 2020-2022 were RMB 0.357 billion, RMB 0.459 billion, and RMB 0.506 billion, achieving sustained growth. However, the net losses did not show a scale effect as the scale of losses did not decrease as the scale increased. During the period, the net losses were RMB 0.228 billion, RMB 0.293 billion, and RMB 0.244 billion, for a total loss of RMB 0.765 billion over three years.

As a result of continuous expansion and expanding losses, JiaLow's debt ratio continued to rise, from 113% in 2020 to 125.64% in 2022, an increase of more than 12 percentage points over two years.

After entering 2023, the huge financial pressure forced JiaLow to "take a step back from the cliff," and it chose to "cut its arm off to survive," significantly reducing lease space to ease management pressure. According to the prospectus, in 2023, the total number of JiaLow work areas was reduced from 65 to 8, the total management area was directly reduced from 0.2539 million square meters to 0.0261 million square meters, a reduction of nearly 90% in management area, and the total number of workstations was reduced to 4540, nearly 0.04 million fewer than in 2022, leaving only a small number.

After this "big slimming," JiaLow's financial statements also changed accordingly. In 2023, JiaLow's revenue was RMB 0.319 billion, a decrease of 36.9% year-on-year, and the gross loss increased sharply to RMB 0.184 billion, while in the same period in 2022, it was only RMB 0.048 billion. The net loss narrowed significantly from RMB 0.244 billion in 2022 to RMB 0.048 billion. The narrowing of net losses was due to an increase in other income. The company recorded revenue of approximately RMB 0.4 billion under other income due to termination of leases at RMB 0.538 billion and losses on disposal of property and equipment due to termination of leases of RMB 0.136 billion.

Entering the first half of 2024, with the end of JiaLow's "slimming" and the return of commercial economic activity to normal, JiaLow began a small expansion again. Although the coverage of cities further focused on the four main cities, the number of work areas increased from 8 to 9, the management area increased to 0.0506 million square meters, and the total number of workstations increased to 8212, a year-on-year increase of 80.88%. However, the scale is still significantly smaller than in the previous two years, and the occupancy rate of mature office spaces remains at the level of 80%, reflecting the relatively inadequate market demand in a sluggish economy.

After the "big slimming," the liabilities of JiaLow far exceeded its total assets.

Through the above analysis, it is not difficult to see that JiaLow's operations since 2020 have been too aggressive. It chose to expand counter-cyclically when it faced the uncertain factor of the new coronavirus epidemic, despite continuing large losses, a debt-to-asset ratio of over 100%, and a relatively lack of grasp on risk control. Although companies need to take a "gamble" when faced with uncertainty, unfortunately, JiaLow lost this bet.

Although JiaLow had its "arms cut off to survive" in 2023 and returned to expansion in the first half of 2024, JiaLow's future development will still be very difficult for the following reasons:

First, JiaLow's balance sheet has seriously deteriorated.

According to the prospectus, as of December 31, 2023, JiaLow's total assets had fallen sharply to RMB 0.227 billion after its "big slimming," compared to RMB 2.849 billion in the same period of 2022, a drop of 92% year-on-year. This was due to the net amount of lease use assets falling from RMB 2.322 billion in 2022 to RMB 0.073 billion in 2023, a typical asset "fire sale."

With the sale of assets, JiaLow's total liabilities have also decreased, from RMB 3.579 billion in 2022 to RMB 1.067 billion in 2023. However, this is still 4.7 times JiaLow's total assets in 2023. Moreover, JiaLow's current liabilities as of 2023 amounted to RMB 0.896 billion, including RMB 0.14 billion of rent reserves and contract liabilities of less than RMB 90 million. If these two items are excluded, JiaLow's current liabilities in 2023 were still RMB 0.666 billion, compared to liquid assets of only RMB 55.55 million in 2023.

Therefore, the future debt repayment pressure on JiaLow is enormous, and the company has entered a state of being "overburdened with debt." This is also the reason why JiaLow sold 5.0567 million shares at a low price before its IPO to raise USD 15.4763 million.

Second, the problem of continuous losses will be difficult to solve in the short term and will continue to affect the balance sheet.

The difficulty of achieving profitability in the shared office industry is a challenge faced by the entire industry, and the reasons for this include a single profit model, fierce market competition, unstable occupancy rates, and high operating costs. Although JiaLow's "big slimming" in 2023 resulted in a sharp narrowing of net losses during the period, mainly due to the sale of usage rights assets that boosted profitability, this is unsustainable.

Although JiaLow resumed expansion in 2024, the key issue is that profitable business models have not been established. The faster the expansion, the more losses will be incurred, as can be seen from the expansion in 2021-2022. Therefore, even if JiaLow achieves faster expansion now, it will only make the company's situation more precarious, and losses will continue to increase and push up debt levels further.

Overall, it can be said that Ting Ting Jia, which rapidly expanded its misjudgment from 2020 to 2022, has entered a very difficult situation. Although the company's "self-salvation" in 2023 has not reversed the situation, it has given the company a chance to breathe. With the company's current basic situation of continued losses and total liabilities several times that of total assets, it is still unknown whether it can successfully go public. Even if it does, a significant reduction in the amount of funds raised may still be difficult to help Ting Ting Jia out of its predicament. Whether it can "turn over" remains to be seen.