Mogu's $87 Million IPO Faces Numerous Challenges

by: Euan Jones
Summary

Mogu, a Chinese fashion company which offers content as well as products, has released further details of its $1.7 billion IPO.

The company provides fashion content like videos in addition to selling apparel, and can take advantage of the growing Chinese apparel market.

Mogu’s revenue growth is low to nonexistent, and the company is restructuring its revenue in a way which is not necessarily more profitable.

Chinese tech IPOs are a risk currently, and Mogu does not have enough to justify taking a bet on this stock.

Chinese online fashion seller Mogu has released further details about its upcoming American IPO. 24/7 Wall Street reported that the company plans to sell 4.75 million American deposit shares (ADSs) at a price between $14 to $16, which would raise up to $87.4 million. Each ADS represents 25 Class A shares. Mogu will be listed on the New York Stock Exchange under the banner MOGU, and the company is underwritten by Morgan Stanley, Credit Suisse, and China Renaissance.

At $15 per share, Mogu will command a market value of $1.7 billion, which is substantially smaller than the $3 billion it claimed to be valued at in 2016 according to Bloomberg. But even at this smaller valuation, investors should stay well away from this company. The tech market is struggling, and Chinese tech IPOs like Xiaomi and Meituan have been disappointing after going public this year to large fanfares. Mogu has additional concerns about its finances and its capacity to grow, and so investors will almost certainly be better off looking elsewhere.

Fashion and Tech

Bloomberg called Mogu “a Chinese startup selling fashion and cosmetics online,” but it is much more than an online store. In addition to offering shirts and pants, Mogu understands that customers want to stay up to date with the latest trends and fashions as they shop, and thus offers a wide range of editorial and video content. The company boasts in its SEC report that “in September 2018, we had live video broadcasts totaling approximately 3,000 hours on a daily basis.”

A key to Mogu’s success is its relationship with tech giant Tencent Holdings, which controls 18% of Mogu’s stock. Tencent helps direct its massive userbase to Mogu’s mobile apps, and the company reports a monthly average users of over 62 million over the 12 months ending September 2018, with each user spending an average of 35 minutes per day watching Mogu’s video content. Mogu’s content means that in addition to earning revenue from sales, it also earns marketing revenue from fashion influencers who understand Mogu’s importance.

The Chinese apparel market is set to be the largest in the world by 2019, and also promises to be highly competitive. This looks to be a solid environment for a company which can influence millions of users to go with one fashion trend over another.

But despite these good news and Mogu’s potential for growth, the company faces some major threats. On a more general level, the company’s potential to grow faces challenges such as a slowing Chinese economy, constant spats between the United States and China, as well as growing Chinese regulation such as a crackdown against Tencent. But to be more specific, Mogu’s financial numbers show that while the company has potential for growth, it has not been showing it as of late.

Mogu’s Finances

The usual formula for a tech IPO is that while they do not make a net profit, they are growing rapidly and improving in other avenues such as lower marketing expenses or cutting debt. But in Mogu’s case, its revenue has either outright decreased or grown minimally. For the six months ending September 30, 2018, Mogu reports a revenue of 489 million RMB ($71 million) compared to 480 million in the same timeframe in 2017. Mogu’s net losses are shrinking, but the company still reported a loss of $44 million in 2018.

A key thing to take away from these revenue numbers is that Mogu is changing where it gets its revenue from. Marketing revenue, which as noted above is revenue created from displaying content, has faded in favor of commission revenue which Mogu earns from sales. Revenue transitions like this are often caused as companies pursue higher-margin enterprises. That is not the case here as Mogu’s sales and marketing expenses are rising, along with its cost of revenue.

Mogu claims that marketing revenue fell “due to our decision to strategically increase our focus on live video broadcasts as an effective and efficient content format to improve user engagement and experience,” which caused the number of customers to decrease. The implication is that those customers will return as Mogu focuses more on live video broadcasts, but there is no way to know if that will indeed be the case.

It should also be pointed out that Mogu’s other numbers are mixed. Cash flow for the six months preceding September 30, 2018 was a negative $38.5 million, while the company has $81 million in liabilities compared to $129 million in cash.

Look Elsewhere

Mogu could certainly work out if it can show a capacity to grow, and investors have highly been interested in the potential of Chinese tech companies. But past IPOs have shown that Chinese companies need to show more in order to be valuable investments, and Mogu faces challenges such as fixing its poor financial numbers.

The company is at a lower valuation than may have been initially expected, and investors who can get in at that $14 to $16 level may take a chance on this company’s potential. But that is a risky bet which is likely not worth it, and investors who will be looking at buying Mogu at a higher price point after the typical post-IPO bump should certainly walk away.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.