Key Takeaways:
- Boqii could face delisting from the NYSE after its market valuation fell out of compliance with NYSE rules
- Company could delist through a management-led buyout and is likely to disappear from the NYSE main board within the next year
By Doug Young
Call it the incredible shrinking pet.
Online pet community operator Boqii Holding Ltd. (NYSE:BQ) is facing an existential crisis, at least in terms of its Wall Street listing, due to its rapidly shrinking market cap. The company announced on Thursday it was notified by the New York Stock Exchange on April 5 that it had fallen out of compliance with a rule requiring listed companies to have market values of at least $50 million.
Boqii said it also breached NYSE rules requiring listed companies to have stockholder equity of at least $50 million. It said its average market cap was $48 million for the 30 days through April 4, while its last reported stockholder equity as of Dec. 31 was an even lower $32.2 million.
The company now has 90 days to provide the exchange with a letter detailing how it plans to return to compliance, or face potential delisting. Such a fate would represent a remarkable turnaround for a company that was once worth $500 million and wowed investors at the time of its 2020 IPO with a story on how it was well-positioned to become top dog in a Chinese pet market forecast to be worth 450 billion yuan ($70.6 billion) annually by 2024.
For anyone out there who feels like they’ve seen this type of delisting notification before, you’re not mistaken. Two months ago, Boqii released a similar announcement saying it had fallen out of compliance with NYSE rules after its stock traded below the required $1 level for 30 consecutive trading days.
That type of announcement has become quite common these days as shares of many U.S.-listed Chinese companies have plummeted over the last year on a series of regulatory concerns on both sides of the Pacific. But the share price problem is relatively easy to fix, usually requiring a company to conduct a reverse share split that brings its stock up above the $1 level.
Falling below the required market value is more difficult, as the only way to fix that is to boost investor sentiment – something Boqii and many of its peers haven’t been able to do amid all the regulatory uncertainty. Adding to the problems, Boqii, which relies on online and offline pet product sales for most of its business, has faced challenges for the offline portion due to frequent business disruptions created by China’s Covid control measures.
“Our offline traffic is heavily impacted by the Covid situation and that is impacting our supply chain as well,” chief strategy officer Fang Kai said on the company’s latest earnings call last month. “And due to the Covid situation, we are seeing some tough – especially for the cross-border business – we see some headwinds in terms of the logistics.”
Showing just how far Boqii has fallen, only a single analyst attended the company’s latest earnings call, keeping it quite short at just 22 minutes. And that analyst was from Roth Capital Partners, which just happened to be the main underwriter for Boqii’s 2020 IPO. So, it seems that dogs aren’t man’s only best friend – so is your IPO underwriter.
Where’s the rally?
Boqii’s beat-up shares took another beating after the latest announcement, sagging 6.8% in Thursday trade to close at $0.381, giving the company a market value of just $35 million. That means the stock will need to rally about 50% for the company to return to compliance. More likely is that someone will see the company as an extreme bargain and make a buyout offer, since Boqii really does look like a promising bet over the longer term.
In that regard, a management-led buyout is most likely, since unsolicited offers often face resistance from founders who control a big chunk of the company’s voting shares. In this case co-founders Liang Hao and Tang Yingzhi control an overwhelming 80% of the company’s voting rights combined, making their agreement to any buyout essential.
If we at Bamboo Works had some extra money to spend, we might certainly be interested in this particular company. Pets have become an extremely hot property among China’s fast-growing middle class, popular among young couples who sometimes see them as surrogates for big families and also popular as companions for older people. What’s more, China’s pet care industry is highly fragmented, putting Boqii in a strong position to emerge as a consolidator.
One turnoff for investors has probably been the company’s growth that, while strong, isn’t in the kind of triple-digit territory that some like to see for this kind of fragmented and fast-growing industry.
What’s more, Boqii’s growth slowed to single-digits in the final three months of last year, with revenue up just 6.3% to 332.6 million yuan for the reasons we mentioned earlier. In another less-encouraging trend, 98% of the latest quarter’s revenue came from product sales, versus 94% in the previous quarter. Such product sales typically carry far thinner margins than more-profitable businesses like dog grooming and medical services, which is an area Boqii is trying to build up.
In a slightly more encouraging sign, the company’s costs remain well under control, allowing it to improve its gross margin 23.1% from 17.9% in the year-ago quarter. And its net loss also improved to 28.8 million yuan from 81.9 million yuan a year earlier. The company’s latest cash holdings of 315.7 million yuan are more than sufficient to cushion it through more similar losses for at least a few more years, and is actually even larger in dollar terms than the company’s current market value.
Valuations seems like almost an afterthought in this instance, as clearly investors aren’t paying much attention to Boqii these days. But for anyone who is watching, the company’s stock currently trades at a lowly price-to-sales (P/S) ratio of just 0.2, far below the ratios of about 2 for both the China-listed Yantai China Pet Foods (002891.SZ) and U.S. leader Chewy (NYSE:CHWY).
In this case, we could probably say the delisting risk may be a major factor behind Boqii’s low valuation. And if we were betting, we would say the odds are greater than 50% that the company will no longer be listed on the NYSE’s main board at this time next year.
