Ready to float and get ahead

Hundreds of expansion-minded, fund-seeking merchants on Alibaba's online marketplace eye New Third Board listings or IPOs

Rome was not built in a day. Nor was any other great city, town, village or company. But in China's rapidly growing internet industry, a potential market-leader, it seems, can be built from scratch within five years.

Three Squirrels is a shining example. It launched on Tmall, Alibaba Group Holding Ltd's online marketplace, in mid-2012. Today, it is China's largest snacks brand in e-commerce.

It started by selling nuts like cashew and pecan. Its 2015 sales reached 2.5 billion yuan ($385 million).

Three Squirrels is an "asset-light company" - no bricks-and-mortar outlets, no investment in growing nuts itself.

Zhou Ting, chief financial officer of the Anhui-based company, attributed the company's success to "a group of right people doing the right thing at the right time".

The next right move, he said, "is going public".

Three Squirrels is among the emerging group of hundreds of online merchants and internet brands that are looking for funds for expansion.

The companies are eyeing listing on the stock market. They were all born and raised in China's booming e-commerce industry, which pulled in nearly 4 trillion yuan in sales last year from more than 400 million shoppers.

Like Three Squirrels, most of them do not own any factories nor employ production line workers. Some of them do not even sell physical products but peddle services, expertise and technologies.

Their strength is their deep understanding of Chinese online shopping behavior and e-commerce, which helps them to outperform many of the bricks-and-mortar leaders in an incredibly short period of time.

To be sure, there are 44 public companies in China that are involved in businesses related to e-commerce. None of them got listed purely because of their online business.

According to China's e-commerce giant Alibaba, nearly 100 merchants on its online marketplaces have plans to go public.

They are from various industries like clothing, home furnishing, food and electronics. Sector leaders boast a combined valuation of hundreds of billions of yuan.

They plan to use the proceeds of their initial public offerings for business expansion.

Guo Jia, chief executive officer of Mayn, a firm in Hubei province that assembles personal computers as per its customers' specifications, said after four years of growth in China, annual sales are projected to reach 3.5 billion yuan this year.

Mayn is popular among video game fanatics who make enormous performance demands on their PCs.

"We assemble superb gaming equipment by sourcing top-end hardware from top suppliers such as Dell Inc," said Guo.

Mayn is ready to expand into the Western markets. "But we have no money to support our overseas expansion."

Mayn, he said, has already received two rounds of funding from venture capitals. It is, therefore, very difficult to find fresh rounds of financing from investors. Banks are not an option for firms such as Mayn that have very little, in terms of physical assets like factories, to offer as collateral for loans.

So, Mayn plans to list first on the New Third Board - the National Equities Exchange and Quotations - that has fewer regulatory hurdles than mainstream bourses.

Later, Mayn will turn to ChiNext, China's Nasdaq-style board for tech companies and startups.

Mayn is not alone in adopting this approach. Nelson Li-led Guangzhou Taotall Technology Co Ltd, which offers turnkey solutions for firms seeking to set up online shops, has already listed on the New Third Board.

"But the ultimate goal is to have an IPO in 2018," Li said. "Improving the company's valuation is one reason (for the IPO). The visibility and the money that an IPO generates could help us secure high-quality talent, which is very critical for the company's growth in the long run.

"E-commerce is a super-competitive business, every one is running fast all the time. At some point, even if you run a bit slower, you will be chased up, but you may never get ahead again."

Thankfully for firms such as Taotall and Mayn, equity investors regard e-commerce stocks as darlings.

According to financial data provider Wind Information, the average price-to-earnings ratio for e-commerce-related stocks on the Shenzhen Stock Exchange was 142 times by the end of April, compared with 46 times for all stocks listed on it.

To help IPO-minded online merchants wade through legal and procedural waters, Alibaba set up a special department in March. The initiative will act as a go-between linking merchants, bourses and China's securities regulator.

Earlier this month, Alibaba led a delegation of executives from 50 online merchants to the Shenzhen Stock Exchange on which most of China's tech stocks are listed.

Gu Ying, head of the initiative, said: "We think the flow-on effect of the listing of Alibaba's online merchants is going to be even bigger than that of Alibaba's listing itself."

Alibaba's IPO in New York in September 2014 was the world's largest, raising more than $25 billion. More than 10 million merchants are active on its online platforms. The e-commerce giant announced its annual sales for the fiscal year ended March exceeded 3 trillion yuan and overtook Wal-Mart Stores Inc, making it the world's largest retailer.

But the IPO aspirants will find the going a lot tougher than that, in spite of their boundless enthusiasm and energy. Fair valuations for a diverse range of e-commerce firms with intangible assets are not easy to obtain because such assets are not readily recognized by regulators and investors.

Huang Song, a professor at Peking University's Financial and Industrial Development Institute, said there is no roadmap for such firms to follow, which means an online merchant's journey toward an IPO could be bumpy.

"For instance, IPO applicants are required to get their earnings audited. But, when it comes to online retailers, it's hard to tell at which time incomes become realized as revenue," he said.

"Sometimes, an online retailer adds a transaction to revenue when the parcel is sent off on delivery, and sometimes the transaction gets booked as revenue when the buyer receives the parcel."

Many of online retailors rely on external online marketplaces such as Tmall from the Alibaba stable, product suppliers and manufacturers. Even if they go in for a float, there is high chance that their businesses would be undervalued by investors, said an expert from China Merchants Securities Co Ltd, a brokerage based in Beijing, who sought anonymity.

"Moreover, some of the online merchants may have exploited some loopholes in law to secure better business performance, such as faking their sales records. Some may have avoided paying tax. But going public requires them to open their tax books. If they didn't do it right, their dirty laundry would be seen by public," said the expert.

Such high risks and hurdles, however, are not dampening the spirits of float-seeking online merchants. Ma Sanxin, deputy manager of nine-year-old Linshi Muye, an online furniture brand, said the firm has always adopted strict rules in its operations, and is now intent on going public in 2020.

"Some people choose the sneaky way to do business because a well-regulated company will drive up costs. But it's not the way we do business," Ma said.

"Linshi will be a 10-year-old company next year. We want to behave and act like a great company so that we can actually be one in future."

mengjing@chinadaily.com.cn