Chinese e-commerce IPO offers Alibaba antithesis

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HONG KONG, Feb 17 (Reuters Breakingviews) – Farm-to-table can also be served in an investor’s boardroom. Huitongda mainly sells electronics and fertilizers to wholesalers in rural areas of the country. It’s a simple, low-margin business compared to the vast business empire run by its big backer, Alibaba (9988.HK). Amid the tech rout, the company’s initial public offering in Hong Kong ticks some of the right boxes.

The 12-year-old company stands out on the splashier side of online retail to relatively wealthier consumers with a greater variety of products and shopping options. Alibaba, which has a 19% stake in Huitongda, already counts 99% of internet users in major Chinese cities among its customers and is expanding in Southeast Asia and beyond. In contrast, almost all of Huitongda’s buyers are domestic bulk suppliers and family stores spread across 20,000 villages and towns; consumer gadgets, farm supplies and home appliances accounted for 80% of revenue in the nine months to September 30.

Huitongda’s income statement is equally rustic. There is untapped e-commerce potential in remote and fragmented parts of China, so sales are growing rapidly and the business is profitable on an adjusted basis. Revenue rose by more than a third, to 46.5 billion yuan ($7.3 billion), from the same three-quarter period a year earlier. Flogging cheap TVs to backcountry merchants isn’t a cash cow or a rush operation. Gross margins were just 2.6%, compared to almost 14% at JD.com (9618.HK), which also holds inventory and sells directly to buyers.

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However, a more pedestrian business might be suitable at the time. Huitongda’s focus on provincial trade should suit Beijing policymakers touting “common prosperity” read more. A wholesale customer base also means it’s less exposed to cybersecurity crackdowns tripping up ride-hailing company Didi Global (DIDI.N) and others that hold potentially sensitive consumer data. And unlike Alibaba and other New York-listed compatriots, Huitongda is entirely backed by domestic investors and does not use complex offshore structures to squeeze through China’s foreign investment rules.

After pricing its shares at the low end of the indicated range, Huitongda will debut with a market capitalization of just over $3 billion, or 26 times projected 2023 earnings, according to Refinitiv IFR. That’s about on par with JD and a 14-multiple premium from Alibaba. Sometimes it’s better to buy local.

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BACKGROUND NEWS

– Chinese e-commerce company Huitongda Network has raised HK$2.2 billion ($282 million) after pricing its initial public offering in Hong Kong at the bottom of a discussed price range, IFR reported on February 14, citing unnamed sources. The company sold 51.6 million shares, or approximately 9.2% of the expanded share capital, at HK$43 each, implying a market capitalization of HK$24.1 billion (3. $1 billion).

– Six leading investors have committed $150 million.

– The shares are expected to begin trading on February 18. CICC, Citigroup and China Renaissance are the co-sponsors.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

Our standards: The Thomson Reuters Trust Principles.

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