In recent developments, Fengchao, widely regarded as the "leader" in the express cabinet sector, has submitted its prospectus to the Hong Kong Stock Exchange, poised for what could be a significant IPO, marking the fifth such achievement for its controlling owner, Wang WeiThis move is particularly noteworthy as Fengchao has emerged as a dominant player in the intensely competitive landscape of logistics, specifically in end-user delivery servicesThe question now looms: what narrative will accompany its capital market journey following its first profitable quarter?

After nine years of establishment, Fengchao has finally achieved profitabilityWhile the company may be a recognizable name in express delivery, its core business extends beyond the well-known end delivery serviceIt also includes innovative services such as smart delivery systems and various value-added offerings that encompass laundry and home delivery services.

Financially, Fengchao's revenue has shown steady growth in recent years, recording figures of 2.526 billion yuan in 2021, 2.891 billion yuan in 2022, 3.812 billion yuan in 2023, with 1.904 billion yuan reported for the first five months of 2024. Remarkably, this initial period for 2024 reflects a 33.6% growth over the same timeframe the previous year

Traditionally, the express cabinet industry has been plagued by massive infrastructure expenditures and delivery costs, characterized by a high asset load, leading to recurrent lossesHowever, Fengchao's financial health has markedly improved.

The financial reports indicated that Fengchao's losses were substantial from 2021 to 2023, recording net profits of -2.071 billion yuan, -1.166 billion yuan, and -542 million yuan, respectivelyYet, in the first five months of this year, Fengchao reversed this trend, achieving a net profit of 71.6 million yuan.

Many analysts attribute Fengchao's newfound profitability to the resurgence in gross profit margins from its primary end delivery service, which surged from -65.3% in 2021 to 32.4% by 2024's initial five monthsConcurrently, the gross profit contribution swelled from -950 million yuan to 252 million yuanThis remarkable rebound in profitability stems primarily from the full depreciation of the cabinets operational for over five years, leading to lower sales costs attributed to fixed asset depreciation.

It is essential to highlight that while the operational costs of the smart cabinets have diminished due to depreciation, Fengchao plans to adjust its accounting practices to extend the depreciation timeline of these cabinets to align more closely with their expected lifespan.

Moreover, the second significant segment, smart delivery services, has also experienced swift growth in recent years

• Meituan's Global Expansion: Why Saudi Arabia?
• U.S. Tech Giants Lose $400B in Market Cap
• AR Company's Capital Trends
• Rent vs. REITs: What's More Important?
• World's Largest Parcel Locker Firm Heads to IPO!

This service allows consumers or courier companies to store parcels in smart cabinets for which they pay a feeThe rise of live streaming and short video platforms has significantly boosted the e-commerce reverse logistics market, catalyzing demand for this service.

Fengchao's smart delivery revenue surged from merely 15 million yuan in 2021 to an outstanding 1.02 billion yuan by 2023, and in the first five months of 2024, it reached 692 million yuan, reflecting a whopping 107% increase compared to the same period in 2023. The revenue proportion from this segment grew from 5.9% in 2021 to an impressive 36.3%, rapidly approaching that of the primary delivery service.

By being the first in the express cabinet sector to seep into the IPO landscape, Fengchao could potentially redefine the current fragmented market picture.

As it stands, Fengchao has firmly established itself as the largest operator of smart express cabinets both in China and globally; however, the competition remains fierce

Notable challengers include JD.com's self-pickup cabinets, Cainiao's delivery stations, YTO's Mama Delivery Stations, and several others from various e-commerce and courier companies.

According to Fengchao's prospectus, the competition in the domestic end logistics market is markedly fragmented, with the top five companies capturing only 14.6% of the total market share as of 2023. Notably, Fengchao holds the largest share at 6.1%, though its rivals closely trail, with the second and third companies maintaining 4% and 2.5%, respectively.

The rapid growth the industry witnessed in prior years is expected to slow, with forecasts citing a shift in market dynamicsA report from Analysys Consulting indicates that the volume of parcel deliveries in China expanded from 31.1 billion parcels in 2019 to an anticipated 94.3 billion by 2023, representing a compound annual growth rate (CAGR) of 32%. Projections suggest this could rise to 166.4 billion parcels by 2028, yet with a reduced CAGR of 12%.

Additionally, the express cabinet industry faces numerous hurdles, including the ongoing search for viable profit models amid high equipment expenditures and mounting maintenance costs

Regulatory changes may also impose additional challenges to the sector, as highlighted in Fengchao's prospectus.

A pertinent example arose in March when new regulations were introduced, imposing fines ranging from 10,000 to 30,000 yuan for using smart parcel lockers without user consent if the events are deemed severeAs regulations tighten, compliance costs continue to escalate for companies in this sphere.

Furthermore, in major urban centers where market saturation is evident, many industry players resort to offering free storage services to attract users, placing additional strains on profitabilityIn light of these challenges, Fengchao's ability to achieve profitability is a notable success.

If Fengchao successfully navigates the IPO, it stands to gain accelerated market share through its dominant position and acquisitions, potentially leading to a reshaping of the industry's fragmented landscape.

Significantly, in recent years, Fengchao has actively pursued international expansion, with Southeast Asia emerging as a critical target

In the first five months of this year alone, it deployed approximately 2,000 smart cabinets in Thailand, showcasing its ambitions for global reach.

Notably, SF Holding, Fengchao's parent company, operates Kerry Logistics, one of the largest third-party logistics providers in Southeast Asia, thus facilitating a robust delivery network in the region to support Fengchao's international endeavorsEntering the Hong Kong capital market could also enhance Fengchao's brand visibility abroad.

The valuation is another pivotal aspect of the upcoming IPO discussion.

Fengchao’s inception story began with high expectations, as the founder Xu Yubin was a former courier within the SF Holding companyUpon launching in 2015, his vision received backing from major logistics figures including ZTO, Yunda, and Prologis, securing an impressive 500 million yuan in initial investments.

Since then, Fengchao has undergone multiple rounds of funding, one of which took place in January of 2017, raising 2.5 billion yuan with the involvement of significant investors like CDH Investments and Guokai Financial.

In early 2021, Fengchao garnered another investment of 400 million USD from various firms, including ZhenFund and Sequoia Capital, leading to a post-investment valuation of approximately $3.4 billion, equating to around 24 billion yuan.

As per the latest insights from Hurun's 2024 Global Unicorn List published in April, Fengchao's valuation reached 25 billion yuan

This increase is particularly significant, considering the overall declines in valuations observed within the logistics sector in recent years, showcasing Fengchao's growth potential.

The express cabinet industry has ostensibly traversed beyond its phase of explosive growthTo maintain or enhance its valuation, compelling narratives will be essential.

One key element could be its sustained viability in profitability.

This should not raise concern, as Fengchao's valuation is buoyed by more than just express cabinetsIts portfolio now includes end delivery services, smart delivery services, as well as interactive media, laundry, and home services.

This expansion emphasizes that Fengchao has evolved beyond amere logistics service provider, now increasingly embracing a model akin to a life services company.

For instance, in its laundry business, Fengchao has established a comprehensive factory network, which includes a self-operated plant in Zhongshan, Guangdong, along with 135 third-party factories across 25 provinces

Since inception, Fengchao has processed a staggering 1.579 million orders in this segment.

Analyzing profit metrics, it's clear that value-added services are now significant contributors to Fengchao's profits, with profit margins leading among its three primary sectorsFor the first five months of 2024, the gross margin for value-added services stood at 44.9%, surpassing the 32.4% aligned with end delivery and 7.3% for smart delivery servicesThe contribution to total profit from these services reached 195 million yuan, not only standing out markedly against the 51 million yuan from smart delivery but also closing in on the 252 million yuan from end delivery services.

Moreso, the allure of Fengchao's value-added services is anchored within its widespread network of express cabinets, coupled with SF Holding's extensive logistic infrastructure, enhancing customer stickinessWithin this expansive ecosystem, the potential for market penetration remains significant.

As a chief player in the end-user logistics service space, Fengchao has established a clear profitability model