Boqii, the pet community operator, risks delisting due to falling valuation

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The company says it could be kicked off the New York Stock Exchange after its market capitalization fell below $50 million for 30 days.

Call it the amazing shrinking pet.

Online pet community operator Boqii farm ltd. (New York Stock Exchange: BQ) is facing an existential crisis, at least as far as its Wall Street listing is concerned, due to its rapidly declining market capitalization. The company announced Thursday it was told by the New York Stock Exchange on April 5 that it no longer complied with a rule requiring listed companies to have a market value of at least $50 million.

Boqii said he also violated NYSE rules requiring listed companies to have equity of at least $50 million. It said its average market capitalization was $48 million for the 30 days through April 4, while its last reported equity as of December 31 was still below $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 deal with possible delisting. Such a fate would represent a remarkable turnaround for a company that was once worth $500 million and wowed investors when it went public in 2020 with a story about how it was poised to become the top dog on a Chinese pet market which is expected to be worth 450 billion yuan ($70.6 billion) per year by 2024.

For anyone who feels like they’ve seen this type of delisting notice before, you’re not mistaken. Two months ago, Boqii posted a similar ad claiming it was no longer in compliance with NYSE rules after its stock traded below the required $1 level for 30 consecutive trading days.

This type of announcement has become quite common these days, as the shares of many US-listed Chinese companies have fallen over the past year due to a series of regulatory issues on both sides of the Pacific. But the stock price problem is relatively easy to fix, usually forcing a company to do a reverse stock split that takes its stock above the $1 level.

Falling below the required market value is more difficult, as the only way to fix it is to boost investor sentiment – ​​something Boqii and many of his peers have been unable to do amid all the turmoil. regulatory uncertainty. In addition 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 interruptions. activity created by China’s Covid control measures.

“Our offline traffic is heavily impacted by the Covid situation and it’s also impacting our supply chain,” Chief Strategy Officer Fang Kai said on the company’s latest earnings call last month. “And due to the Covid situation we are seeing difficulties – especially for cross-border business – we are seeing headwinds in terms of logistics.”

Showing just how far Boqii has fallen, only one analyst attended the company’s latest earnings call, keeping it pretty short at just 22 minutes. And that analyst came from Roth Capital Partners, which happened to be the lead underwriter for Boqii’s 2020 IPO. So it seems dogs aren’t man’s only best friend, just like your underwriter IPO.

Where is the rally?

Boqii’s battered shares took another hit after the latest announcement, falling 6.8% in Thursday’s trading to close at $0.381, giving the company a market value of just $35 million. This means that the stock will have to go up about 50% for the company to return to compliance. It’s more likely that someone sees the company as an extreme bargain and makes a buyout offer, as Boqii definitely looks like a promising long-term bet.

In this regard, a management-led buyout is most likely, as unsolicited offers often meet resistance from founders who control much of the company’s voting stock. In this case, the co-founders, Liang Hao and Tang Yingzhi, control an overwhelming 80% of the company’s combined voting rights, making their agreement to any takeover essential.

If we at Bamboo Works had some extra money to spend, we could definitely be interested in this particular company. Pets have become an extremely popular property among China’s rapidly growing middle class, popular among young couples who sometimes see them as substitutes for larger families, and also popular as companions for the elderly. Additionally, China’s pet care industry is highly fragmented, putting Boqii in a strong position to emerge as a consolidator.

A turning point for investors has likely been the company’s growth, which, while strong, isn’t in the kind of triple-digit territory that some like to see for this type of fragmented, fast-growing industry.

Additionally, Boqii’s growth slowed to single digits in the last 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 revenue last quarter came from product sales, compared to 94% in the previous quarter. These product sales typically generate much thinner margins than more profitable businesses like dog grooming and medical services, an area Boqii is trying to expand.

In a slightly more encouraging sign, the company’s costs remain well contained, allowing it to improve its gross margin to 23.1% from 17.9% in the prior year 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 of 315.7 million yuan is more than enough to cushion similar losses for at least a few more years, and is in fact even larger in dollar terms than the company’s current market value.

Valuations almost seem like an afterthought in this case, as it’s clear investors aren’t paying much attention to Boqii these days. But for anyone watching, the company’s shares are currently trading at a low price-to-sales (P/S) ratio of just 0.2, well below ratios of around 2 for companies listed in China. Yantai China Pet Foods (002891.SZ) and American leader Soft (CHWY).

In this case, we could probably say that delisting risk could be a major factor in Boqii’s low valuation. And if we were to take a bet, we’d say there’s a greater than 50% chance the company will no longer be listed on the NYSE main board by this time next year.

Disclosure: Nothing.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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