EDA attracts investors with its history of cross-border e-commerce – Baozun (NASDAQ:BZUN), Salesforce (NYSE:CRM)

Key takeaways:

• EDA revenue surged 71% last year on strong demand for logistics services for Chinese cross-border e-commerce sellers
• The company’s “pre-sale stocking model” may give it an advantage as the direct shipping model used by rivals Temu and Shein faces criticism in the U.S.

Doug Young

Temu and Shein may be getting all the attention these days because of their rock-bottom prices for fashion clothing and other e-commerce trinkets that are mailed directly from factories in China to Western consumers. But newly replaced EDA Holdings Ltd. offers an attractive alternative to cross-border e-commerce, especially as Temu and Shein come under fire from US politicians.

EDA shares debuted on the Hong Kong Stock Exchange last week, rising more than 80% on the first day, raising a relatively modest HKD223 million ($28.5 million) through the sale of 97.6 million shares at HKD2.28 each. The share price has fallen since its first-day gains, but was still 51% higher than its last closing IPO price of HK$3.44 last Friday.

EDA operates a suite of cloud services that provide logistics for cross-border Chinese e-commerce sellers selling to the US, Europe and Australia. These services cover a wide range of services, from first-mile international freight transportation within China to last-mile fulfillment services in destination countries for products sold via e-commerce.

At its most recent level, the company sports a respectable – but not particularly exciting – price-to-earnings (P/E) ratio of 20, with a similarly respectable but unremarkable price-to-sales (P/S) ratio. ratio 1.16. P/S lags at 1.65 Weimob (2013.HK), but is significantly ahead of 0.13 for Baozun(NASDAQ:BZUN), both service providers to domestic Chinese e-commerce retailers. Giants from the USA Shopify (NYSE:SHOP) i Sales force (NYSE:CRM), the prices of both companies are much higher, with P/S ratios of 10 and 6.5, respectively.

EDA’s lower multiples compared to global giants are likely at least partly due to its relatively small size. Even after the big post-IPO gains, the company’s market capitalization is still a relatively modest HK$1.5 billion, or just under $200 million. According to his prospectusfirst filed in February, the company is not at the top of its class, it is the seventh-largest provider of e-commerce export supply chain solutions based on 2022 revenue.

The business of selling Chinese goods abroad through e-commerce has been growing rapidly in recent years as Beijing encourages its manufacturers to sell their goods directly to consumers abroad. According to third-party data included in the prospectus, the B2C market for such e-commerce exports grew 28.4% annually in gross merchandise value (GMV) from 2017 to 2022, reaching 3.22 trillion yuan ($445 billion) in 2022. This growth is expected to slow slightly over the next few years to 13.4% annually and reach 6 trillion yuan by 2027.

The explosion has led to a concomitant increase in demand for related services such as EDA. The B2C e-commerce export solutions market grew by 28.8% annually from 2017 to 2022, reaching 402 billion yuan in 2022. The EDA said the rapid growth was partly due to the pandemic as people started shopping online after closing many stores. He added that growth is expected to slow to about 9.1% annually between 2022 and 2027.

Pre-sale model of stockings

Founded in 2014 in the booming southern city of Shenzhen, EDA was an independent company controlled by founder Liu Yong for most of its life before being acquired by a larger China Lesso Group Holdings Ltd. (2128.HK) in 2021. Lesso, which provides logistics services for goods shipped from China to Southeast Asia, has decided to spin off EDA to give it greater flexibility in running its own business, including its own fundraising.

EDA differs from big brands like Temu and Shein in that it uses a business model in which its customers’ goods are stocked in local warehouses in the countries where those goods will ultimately be sold. This “pre-order model” allows for quick delivery after placing the order. To facilitate this model, EDA partners with 40 local warehouse operators in the US, six in Canada and another seven in total in Germany, the UK and Australia.

By comparison, companies like Temu and Shein use a system to directly ship products from China to the countries where their buyers are located. This system carries less risk of stockpiling unsold stock, but takes much longer for deliveries to reach their destination and is less practical for returned goods.

Recently, the direct shipping model has faced a new type of risk as the United States explores closing a loophole that allows Shein and Temu to sell cross-border e-commerce goods in the U.S. without paying any import duties. Closing this loophole would immediately make these products significantly more expensive, eliminating one of their key advantages. Such a move would work to the advantage of EDA and other companies that use the pre-stocking model, as all their goods already pay import duties.

On the financial side, EDA’s growth over the last two years appears to be quite strong, which partially explains why its latest P/E and P/S ratios look relatively low. The company’s revenue rose 71% last year to 1.21 billion yuan from 709 million yuan, although the growth rate was slightly slower at 21% the previous year.

Unlike many of the newly listed companies we cover that rely on a handful of clients, EDA also looks relatively attractive due to its high degree of diversification. Of the company’s 850 customers over the past three years, the five largest accounted for just a third of its revenue. Its largest customer accounted for approximately 12% of revenue each year.

The company’s gross margin has ranged from 15% to 16% over the last three years, which seems comparable to what you would expect from a logistics operator, even though EDA likes to emphasize that it uses an “asset-light” model, which is based on to outsource most logistics tasks to third parties. The company is relatively profitable, reporting a profit of 69.4 million yuan last year, and does not appear to have any cash problems, with cash flow positive in each of the last three years.

Ultimately, the company looks quite solid in terms of its market position and concentration in a few key markets. There could also be benefits as Temu, Shein and other companies using the drop shipping model have come under fire. Its smaller size may be a disadvantage for investors, although some may argue that it may deserve a higher valuation due to its high growth potential.

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