NEW YORK, United States — Chinese e-commerce platform Mogu's shares priced at the low end of their expected range Thursday, reflecting investors’ cooling appetite for money-losing startups, even in China’s booming fashion market.
Over the past two years, Mogu has embraced China’s live-streaming trend, incubating a stable of 48,000 fashion influencers who pump out content to more than 62.6 million active users, mainly from China’s free-spending post-90s generation. Customers can buy fashion featured in the live broadcasts, an increasingly popular purchasing method in China.
The company bet that its spin on e-commerce — and China’s fast-growing fashion market — would appeal to investors, who have turned away from tech stocks in recent months. Shares of startups and tech giants alike have tumbled in the second half of 2018 over concerns about slowing global growth and rising US interest rates, which make it more expensive for companies to raise funding.
Mogu shares priced Thursday at $14, raising $67 million for the company and implying a valuation of at least $1.3 billion — a far cry from the $4 billion valuation reported earlier this year. The company, backed by Chinese tech giant Tencent holdings, marketed its sale of 4.75 million shares at $14 to $16 apiece. Shares fell to below $12 after they began trading, before recovering to end the day at $14.
“The market now does not look good,” said Mogu chief executive Qi Chen, known in English as Shark Chen, in an interview prior to the IPO. “But for us the most important market is our consumer market, and China’s fashion market is obviously growing bigger and bigger.”
Pinterest clone Mogujie.com was founded in 2011, allowing users to create wishlists that could be directly shopped via links to Alibaba platforms Taobao and Tmall. Before long, Alibaba blocked external links from Mogujie, prompting the company to develop its own e-commerce platform. It then acquired rival Meilishuo in 2016, in a deal that at the time reportedly valued the combined entity at $3 billion.
The company targets the mass market, rather than follow the lead of Alibaba’s Luxury Pavilion or JD.com’s Toplife in chasing the luxury sector, where margins are higher. According to regulatory filings, Mogu lost $44 million on revenue of $71 million for the six months ending September 30, with revenue (which comes from marketing and commissions from merchants who generate transactions on the platform) up 2 percent over the same period a year earlier.
Meilishuo investor Tencent also came on board and is now Mogu Inc.’s largest shareholder, with an 18 percent stake. This IPO can be seen as another battleground in the ongoing war between Tencent and Alibaba for tech supremacy in China.
China’s wanghong economy is real. The question is whether Mogu can effectively take advantage.
The offering is also a key step in the evolution of China’s famed “wanghong" (influencer) economy, which has been valued at 53 billion yuan ($8 billion) per year and growing. Less than half of that revenue coming from direct sales (the monetisation method available to influencers using Mogu’s platform) with most coming from marketing and digital gifting from fans.
This balance is shifting, however, as influencers and domestic fashion manufacturers traditionally supplying third parties look to build their own brands. Another influencer incubator focusing on brand building and e-commerce, Ruhan, is also rumoured to be seeking an IPO in 2019.
Mogu and Ruhan are both looking to capitalise on the shift of China’s fashion business to a domestically made, branded and consumed model as many manufacturers are forced out of the global low-end apparel market by rising wages and competition from elsewhere in Asia.
Chen said his model breaks from the traditional fashion supply chain, where a designer places an order with a factory in anticipation of what they expect consumer demand to look like months later, which can lead to overstock or shortages. On Mogu, customers place orders during live video broadcasts, which designers can use to manufacture exactly the number of items they need.
But Mogu’s stagnant revenue and steep losses raise questions about the company’s ability to execute, said Brock Silvers, managing director at Kaiyuan Capital. Competitors can easily mimic the company’s business model and consumers are fickle, he added.
“China’s wanghong economy is real. Younger Chinese consumers are extremely internet-based, and today’s wanghong stars are similar to yesterday’s movie stars in terms of cultural reach,” he said. “The question is whether Mogu can effectively take advantage.”
Chen said Mogu’s content is an advantage over potential competitors, and the company is working on using artificial intelligence and other technologies to help consumers discover fashion they’ll want to buy.
“Our algorithm continually suggests what might be of interest to our consumers, the blogger or content they might like,” he said. “So it’s relatively easy for them to discover what’s popular and what suits them.”