New Ruipeng Pet Group Begins U.S. IPO Rollout (Pending:RPET)

A Quick Take On New Ruipeng Pet Group Inc.

New Ruipeng Pet Group Inc. (RPET) has filed to raise an undisclosed amount in an IPO of its American Depositary Shares representing ordinary shares, according to an F-1 registration statement.

The firm provides pet care, supply chain services and marketing solutions in the pet care industry in China.

RPET’s revenue growth is decelerating and operating losses and cash burn remain high, negatives in the current U.S. stock market environment where the cost of capital has been increasing.

I’ll provide a final opinion when we learn more IPO details from management.

Ruipeng Pet Overview

Shenzhen, China-based New Ruipeng Pet Group Inc. was founded to develop a pet care platform handling most aspects of the pet care industry in Mainland China.

Management is headed by president and Co-Chairman Yonghe Peng, who has been with the firm since its inception in 2013 and was previously the founder of Ruipeng Pet Hospital and, prior to that, worked as a veterinarian at the Institute of Pest Control in Shenzhen.

The company’s primary offerings include:

• Pet care hospitals

• Supply chain service provider

• Diagnostic services

• Marketing solutions

• Talent training

As of September 30, 2022, Ruipeng Pet has booked fair market value investment of $1.44 billion from investors, including Hillhouse Entities.

Ruipeng Pet – Customer/Partner Acquisition

According to management:

We pursue organic growth through the integration of our nationwide pet hospitals, warehouses and retail channels and by leveraging our rich and replicable operating experience and our large talent pool. We also achieve robust growth and expansion through strategic acquisitions of suitable targets within the industry.

Management says the company is the number one pet care services firm in China, operating a supply chain network of over 45,000 pet stores and has 4.9 million registered customers on its Rvet system.

Sales and Marketing expenses as a percentage of total revenue have varied within a narrow range as revenues have increased, as the figures below indicate:

Sales and Marketing	Expenses vs. Revenue
Period	Percentage
Nine Mos. Ended September 30, 2022	6.5%
2021	7.5%
2020	5.8%

Click to enlarge

(Source – SEC)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, fell to 3.2x in the most recent reporting period, as shown in the table below:

Sales and Marketing	Efficiency Rate
Period	Multiple
Nine Mos. Ended September 30, 2022	3.2
2021	5.0

Click to enlarge

(Source – SEC)

Ruipeng Pet’s Market & Competition

According to a 2022 market research report by iResearch, the Chinese market for pet care is expected to reach $60 billion by the end of 2023.

This represents a forecast CAGR of 14% from 2020 to 2023.

The main drivers for this expected growth are an increase in discretionary income and growing pet adoptions by consumers in China.

Also, the chart below shows the historical and projected future growth trajectory of the Chinese pet industry:

Major competitive or other industry participants by type include:

• Pet veterinary facilities

• Pet store chains

• Independent pet stores

• Online retailers

• Supermarkets

New Ruipeng Pet Group Inc. Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing topline revenue at a decelerating rate of growth

• Increasing gross profit and gross margin

• High and growing operating losses

• Fluctuating cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Nine Mos. Ended September 30, 2022	$ 606,610,000	26.7%
2021	$ 672,478,000	58.7%
2020	$ 423,702,113
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Nine Mos. Ended September 30, 2022	$ 30,756,000	27.4%
2021	$ 31,372,000	56.3%
2020	$ 20,067,746
Gross Margin
Period	Gross Margin
Nine Mos. Ended September 30, 2022	5.07%
2021	4.67%
2020	4.74%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Nine Mos. Ended September 30, 2022	$ (149,616,000)	-24.7%
2021	$ (190,175,000)	-28.3%
2020	$ (138,063,662)	-32.6%
Comprehensive Income (Loss)
Period	Comprehensive Income (Loss)	Net Margin
Nine Mos. Ended September 30, 2022	$ (251,462,000)	-41.5%
2021	$ (161,859,000)	-26.7%
2020	$ (103,328,169)	-17.0%
Cash Flow From Operations
Period	Cash Flow From Operations
Nine Mos. Ended September 30, 2022	$ (70,584,000)
2021	$ (164,022,000)
2020	$ (67,057,324)
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

As of September 30, 2022, Ruipeng Pet had $120.3 million in cash and $847.9 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2022, was negative ($168.2 million).

New Ruipeng Pet Group Inc. IPO Details

Ruipeng Pet intends to raise an undisclosed amount in gross proceeds from an IPO of its American Depositary Shares representing ordinary shares.

Existing and additional investors have indicated a non-binding interest in purchasing shares of up to $50.0 million in the aggregate at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

approximately 35% for strengthening our brand, expanding our pet hospital network in China, and further upgrading our pet care services;

approximately 20% for investing in our supply chain service and local services capabilities;

approximately 20% for exploring new initiatives including upstream and downstream business opportunities as well as global expansion, although we have not identified any specific opportunities including mergers and acquisitions at this time;

approximately 15% for research and development to enhance digitalization and technology, especially in smart treatment, online platform and data insight; and

approximately 10% for working capital and other general corporate purposes.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says the firm is not currently subject to any material legal or administrative proceedings.

The listed bookrunners of the IPO are Morgan Stanley, Credit Suisse, CICC and UBS Investment Bank.

Commentary About Ruipeng Pet’s IPO

RPET is seeking U.S. public capital market investment to fund its general corporate growth plans and for working capital needs.

The firm’s financials have produced increasing topline revenue at a decelerating rate of growth, growing gross profit and gross margin, high and growing operating losses and variable cash used in operations.

Free cash flow for the twelve months ended September 30, 2022, was negative ($168.2 million).

Sales and Marketing expenses as a percentage of total revenue have fluctuated within a narrow range as revenue has increased; its Sales and Marketing efficiency multiple fell to 3.2x in the most recent reporting period.

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment into the company’s growth and operating requirements.

RPET has spent heavily on capital expenditures despite generating substantial negative operating cash flow.

The market in China for pet care products and services has grown quite strongly in recent years and the company has a prominent position in the market.

Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The Chinese government’s crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Also, a potentially significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.

Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities.

Morgan Stanley is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (40.3%) since their IPO. This is a lower-tier performance for all major underwriters during the period.

Like so many larger Chinese companies, the firm generates topline revenue growth and high operating losses.

Its growth is decelerating and the high operating losses and cash burn are negative in the current growing cost of capital environment in the U.S.

When we learn more about the IPO from management, I’ll provide an update.

Expected IPO Pricing Date: To be announced.