SF Intra-City promises to deliver the goods

Hangzhou SF Intra-City Industrial (9699), the on-demand delivery service platform of SF Holdings, is poised to go public on the main board in Hong Kong on December 14.

SF Intra-City started as a business unit of SF Holding in 2015 and has been operating independently since 2019. It claims to be the largest and fast-growing third-party on-demand delivery service provider in China, primarily serving companies which are not affiliated with centralized marketplaces such as Taobao, taking up over 10 percent of the total market share last year.

The third-party on-demand delivery service market is highly fragmented in mainland China, where the aggregate market share of the top six service providers was around 35.6 percent in terms of order volume, data from iResearch shows.

SF Intra-City aims raise up to HK$2.36 billion and expects to use most of the funds for research and development and technology infrastructure, expansion of service coverage - including scenario coverage and geographical coverage, and the rider pool. The remaining funds may be used for potential strategic acquisitions and investment in upstream and downstream businesses along the value chain.

Cornerstone investors Taobao China and the bike-sharing firm Hello are subscribing to a total of HK$890 million worth of new shares, and China International Capital Corporation Hong Kong Securities and Merrill Lynch (Asia Pacific) are the joint sponsors of the deal.

However, SF Intra-City has yet to reach profitability in the last three years, due to its massive expansion.

It has incurred net losses since 2018, rising 42 percent from 328 million yuan (HK$401 million) to 469 million yuan in 2019, and the figure further expanded 38 percent year-on-year to over 757 million yuan in 2020. The company expects gross losses, net loss and net operating cash outflows may continue for another three to five years until it moves past the early stage of business and builds economies of scale.

Considering the company handled a total of 760.9 million orders last year, the company has lost nearly one yuan for each order.

Despite that, the company's top line saw significant growth from 2018 to 2020 with revenue doubling from 993 million yuan in 2018 to around 2.11 billion yuan in 2019 and further jumping 130 percent to 4.84 billion yuan in 2020.

Besides that, its parent SF Holding is now its fourth-largest customer, with the courier giant accounting for 38.6 percent of its revenues in the first five months in 2021, from a mere 3 percent in 2018.

Backed by the well-known SF brand and synergy with SF Holding, it is no surprise that SF Intra-City feeds off its parent. To further narrow its gross loss margin, SF Intra-City is also increasing the volume mix of orders fulfilled by crowd-sourced riders, who are typically not full-time riders and are engaged by outsourcing firms as contractors.

Explaining its cash-burning business model in the prospectus, SF Intra-City says that to pave the way for long-term success in the fast-growing market, it has been focusing on "growing our customer base, expanding our geographic coverage of on-demand delivery service network and developing a diverse and integrated rider pool, rather than seeking immediate financial return or profitability."

Similar tactics are also adopted by rivals like the JD.com-controlled (9618) Dada Nexus. Founded in 2014 and listed on Nasdaq in 2020, Dada has been in the red since 2017 and reported a net loss of 534 million yuan last year.

Therefore, it is unclear when SF Intra-City will come out of its losing streak and become profitable.