Two Chinese companies, Best (NYSE:BSTI) and Secoo (NASDAQ:SECO), both recently went public in the US with mixed results. Best originally planned to sell 62.1 million shares between $13 to $15 per share, but soft demand caused it to revise the offering to 45 million shares at $10. The stock now trades marginally higher at about $11.

Secoo priced its initial offering of 8.5 million shares at $13, but it seemingly overestimated investor demand, and the stock plunged to about $7 per share over the following weeks.

Investors don't seem excited about either of these stocks, but I think that they deserve a closer look.

Tiny packages surrounding a globe on top of a laptop keyboard.

Image source: Getty Images.

What do Best and Secoo do?

Best is a logistics and supply chain company. Its freight network reaches 96% of all Chinese cities, and includes hundreds of warehouses and thousands of line-haul routes. The company also operates warehouses in the US and Germany, and ships to Australia, Japan, and Canada with the help of regional partners. One of the company's top investors is Chinese e-commerce giant Alibaba (NYSE:BABA), which uses Best's network for some of its shipments.

Secoo is a luxury goods e-tailer, with 15.1 million registered members and a 25% share of China's online market for high-end brands. Unlike bigger e-commerce players like Alibaba's Tmall and JD.com (NASDAQ:JD), Secoo avoids first-tier cities and focuses on second-, third-, and even fourth-tier cities which have rising income levels but aren't adequately served by bigger brands. It's secured distribution partnerships with luxury giants like Versace, Dior, and Ferragamo, and it analyzes customer data through a partnership with tech giant Tencent.

How fast are Best and Secoo growing?

Best's revenue surged 68% annually to 8.84 billion yuan ($1.3 billion) last year, and rose another 134% during the first half of 2017. That growth was fueled by surging e-commerce growth across the country and soaring demand for logistics solutions. However, Best remains deeply unprofitable -- its loss widened from 1.06 billion yuan ($160 million) in 2015 to 1.36 billion yuan ($210 million) last year.

Secoo's revenue rose 49% annually to 2.59 billion ($390 million) last year, while its GMV (gross merchandise volume) rose 35% to 3.47 billion yuan ($530 million). For the first half of the year, Secoo's revenue rose another 30% annually as its GMV grew 51%. Secoo reported a net loss of 45 million yuan ($6.8 million) last year, but it reported a net profit of 52 million yuan ($7.9 million) in the first half of 2017 -- so it might book a full year profit this year.

But both companies face tough competition

Best and Secoo reported impressive growth in the past, but they both face tough competition in their respective markets. The logistics market in China is a highly fragmented one, and its major competitors include JD's own JD Logistics, SF Holdings, and ZTO Express, which went public last year.

Alibaba's backing doesn't guarantee Best's success, since the company also invested in plenty of other logistics players across China. That competition could drive down prices, making it tough for logistics companies -- even those with Best's scale -- to squeeze out sustainable profits.

The main challenge for Secoo is surviving against bigger players like Alibaba and JD.com. In the past, Secoo gained a reputation as a trusted vendor of luxury goods amid the constant issues with counterfeit goods floating around Tmall, Taobao, and JD.com. But Alibaba and JD are cleaning up their acts and expanding into the online luxury space with dedicated platforms.

Tmall recently introduced a "luxury pavilion" storefront for its high-end brands, while JD purchased a stake in luxury e-tailer Farfetch and recently launched a luxury goods platform called Toplife. If these platforms lure away Secoo's core customers, its entire business model could crumble.

The valuations and verdict

Best currently trades at 2 times sales, which is well below the industry average of 5 for business services providers. But Secoo is much cheaper at 0.4 times sales, versus the industry average of 3 for specialty retailers.

Based on these figures, it seems like the market believes that Best will keep pace with its rivals, while Secoo will succumb to the growth of Alibaba and JD.com's new platforms. However, it's premature to declare Secoo dead before seeing its first quarter as a public company, since it has a first mover's advantage in the space and might actually generate its first-ever profit this year.

The same can't be said about Best, which could struggle to grow its earnings in a low-margin industry filled with hungry competitors. Therefore, I personally think Secoo has more upside potential than Best at current prices -- although both stocks remain highly speculative plays.

 

Leo Sun owns shares of Secoo Holding Limited-ADR and Tencent Holdings. The Motley Fool owns shares of and recommends JD.com. The Motley Fool has a disclosure policy.