Luxury e-tailer Secoo (SECO -6.57%) was one of the most disappointing Chinese tech IPOs of 2017. The IPO was priced at $13 last September, finished its first trading day at just $10, then dropped below $7 a month later.
Secoo subsequently rebounded to the $10 level -- with a brief jump to nearly $15 on vague blockchain chatter -- but still seems to be left behind by other hotter Chinese stocks. I personally owned some of Secoo's IPO shares, then averaged down on its decline -- but I recently sold my entire position on its blockchain pop. Here are my five main reasons for doing so.
1. The suspicious IPO sell-off
Most IPOs, even "busted" ones like Secoo, tend to rise for the first few trades before selling off. But Secoo's first trade of the day dropped its opening price from $13 to $12.10, setting the tone for the stock's big first-day drop.
In an interview with SINA, Secoo's top investor IDG Capital vaguely blamed the drop on "hedge funds" with a "short-term" view of the company's prospects. But IDG didn't clarify if those funds had held private shares of Secoo or received IPO shares -- because it wouldn't make sense to dump IPO shares at a steep loss on the first trading day.
2. The reason for its IPO
In Secoo's F-1 filing, the company reported that it finished the first half of the year with just 34.9 million RMB ($5.1 million) in cash and equivalents, a 37% drop from the end of 2016.
Therefore, Secoo was about to run out of cash, and needed to replenish that reserve with its $140 million in IPO proceeds. Yet Secoo continues to burn through that fresh cash, finishing the third quarter with just 886.2 million RMB ($133.2 million) in cash and equivalents.
3. Its "active customers" figure
In its F-1 filing, Secoo disclosed an "active customer" figure that was defined as accounts that "made at least one purchase during the specified period." However, there was a huge disparity between the company's number of registered members and "active customers."
In the first six months of 2017, Secoo claimed that it had 15.1 million registered members but only 0.2 million active customers. This means that just over 1% of its members actually bought anything during the period.
For the third quarter, Secoo didn't disclose its total number of registered members, and merely stated that its active customers for the quarter had risen 44% annually to 158,000. That seems like a really small figure for a company that claims to control 25% of China's online luxury market.
4. The questionable market share figure
Secoo's 25% market share figure actually comes from consulting firm Frost & Sullivan, which also called it Asia's "largest" online integrated upscale products and services platform, as measured by gross merchandise volume (GMV), for 2016.
That number is very hard to verify, since larger online marketplaces, like Alibaba's (BABA -0.74%) Tmall and JD.com (JD -1.77%), don't separately disclose their sales of "upscale" products.
But in terms of total GMV, Secoo generated 3.47 billion RMB ($512 million) in GMV in fiscal 2016, while Alibaba and JD.com respectively generated annual GMVs of over 3 trillion RMB and 658 billion RMB that same year.
Meanwhile, a recent ranking of China's top e-commerce companies by Analysys International Enfodesk didn't even list Secoo among the top nine sites in the country. This means Secoo's "real" e-commerce market share is likely lower than ninth-place Jumei's 0.4% share.
This isn't the first time Frost & Sullivan's "market leader" or "market share" claims have been questioned. Last July, a report from Yicai Global listed the firm's other questionable claims, and noted that several fraudulent firms all "hired Frost & Sullivan to provide a market position advisory report."
In a statement to Yicai, Frost & Sullivan claimed that independent consultants shouldn't be held accountable for financial problems at certain listed companies. Yet Frost & Sullivan's claims about Secoo's "leading" position in China's luxury market still raise eyebrows for the same reasons.
5. The competition
Lastly, Secoo faces intense competition from Alibaba's Tmall and JD.com, which both ramped up their luxury marketplaces over the past year. JD acquired a stake in luxury e-tailer Farfetch to expand its upscale offerings last June, while Tmall launched a "luxury pavilion" storefront for showcasing its top high-end brands last August.
To make matters worse, Tencent's (TCEHY -0.40%) WeChat, the most popular messaging app in China, convinced top brands like Louis Vuitton and Burberry to sell products within its fledgling e-commerce ecosystem. Top luxury brands are also ramping up their own direct-to-consumer channels in China, which could render smaller e-tail partners like Secoo obsolete.
The key takeaway
Secoo boasts some impressive top and bottom line growth figures, and the stock looks cheap at about 1.1 times sales. But if we dig deeper, we'll notice a lot of facts that simply don't add up. That's why I'm selling Secoo and replacing it with JD.com in my long-term Chinese tech portfolio.