To The Moon

Summary

• Missfresh is set to raise $27 million from two new investors and buy a Hong Kong-based digital marketing firm for $12 million.

• The former online grocery giant’s financial troubles are probably too deep for such a small-time acquisition to fix.

• Even after the surge in its stock following the latest announcement, Missfresh’s price-to-sales ratio is still just a miniscule 0.05, as its stock price sinks far faster than the plunge in its revenue.

Abstract creative financial graph interface and world map on flag of China and blurry cityscape background, forex and investment concept. Multiexposure

Missfresh Ltd. (NASDAQ:MF $Missfresh Limited(MF)$ ) is pressing the reset button, taking on new funds and a fresh identity as it looks to return from a brush with death in its previous form as one of China’s online grocery pioneers. The company’s remaining investors - mostly mom-and-pop buyers of penny stocks - appear to be giving a cautious thumbs up for Missfresh’s new path to a 2.0 version. But many questions remain that may leave skeptics scratching their heads.

Last Thursday, Missfresh announced it would sell 5.4 billion Class B shares for $27 million to two investors. The transactions will give the pair 88% of the company, valuing Missfresh at about $30 million. The new investors will delegate their voting rights to founder Xu Zheng, who will remain chairman and CEO. In the same statement, Missfresh said it will buy 100% of Mejoy Infinite, a Hong Kong-based digital marketing firm, for $12 million.

The stake sale’s $30 million valuation was well above Missfresh’s paltry $4 million market capitalization before the announcement. But even that inflated figure is still a far cry from the multibillion-dollar valuation the company had at the time of its New York IPO just two years ago.

Still, the deal and its implied higher valuation sparked a massive rally for Missfresh shares, which have roughly quadrupled since the announcement, lifting the company’s market cap to $15.6 million. Equally important, the rally has lifted the stock above the $1 mark, below which its stock faced potential de-listing for failing to comply with the Nasdaq’s minimum price requirement.

The Mejoy Infinite acquisition will make digital marketing a key part of Missfresh’s rebuilding process. It will complement the private label food business that Missfresh launched in January last year to “revolutionize the neighborhood retail business,” according to the company’s latest annual report filed the same day last week as the new fundraising announcement.

The current Missfresh is a shell of its former self. Last year it shut its flagship distributed mini-warehouse operations, which allowed it to deliver fresh produce and other groceries within an hour. It also closed one business that helped to digitalize wet markets and another that offered retail cloud services. Its revenue plunged 60% to 2.8 billion yuan ($400 million) last year from 2021, with continued losses devouring most of its cash holdings. At the end of last year, its total liabilities were more than nine times its total assets.

Missfresh’s demise owes largely to a cost-heavy business model to provide its speedy delivery services, with operating expenses dwarfing its revenue. The company also faced intense competition from companies like Dingdong (DDL $Dingdong (Cayman) Limited(DDL)$ ), Pinduoduo (PDD $Pinduoduo Inc.(PDD)$ ), and Meituan (OTCPK:MPNGF, OTCPK:MPNGY) (3690.HK), which further eroded its margins.

Adding to its woes, Missfresh admitted last year to overstating its revenue for the first nine months of 2021, following a review of transactions for its delivery business by an independent audit committee that began in April. The revelation led to the dismissal of employees involved in the fraud, voluntary departures of executives, and lawsuits. At the same time, the company turned to mass layoffs as its mounting woes put further pressure on its unsustainable cost structure.

Delisting threat

All these events put Missfresh under immense pressure to raise funds and right its ship, first and foremost to simply survive, and secondarily to stay listed on the Nasdaq. The company warned in June that it could be kicked off the bourse because its market capitalization was below the minimum requirement of $5 million for 30 consecutive trading days. Missfresh, whose pre-IPO investors include Tencent, Goldman Sachs, and U.S. investment firm Tiger Global, also doesn’t meet a $10 million minimum for shareholder equity and failed to submit its 2022 annual report on time.

As dire as its situation is, it’s not so clear how the new digital marketing operation might revive Missfresh’s fortunes.

For one, there’s very little publicly available information about Mejoy Infinite, including financials that might shed some light on its revenue-generating potential. The company was founded in 2018 and targets Chinese advertisers of service tools, games, and cross-border e-commerce, according to CB Insights. But that’s about all that comes up from an online search of the company’s name. There’s also an inactive Facebook page bearing Mejoy Infinite’s name, with just two promotional photos and a post linking to its website, all published on the same day in March.

That website doesn’t seem to be actively managed either, given that its “news” section was last updated two years ago. And oddly, it lists a mainland China phone number, while the Facebook page displays a Hong Kong address for office space in an old building near the city’s main business district. For a digital marketing firm, Mejoy Infinite’s online footprint is strangely small - at least in terms of English representation.

Something that small wouldn’t have merited even a second glance a couple of years ago for Missfresh, which raked in nearly $1 billion in annual revenue at its peak. Times have certainly changed since then, and there’s sure to be some skepticism over whether this mysterious small marketing shop can or will restore the former highflyer to its glory days. Investors who lost big bucks on the company won’t be too assured either that founder Xu is remaining at the helm.

For starters, Xu doesn’t really have any experience with digital marketing. Before starting Missfresh, he spent more than a decade at Lenovo’s notebook business and a couple years in the fruit department of the computer maker’s agricultural arm, Joyvio.

And at the end of the day, Missfresh and its missteps are Xu’s responsibility. The company’s website currently lists him as the sole member of its management team. Missfresh’s board consists of him and just two other independent directors, who lead or participate in the firm’s audit, compensation, and nominating and corporate governance committees. It’s hard to see how such a small company can have strong enough internal control systems to avoid future blunders and missteps.

Even after the surge in its stock following the latest announcement, Missfresh’s price-to-sales (P/S) ratio is still just a miniscule 0.05, as its stock price sinks far faster than the plunge in its revenue. And it’s quite possible the ratio could fall back again when initial euphoria over this latest transformative story fades into skepticism.

Source: seeking alpha