KK Group hopes the fourth time is lucky with new Hong Kong IPO bid

By Edith Terry

The betting is on: will Dongguan-based retailer KK Group Co. Holdings Ltd. finally make it to market with its latest IPO application filed last week? The by the operator of several brick-and-mortar lifestyle chains represents its fourth listing attempt after previous applications in 2020, 2021 and last year never made it past the IPO checkout counter.

There are plenty of reasons why it should succeed this time, but also some factors against it.

KK Group is one of a new breed of retailers capitalizing on a recent thirst by Asia’s Gen Z’ers for immersive retail experience outside their usual e-commerce buying. It wasn’t long ago that many said bricks-and-mortar retailing had no future in China, as young consumers flocked to e-commerce for much of their daily needs.

But the Covid-19 experience, which left Chinese cities facing on-again, off-again lockdowns for three years, seems to be stoking nostalgia for old-fashioned, hands-on retail shops offering fast-moving product mixes at mid-market prices, and lots of bright colors and lights.

KK Group operates in a segment of the market called “non-grocery offline lifestyle retail,” where companies like Hong Kong’s AS Watson Group and China’s Miniso (9896.HK, MNSO.US) have also done well during the offline lifestyle retail renaissance. Watson’s led the market in China with 13.9 billion yuan ($1.95 billion) in sales in 2022 and 5.2% share, while Miniso wasn’t far behind with 10.6 billion yuan in sales and 3.9% share.

KK Group was next in the pecking order, with 4.4 billion yuan in sales and 1.6% of the market in 2022, according to third-party market data provided in its prospectus. It said the total market was worth 268.5 billion yuan in 2022, and is expected to post strong growth of nearly 20% annually to reach 655.5 billion yuan in 2027.

KK Group’s previous IPO failures may have owed partly to its weak bottom line. The company recorded a combined 7.6 billion yuan in losses in 2020 and 2021, while its net liabilities increased from 2.7 billion yuan to 8.2 billion yuan over that period.

But it seems to have turned a corner, somewhat ironically, in the final year of the pandemic when China was implementing some of its strictest Covid controls. KK Group moved into the black with a modest profit of 61.8 million yuan in 2022, before roaring ahead with a 209.4 million yuan profit in the first 10 months of last year, up 11% from the same period in 2022. Its revenue for the first 10 months of last year rose by an even stronger 55% to 4.8 billion yuan year-on-year.

It has achieved that revenue growth partly through a steady store-opening campaign for its four major brands, led by Colorist and KKV, which collectively make up the big majority of its shops. Its total store count rose 31% from 556 at the end of 2020 to 724 last October. Its prospectus said the current store count now stands at more than 800, following the opening of 87 new stores since last October. Its monthly average gross merchandise value (GMV) per store increased by 43.8% from 510,500 yuan in 2022 to 731,000 yuan in 2023.

In addition to its core China operation, KK Group’s foreign sales are also promising. Its KKV stores began operating in Indonesia in March 2020, and now total 39 stores in 34 cities through its partnership with a local franchisee.

In the first 10 months of 2023, the Indonesian operation generated revenues of 420.1 million yuan and a profit of 96.9 million yuan, with a gross profit margin of 23.1%. The Indonesia stores have almost three times higher the monthly GMV of KK Group’s domestic Chinese stores, averaging 2.5 million yuan in the first 10 months of 2023. The company’s first store in Malaysia opened in January 2024.

A similar valuation to rival Miniso, which trades at a price-to-earnings (P/E) ratio of 19, would give KK Group a market value of $670 million, based on an estimate for the company’s 2023 full-year profit. That would be well behind Miniso’s $5.3 billion market cap, but roughly twice the $319.8 million for Yatsen (YSG.US), operator of a Chinese cosmetics chain.

So, what’s to worry about in KK Group’s latest listing attempt? One reason for investor caution might be the group’s rapid conversion from essentially a franchise model to an operator of self-owned bricks-and-mortar stores. Such direct ownership is typically more profitable, but also brings large additional operating costs.

Between 2020 and October 2023, KK Group’s store mix flip-flopped from 76.3% franchised stores and 23.7% self-owned, to 15.1% franchise stores and 84.9% self-operated ones. At the end of January this year, it had 120 franchised stores and 680 self-owned ones.

KK Group has argued that the asset-light franchise model has lower profit margins, at 24.2% in the first 10 months of 2023, compared to 52.1% for its self-operated stores during the same period. That contrasts with Miniso, which has done quite well with its model that relies almost entirely on franchised stores.

Another potential downside is KK Group’s reliance on third-party brands in its stores, which typically carry lower margins than own-label brands. Of the nearly 23,000 items in KKV’s and Colorist’s catalogues, 86.2% came from third-party brand owners last year, with the rest as own-label brands. KK Group notes that its revenue from house brands more than doubled year-on-year to 650 million yuan in the first 10 months of last year. Even so, those brands still made up a relatively small 13.8% of its 4.7 billion yuan in revenue for the 10-month period.

Meanwhile, another factor that could potentially scuttle KK Group’s latest IPO bid is the current weak market in Hong Kong, especially for China stocks, many of which are hovering near five-year lows. But all things considered, the company’s growing focus on higher-margin self-operated stores and house-brand products, combined with its recent profitability and strong position in experience-style retailing, make KK Group look like a solid purchase for retailing-minded investors.