WeWork's Waterloo has made the capital market cool on the shared office services industry.

During its peak, WeWork's business covered over 700 communities in approximately 40 countries around the world, with a valuation of $47 billion and ranking as the second largest unicorn company in the United States after Uber. It was once referred to, along with Uber and Airbnb, as one of the three giants in the sharing economy.

However, since its approach to the capital market, WeWork has been slipping step by step. As early as September 2019, because the market gave it a much lower valuation than its pre-IPO financing valuation, WeWork withdrew its listing application in the United States. Little did it expect that this was only the beginning of a disaster.

Due to the COVID-19 pandemic that swept across the globe from 2020, WeWork's business operations suffered a major blow, with its financial statements quickly deteriorating. This forced WeWork to go public through a SPAC merger in 2021, but by then its valuation had fallen to $9 billion.

WeWork's performance following its circuitous route to the stock market was not satisfactory, and its business operations did not improve against the backdrop of a sluggish global economy. High indebtedness and continuous losses led to cash flow disruption, causing the stock price to drop below $1 in April 2023. By August 2023, WeWork had officially delisted from the NYSE and applied for bankruptcy liquidation, with a market value of less than $0.3 billion.

In just four years, a $47 billion valuation dissipated, and capital markets cooled on the shared office industry. However, WeWork's collapse did not prevent players in the shared office field from going public, such as China's office space operations service platform, Grand Add (AGII.US), which is now seeking a listing on Nasdaq.

As early as September 16, 2022, Grand Add submitted its public version of the prospectus (F-1 document) to the SEC for the first time. Since then, it has updated its prospectus nine times, but has not yet gone public, and during this period, Grand Add has been very active.

It first sold approximately 5.0567 million shares for $15.4763 million, at a price of $3-3.8 per share, to ease the company's financial urgency, and these shares will be delivered to the investors after this IPO.

At the same time, Grand Add has repeatedly lowered its fundraising target. Initially, in the IPO terms for November 2022, it planned to issue 8.7 million common shares at a price of $4-5, raising up to $43.5 million in funds. By March 2023, Grand Add had adjusted its offering plan, intending to issue 4.5 million common shares at a price of $4.5 to $6, raising up to $27 million. Earlier this year, Grand Add once again lowered its fundraising target, intending to issue 2 million common shares at a price of $5 to $6, raising up to $12 million. In the updated prospectus of June 25th, Grand Add plans to issue 1.4 million common shares at a price of $6 to $7, raising up to $9.8 million in funds.

The emergency fundraising before going public and successive reductions of fundraising targets show Grand Add's financial constraints and the fact that it is encountering difficulties in its IPO. Can Grand Add overcome this dilemma? Will it repeat WeWork's drama? Perhaps the fundamental factors still lie in the company's fundamentals.

Surviving with a severed arm after expanding against the trend

Looking at Grand Add's development since 2020 from a rearview mirror perspective, it has made a strategic mistake in aggressively expanding. According to the prospectus, as of 2020, Grand Add's operations covered 6 cities in China, with 48 working areas, a management area of 0.2036 million square meters, and approximately 0.0289 million workstations in operation. If pre-opening workstations are included, Grand Add had about 0.0329 million workstations in 2020, with a occupancy rate of mature office space reaching 87%.

By 2020, the COVID-19 pandemic had begun to spread throughout the country, and this had a significant impact on commercial economic activities. Grand Add's business operations also suffered a blow, but it did not stop expanding. In 2021, it increased its business coverage to 7 cities and the total number of working areas to 61, with a management area of over 0.05 million square meters added in one year, and the number of workstations in operation and the total number of workstations increased significantly.

Moreover, the expansion trend continued into 2022, and although the management area of the working areas did not expand that year, the management area added in 2021 was still being converted to new workstations, resulting in a continuous increase in the number of workstations in operation and the total number of workstations, with the two numbers being 0.0419 million and 0.0444 million, respectively.

It is evident that Grand Add's management wanted to use the COVID-19 pandemic, a "black swan," to speed up expansion and outpace other competitors in adversity. From a realistic business case perspective, there are many examples of counter-cyclical expansion and achieving faster development during industry booms. This development strategy has obvious feasibility.

Unfortunately, JiaJia underestimated the length of time and breadth of impact of the COVID-19 outbreak on commercial and economic activities. By 2022, although the number of workstations in operation and the total number of workstations continued to grow, the occupancy rate of mature office spaces had declined to 80%, a decrease of 7 percentage points from 87% in 2020. In terms of product structure, the operating income of 10-30 billion yuan products were 401/1288/60 million yuan respectively.

On one hand, new workstations are constantly being added, but on the other hand, the occupancy rate of mature office spaces continues to decline, indicating an overall ineffective investment. Continuous losses have also added immense pressure to JiaJia.

According to the prospectus, thanks to JiaJia's expansion against the trend, it achieved continuous growth with revenues of 0.357 billion (RMB), 0.459 billion (RMB), and 0.506 billion (RMB) in 2020-2022 respectively. However, the net losses have not shown a scale effect reducing losses as the company grows. The net losses incurred during the period were 0.228 billion (RMB), 0.293 billion (RMB), and 0.244 billion (RMB), totaling to a loss of 0.765 billion RMB over the three years.

Due to the continuous expansion and increasing losses, JiaJia's debt-to-asset ratio continued to rise, from 113% in 2020 to 125.64% in 2022, an increase of more than 12 percentage points in two years.

Entering 2023, the tremendous financial pressure forced JiaJia to take drastic measures to reduce leasing space and ease operational pressure. According to the prospectus, by 2023, the total number of JiaJia's work areas had been reduced from 65 to 8, and the total management area had plummeted from 0.2539 million square meters to 0.0261 million square meters, a reduction of nearly 90%. The total number of workstations also dropped to 4540, a decrease of nearly 0.04 million from 2022.

After the "big slimming," JiaJia's financial statements changed accordingly. In 2023, JiaJia's revenue was 0.319 billion RMB, a year-on-year decrease of 36.9%. Gross losses increased dramatically to 0.184 billion RMB, while net losses narrowed significantly from 0.244 billion RMB in 2022 to 0.048 billion RMB. The narrowing of net losses was due to an increase in other income resulting from income of approximately 0.538 billion RMB from lease terminations and property and equipment disposal losses of 0.136 billion RMB due to the termination of lease contracts.

In the first half of 2024, following the end of JiaJia's "slimming" and the restoration of business and economic activities to normalcy, JiaJia resumed slight expansion. Although its coverage focused on four cities and work areas increased from 8 to 9, the management area increased to 0.0506 million square meters, and the total number of workstations rose to 8212, an increase of 80.88% year-on-year, the overall scale was still significantly smaller than in the previous two years, and the occupancy rate of mature office spaces was still at 80%, reflecting relatively weak demand in a sluggish economy.

After the "big slimming," JiaJia's debt exceeded its assets, with a debt-to-asset ratio multiples higher than its total assets.

As analyzed earlier, JiaJia's management has been too aggressive since 2020, with continuous large losses, a debt-to-asset ratio exceeding 100%, and still choosing to expand against the uncertainty brought on by the epidemic, showing a lack of risk control. Although companies need to take risks in the face of uncertainty, JiaJia unfortunately lost in this bet.

Although JiaJia recovered from the slump by slimming down in 2023 and resumed expansion in the first half of 2024, the company's future development will still be very difficult due to several reasons:

Firstly, JiaJia's balance sheet has seriously deteriorated.

As of December 31, 2023, JiaJia's total assets had plummeted to 0.227 billion RMB after the "big slimming," compared to 2.849 billion RMB in the same period in 2022, a staggering 92% YoY drop. This is due to the net amount of operating lease assets dropping from 2.322 billion RMB in 2022 to 0.073 billion RMB in 2023, a typical large-scale asset "dumping."

With the sale of assets, JiaJia's total liabilities also decreased from 3.579 billion RMB in 2022 to 1.067 billion RMB in 2023, but this was still 4.7 times its total assets. More crucially, JiaJia's current liabilities in 2023 amounted to 0.896 billion RMB, including 0.14 billion RMB in tenant rental reserves and contract liabilities of less than 90 million RMB. If these two items are excluded, JiaJia's current liabilities in 2023 were still 0.666 billion RMB, compared to only 55.55 million RMB in current assets.

It can be seen that JiaJia will face enormous pressure in the future to repay its debts, and the company has essentially become insolvent. This is the reason why JiaJia priced its 5.0567 million shares at a low price to raise 15.4763 million US dollars before its IPO.

Secondly, the problem of sustained losses will be difficult to solve in the short term and will continue to affect the balance sheet.

It is a challenge for the entire shared office industry to achieve profitability. The causes of this situation are multiple, including a single profit model, intense market competition, unstable occupancy rates, and high operating costs. Although JiaJia slimmed down in 2023 to greatly reduce net losses during the period, this was primarily due to the "dumping" of usage rights assets to boost profitability, which is not sustainable.

Although JiaJia resumed expansion in 2024, the crux of the problem is that a profitable business model hasn't been established. The faster JiaJia expands, the more it will lose, as seen in its previous expansion from 2021-2022. Therefore, even if JiaJia achieves faster expansion, it will only make the company's situation more difficult, with losses continuing to grow and pushing up debt levels further.

Overall, Tangtang Jia, which accelerated its expansion due to misjudgment from 2020 to 2022, has entered a very difficult situation. Although the company's "amputation" strategy saved the company in 2023, it obviously cannot reverse the situation, but only buys the company a breathing space. With the current fundamentals of the company still incurring losses and the total debt several times that of total assets, it is still unknown whether it can successfully go public, and even if it does, a significant reduction in the amount raised may not be able to alleviate the difficulties faced by Tangtang Jia. Whether it can "turn the tide" can only be seen.