Who needs people to discover your e-commerce goods when those goods can discover people?

That's the business model being peddled by cross-border e-commerce company Xiamen Jihong Technology Co. Ltd. (002803.SZ), which hopes to soon peddle its stock to international investors with a Hong Kong IPO. The company filed a second listing application to the Hong Kong Stock Exchange late last month, after its original application in February lapsed. 

The listing's joint sponsors are Chinese majors CICC and CMB International, showing it plans to mostly target Chinese and Asia-based investors.

Starting out as a paper packaging business, Jihong initially focused on addressing the needs of end-consumers and piquing their interest using its creative packaging designs. That gave it the skills to attract consumers in its early years, leading it to seize on new business opportunities presented by the rise of the mobile internet and cross-border social e-commerce in 2017.

Unlike more mainstream e-commerce companies like Alibaba's Taobao, whose business model centers on "people discovering goods," Jihong flips the equation on its head to a model of "goods discovering people." Using its experience in identifying what will attract consumers, the company specializes in guiding such buyers to goods they will want and purchase. 

But since its business model requires steady investment in advertising, the company's sales, marketing and distribution expenses have long taken up a considerable part of its spending. Jihong now mainly places its ads on major global online platforms such as TikTok, Facebook, Google, Line, Snapchat, X and Instagram.

According to its latest listing application, cross-border social e-commerce revenue has provided more than half of Jihong's total in the past three years, accounting for as much as 63.6% in 2023. But revenue from that business suddenly plunged 68.3% in the first half of 2024 to 1.38 billion yuan ($194 million), taking it down to 56.3% of the overall total. The rest comes from its original paper packaging business, which could only slightly offset the drop by posting a slight 1.9% rise to 1.01 billion yuan during the period. As a result, the company's overall revenue for the six-month period fell 21.7% to 2.45 billion yuan year-on-year, and its profit tumbled 62% to 66 million yuan. 

Since gross margins for cross-border social e-commerce are generally much higher than for paper packaging, the company's gross margin also took a big hit in the latest period, falling 6.1 percentage points year-on-year to 40.5% in the first half of 2024. That explains why the company's profit decline was so much steeper than its revenue drop.

Hit by weak exchange rates

Fierce competition in cross-border social e-commerce, together with sharp fluctuations in the Japanese yen and Korean won exchange rates, were the primary culprits behind the sharp revenue declines in Northeast Asia, including Japan and South Korea, the company said. The Northeast Asia region is Jihong's largest revenue contributor outside of China and averages relatively high prices per order. As revenue from the region wanes, the company has begun to expand into Europe in hopes of recovering lost ground.

Chinese customs data shows the nation's exports to Japan and South Korea fell 6.3% and 3.7% in the first half of 2024, respectively. Exports to Vietnam, Malaysia, Indonesia and Thailand grew 22.5%, 12.6%, 10.8% and 9.2%, respectively, during the period. That shows China's exports to countries with which it has trade tensions have been falling in recent months, with cross-border e-commerce companies like Jihong suffering collateral damage.

Asia is currently the largest market for Jihong's cross-border social media e-commerce business. Mainland China accounted for 43.4% of the total revenue from that segment in this year's first quarter, followed by 28.6% from Northeast Asia and 13.2% from Southeast Asia. Jihong was China's second-biggest B2C export e-commerce company last year based on revenue from its social media e-commerce business, with 2.3% of the market.

AI-powered model

To support its "goods discovering people" sales model, Jihong is leveraging cutting-edge technologies, especially AI, to integrate cross-border social e-commerce application scenarios. It says its upgraded AI-powered sales model has significantly reduced the cost of time for customers to find goods and improved their shopping experience. 

The company is also utilizing its big troves of customer data to continuously improve its data analysis capabilities, train models, and optimize its systems to more precisely understand consumers to improve its product sign-up rate prediction abilities and accuracy of its pricing model.

Steady investment in advertising and other marketing are obviously a must for cross-border social e-commerce companies, and Jihong is no exception. It spent 745 million yuan on advertising in the first half of 2024, generating 1.38 billion yuan in revenue for the business during the period. 

The return of cross-border social e-commerce revenues on advertising investment is considered an indicator for assessing the effectiveness of advertising, with higher ROI reflecting more effective advertising. In that regard, Jihong had a 191% ROI in the first quarter of 2024, down from rates of approximately 200% in each of the last three years. The company's average order fulfillment rate in this year's first quarter was 87.6%. Both indicators are higher than the industry average, the company said.

Meantime, Jihong has also developed its own brands that are mainly sold on e-commerce platforms and branded websites. The company currently owns six such brands, ranging from Veimia lingerie, Senada electric bikes, Konciwa UV umbrellas and Pettena pet accessories.

We should point out that Jihong is currently burning through its cash, which dropped to 666 million yuan by the end of June, down from about 1 billion yuan at the end of last year. That sharp decline, by about 37%, within just six months may partly explain why the company is so eager to raise new funds in Hong Kong right now.