Who says there's no big growth left in China's fiercely competitive and rapidly maturing e-commerce sector? 

Not JST Group Corp. Ltd., China's largest provider of software as a service (SaaS) for enterprise resource planning (ERP) in e-commerce, which is trying to impress investors with its strong growth in a recently updated application for a Hong Kong listing. The IPO is backed by two big names, China's own CICC and global giant JPMorgan, indicating the potential for strong investor interest both at home and abroad.

JST was China's top ERP SaaS provider for e-commerce last year, with a 23.2% market share, according to its listing materials filed last month. It ranks first in terms of its share of China's overall SaaS market over the same period, with a 7.5% share.

SaaS is a web-based model that allows customers to use software services on demand in the cloud and pay on a subscription or usage basis. ERP software helps companies manage and integrate their various resources for information sharing and collaboration between departments, improving efficiency and making such resources easier to manage.

SaaS old timer

Founded in 2014, JST is an e-commerce specialist whose cloud-based SaaS products help merchants improve their business capabilities and performance, and develop cross-platform business, while reducing costs of deployment and operations.

Its IPO application states the company's products can facilitate customer connectivity with more than 400 e-commerce platforms in China and around the world - more than double the industry average of less than 200 connections. The company's number of SaaS customers grew from 33,000 at the end of 2021 to 62,000 by the end of last year, putting it well ahead of the industry average of less than 20,000 customers.

In addition, JST's ERP products were able to process about 65 million orders on an average day last year, with a high of 230 million orders on a single day, making it the largest processor of e-commerce ERP SaaS orders in China.

The company has posted strong growth in recent years. Its revenue rose by 20.7% from 430 million yuan ($59.4 million) in 2021 to 520 million yuan in 2022, and jumped another 33.3% to 690 million yuan last year. Its net cash inflow from operations also increased from 78.7 million yuan in 2022 to 210 million yuan in 2023.

However, the company is still in the red, reporting losses of 250 million yuan, 500 million yuan and 490 million yuan in the three years from 2021 to 2023, respectively.

Profits ahead?

Such long-term losses are relatively normal in JST's industry, as SaaS products often require large initial investments for product development and customer acquisition and retention, according to third-party research in the listing document. Such companies, including those in the U.S. and China, usually lose money for about 15 years before becoming profitable. After making its initial layout and developing and marketing its products, the big challenge comes in attracting and retaining customers. Once a company can do that and cross the break-even line, its profitability could quickly grow.

The good news for JST is that its customer retention rate is quite high, helping it to boost both its revenue and gross margins. Its customer retention rate is currently above 86% annually, well above the market average of 60% to 70%, according to its filing. Its gross margin is also on an upward track, growing from 50.5% in 2021 to 52.3% in 2022 and further still to 62.3% in 2023 as it achieves economies of scale and gets more repeat customers, the company said.

As that happens, sales and R&D expenses as a percentage of the company's revenue is declining. The company's sales and marketing expenses decreased from 60.1% of its revenue in 2022 to 49.3% last year, while its R&D expenses fell from 44.8% to 33.6% over the same period. That appears to show JST Group is becoming more efficient on its way to profitability.

The company operates in a Chinese e-commerce SaaS market that grew from 7.3 billion yuan in 2020 to 11.7 billion yuan in 2023, representing annual growth of 17.2%. That growth is expected to accelerate to 20.4% annually over the next five years, reaching 29.5 billion yuan in 2028; in addition, the ERP products market is expected to grow from 2.6 billion yuan in 2023 to 7.7 billion yuan by 2028, according to market data in the listing document.

Despite its relatively small market and long return cycle, JST's decision to focus on ERP products has won a strong vote of confidence from investors. The company completed six funding rounds between 2015 and 2020, raising more than 1 billion yuan from big names such as Sequoia China, Goldman Sachs and CICC Capital. It was valued at over 6 billion yuan after its Series C financing in 2020, up 70 times from its value five years earlier.

SaaS concept stocks in Hong Kong currently trade at lackluster price-to-sales (P/S) ratios, often reflecting their slowing growth. Kingsoft (3888.HK) trades at 3.5 times, while Weimob (2013.HK) and China Youzan (8083.HK) trade at 2.2 times and 1.7 times, respectively. But with China's economy starting to get back on track, and growing enthusiasm about the future potential for AI, now might just be the right time for a faster-growing company like JST to try its hand at going public.