Key takeaways:

• Ubox has filed for a Hong Kong IPO despite reporting losses in the past two years due to pandemic-related disruptions to its core vending machine business
• The company’s backers include Alibaba’s Ant Financial, which led a 1.6 billion yuan investment in the company in 2019

By Ken Lo

Perhaps it hoped a star-studded investor lineup and use of a germ-safe non-contact automated retail concept would spare it from the worst of the pandemic. But if high-tech vending machine maker Beijing Ubox Online Technology Corp. believed it was safe, it has been sorely mistaken as it heads toward a Hong Kong IPO pocked with hardships.

Diving into the red

Ubox’s retail business has generated steady cash over the years, including a profit of 40 million yuan on 613 million yuan in revenue from its operations as recently as 2019. Thus, the funding from Ant that year was probably more strategic than a sign of desperation more often seen from money-losing companies raising fresh funds.

But pandemic-related containment measures have put a major damper on Ubox’s business lately, since many of the public establishments that host its vending machines and mini-KTVs have been shut. That has pushed the company deeply into the red, with Ubox registering losses of 1.18 billion yuan and 190 million yuan in 2019 and last year, respectively.

To better shield itself from the pandemic’s impact, Ubox has sharply cut back its reliance on directly-operated vending machines. It got just 22.8% of its business from such machines last year, down significantly from 83.7% in 2019, as it offloaded responsibility for machine operation to its business partners. That, combined with effective cost-control measures, helped it to substantially reduce its losses last year.

Eye on M&A

Ubox’s dominance in automated retailing is being gradually challenged as competition heats up during the pandemic. Non-contact consumption has taken off in the last two years due to its hygienic nature, fueled by demand for machines that can distribute products with minimal contact that could potentially spread diseases.

The big demand has sparked a stampeded of competition to the space, resulting in lower prices for machines. Despite that, Ubox has benefited from its market-leading position that gives it greater economies of scale and lower operating costs.

For Ubox, the good news is that even though the pandemic will be over someday, the shift to low- or no-contact consumption is here to stay and will drive the future development of automated retailing. That market in China is expected to grow from 27.1 billion yuan in 2021 to 79.9 billion yuan in 2026, representing a compound annual growth rate of 24%, according to third-party data in the prospectus.

Ubox hopes to stay ahead of the competition by continually investing in product development to improve its core technologies. But its R&D spending is relatively small, accounting for just 1.4% to 2.2% of its revenues in the last three years – much lower than the 12% for industry peer New Beiyang (002376.SZ).

Instead, Ubox appears to believe it can get more bang for its buck from M&A. It spent heavily to acquire several software developers and smart vending machine operators before the pandemic, with its cash outflow on investments reaching 717 million yuan in 2019. The company’s prospectus also points out that it intends to use some of the funds from the listing to purchase or invest in promising automated retail companies.