A cross-border e-commerce logistics company packaged as a SaaS story

The logistics system is the moat of Amazon's retail business, providing long-term competitive advantage. For Amazon, self-built logistics can allow consumers to enjoy premium services such as next-day delivery, creating dependency on the platform, increasing migration costs, expanding platform network effects, and forming competitive barriers that current players like Temu, Shein, and AliExpress cannot shake. Amazon also leverages this moat to provide integrated warehousing and logistics services for platform merchants (Fulfillment by Amazon, or FBA). However, as the world's largest e-commerce trading platform, FBA cannot cover all aspects due to the vast number of merchants and SKUs. For large items such as furniture, FBA is not very friendly as the larger the size, the higher the fees, leading to smaller profit margins for merchants. To avoid having FBA compress their profit margins, merchants specializing in large items may choose third-party logistics service providers like EDA Group Holdings (2505.hk) that mainly operate on an overseas warehouse model with lower fees.

EDA was spun off from China Lesso (2128.hk) and successfully listed on the Hong Kong Stock Exchange on May 28th. Its global offering price was HKD 2.28 per share, with the stock soaring 35.5% to HKD 3.09 per share on the first day of trading, and closing with an 84.21% increase. The impressive first-day surge, compared to recent IPOs like Chabaida and Chumenwenwen, is indeed remarkable in the Hong Kong stock market. However, the subsequent days of decline also indicate some issues. EDA claims that the group's logistics business operations are centered around SaaS. If it truly is SaaS, then it may be at its bottom now, but if it is just a third-party freight forwarder disguised as SaaS, it may not have significant long-term investment value. I. Riding the Industry Trend EDA mainly provides overseas warehousing-based last-mile fulfillment services for domestic furniture and home furnishing brands and manufacturers to expand their overseas sales.

As a cross-border overseas fulfillment node for high-value, long-cycle, and high-return-rate large home furnishing items, overseas warehouses have prominent advantages in shortening order delivery times and reducing after-sales costs. The rapid growth of cross-border e-commerce players like Temu and Shein in recent years, along with the transition in platform models from fully managed to semi-managed during the development process, has led to the growth rate of overseas warehouses far exceeding the industry average. In the past, under the fully managed model, merchants only needed to supply goods, while the platform was responsible for marketing, logistics, after-sales, and other aspects. This model, where goods were directly shipped from China, not only had long fulfillment times but also very high costs, severely limiting the variety of products available The current semi-trust model delegates logistics, operations, and other aspects back to merchants. In order to reduce burdens and improve fulfillment capabilities, Temu's semi-trust model prioritizes recruiting merchants with overseas warehouse resources and strong fulfillment capabilities. Under the semi-trust model, platform category restrictions are correspondingly relaxed, allowing large items such as home furnishings and lighting fixtures to be accelerated for entry. Taking advantage of this opportunity, EDA has seen a significant increase in the number of orders received. Moreover, by shipping large items in bulk and signing the same type of transportation vehicles and warehouses with local express operators, better discounts can be negotiated, resulting in a cheaper final delivery cost as the number of shipments increases. The fees for exporting oversized furniture to the US FBA consist of logistics transportation costs and oversized item surcharges. According to relevant data from Shenzhen Xiangcheng, for sofas with a single side longer than 120CM but less than 240CM, FBA logistics pricing generally charges 185 yuan per item. Compared to FBA pricing, EDA's fees are lower, typically at an 85% discount compared to FBA. (Source: EDA Prospectus) (FBA Fee Details) Being cheaper than FBA is the key to EDA's development. In April of this year, EDA also became an official certified warehouse for Temu's semi-trust model. With the help of the rapidly growing e-commerce platform, the group still has the potential to ride the industry wave. However, waves always pass. As of the latest data, EDA has contracted 56 overseas warehouses, with 10 being self-operated warehouses and 46 being franchise warehouses. In the group's long-term plan, it will continue to operate under a light-asset model through franchising rather than self-building. If the positioning is as a SaaS company, there is indeed no need to build overseas warehouses. Shopify, which provides SaaS services for independent sites, sold the logistics service provider Deliverr that it had previously acquired for $2.1 billion in order to focus more on software business. This move was also well received by the market, with the stock price rising by about 24% on the day of the announcement. However, the problem lies in the fact that EDA is not really a SaaS company. II. The SaaS Lie From the current stock price and performance, EDA's talk of SaaS is just a story told to enhance valuation. In 2023, the group's gross profit margin and net profit margin were only 16.3% and 5.5%, not to mention compared to Shopify, even its parent company, China Lesso, in the manufacturing industry, falls short, clearly not at the level expected of a SaaS company In terms of growth rate, EDA's performance has been growing over the past three years. However, when broken down, each year's growth is accompanied by corresponding industry events, with almost no alpha impact from the company itself. In 2021, influenced by factors such as the pandemic and labor shortages, North American container ports experienced unprecedented congestion due to goods piling up without being unloaded, highlighting the advantages of overseas warehouses and starting to develop rapidly. In 2022, after Amazon's crackdown on accounts, a large number of cross-border sellers' stores were closed, leaving millions of inventory stranded and having to look for overseas warehouses. The explosive year of revenue and profit in 2023 was also a year of rapid growth for Temu. EDA completed ERP system integration with 14 clients and API integration with 11 e-commerce platforms in that year.**Following industry beta development is also feasible, but companies with weak internal capabilities are likely to be overtaken by others after the industry beta phase ends.**From a business perspective, EDA provides full-cycle fulfillment services covering the first and last mile, but the largest source of revenue is concentrated in the last mile, accounting for 78.5% of total revenue. In terms of regions, the United States is the main source of revenue, accounting for 80.1%, 79.9%, and 83.4% of revenue from 2021 to 2023, maintaining around 80% of revenue share. Fulfillment operations are mainly carried out in the United States, making them more susceptible to the U.S. market conditions. In 2023, warehouse rental costs in the U.S. increased by 12%, as rental costs are the main operating cost of overseas warehouses, accounting for around 60%, leading to an approximately 80% year-on-year increase in last-mile fulfillment costs for EDA in that year, with total sales costs increasing by 68%. However, it is worth noting that the group's total revenue only increased by about 70% that year. With revenue and costs increasing almost proportionally, it indicates that the SaaS services provided by the group lack value-added effects, making it difficult to obtain service premiums, and the profit margin relies entirely on discounts from bulk purchases.**Looking at historical data, The top five customers of the group have always been unstable. For merchants, EDA is not indispensable. Having unstable customers indicates that the migration cost is not high, and the EDA platform has not yet formed a network effect moat like Amazon. Without a moat, the long-term profitability is questionable. Third, Profit Decline Risk Since the epidemic, cross-border e-commerce has developed rapidly, and overseas warehouses as supporting services are in short supply. However, looking ahead, following Amazon as the industry benchmark, the trend of logistics integration for cross-border e-commerce platforms is becoming more and more evident. In April last year, Shein established its first DC (Distribution Center) warehouse in the United States; in March this year, Cainiao has built and operated over 40 overseas warehouses globally, providing end-to-end supply chain services for Chinese cross-border merchants. This trend makes EDA's franchise warehouse model less competitive. If platforms with strong capital introduce more attractive franchise policies, franchisees are likely to run away. The group's ceiling is accelerating towards the top as the industry develops. In the short term, EDA faces considerable risks. With the increasing number of overseas warehouse players, having lower prices than FBA is no longer meaningful, but compared with peers, EDA has not made its service prices more attractive. The following image shows the fee details of Lege Shares, where $21.04 is approximately equal to 151 RMB, cheaper by a few yuan compared to EDA's fee of 158 RMB per transaction in 2023. Of course, it is not rigorous to assert that Lege's fees are lower based on just one set of data. However, Lege's overseas warehouses are mostly self-built, and the advantage of self-building lies in "cost locking," unaffected by rental fluctuations, suitable for price wars. EDA, which mainly relies on franchise warehouses, will continue to be affected by rising rents, making it unable to easily reduce prices. In addition to franchise warehouses, EDA also needs air transport, sea transport, and local courier suppliers to provide fulfillment services. According to the prospectus, in 2023, the group's procurement from the top five suppliers amounted to 531.9 million RMB, accounting for 53.5% of the total, with the largest supplier accounting for 37.4% Relying heavily on third-party logistics has further increased the group's profit risks. Since April this year, global express delivery giants UPS and FedEx have started charging additional fees for delivery in 82 postal code areas. DHL had already announced an increase in its global average prices earlier this year. The air freight import price index in the United States hit a new high this April. With the rise in express delivery prices and the new high in air freight index, without looking at the long term, EDA's cost side is already under pressure this year, posing a risk of declining profits in the short term. IV. Conclusion Whether as a company or an investment target, lacking long-term development capabilities and facing short-term profit decline risks is a significant issue. Initially, joining a warehouse can help EDA quickly obtain customer orders and seize market share. However, looking ahead, the cost advantages of self-built warehouses will become more apparent, with more capital to engage in price wars. If unable to charge lower fees than competitors, customers with low migration costs to the EDA platform may accelerate their loss. In 2024, Amazon FBA raised return processing fees for high return rate items and added inventory configuration service fees, low inventory fees, and expanded the segment range for large and extra-large items. This means that FBA in the new year is less friendly to large items and charges higher fees. In addition, industry experts indicate that platforms like Temu and Shein currently lack the ability to build overseas warehouses. The current situation of these two industries suggests that EDA's revenue will continue to grow steadily for at least the next three to five years. However, in the long term, the group still needs to consider whether to adopt the SaaS model or build overseas warehouses. Different development models directly determine the upper and lower limits of EDA's valuation. If a market-recognized SaaS model is introduced, the valuation ceiling is expected to benchmark against Shopify. If self-built overseas warehouses are chosen, the current valuation seems high compared to Le Gou. Moreover, the initial investment costs for both paths are not low. According to the prospectus, EDA is issuing 97.625 million shares globally this time, with an issue price of HKD 2.28-3.06 per share, and the net proceeds from the global offering are approximately HKD 203 million. This fundraising scale seems insufficient for major endeavors