Q&K Files for IPO in the U.S. in Midst of a Stagnated Long-Term Home Rental Market

Amidst the mourning cries of failed businesses, Q&K may very likely be the first Chinese long-term home rental brand to make a successful listing on the stockmarket.

On 7 October, Q&K International Group formally submitted its prospectus to the U.S. Securities and Exchange Commission. The Chinese home rental platform plans to raise up to US$100 million, with Morgan Stanley and China International Capital Corporation as joint underwriters of the deal.

According to the prospectus, funds raised by the IPO will be used to expand the numbers of apartments and rooms, invest in new technologies and infrastructure, and cover daily operational expenses.

Unlike competitors such as Danke and Ziroom, whose rumored listings in the U.S. failed to materialize, Q&K has hit the ground running. However, given the current industry quagmire, the submission of the Q&K prospectus alone may not suffice to build confidence in the market. On the contrary, the prospectus has only caused the market to reflect further on its history to date.

Close to US$500 million in loss in 2018 financial year

Established in 2007, Q&K officially commenced its home rental business in 2012.

The company obtained angel investment from Newsion Venture Capital, followed by further investments from organizations including FortuneVC, SAIF Partners and Morgan Stanley. By 2018, Q&K had completed its Series C round of fundraising with total funds raised in its four rounds of equity financing exceeded US$100 million.

Q&K primarily targets young urban tenants aged 20 to 35 and focuses on leasing decentralized apartments, supplying uniformly decorated apartments that have rental costs between 1,000 and 2,000 RMB. By the end of 2018, Q&K operations covered seven cities, namely Shanghai, Suzhou, Hangzhou, Nanjing, Wuhan, Beijing and Jiaxing, with a total of 91,234 rooms.

However, judging from a city-by-city comparison, Shanghai is Q&K's biggest market with more than 60,000 listings.

Q&K listings across different cities

According to the prospectus submitted by Q&K, by 31 October, 2018, Q&K's complex annual growth rate was 114.4%, while its revenues in 2017 and 2018 U.S. financial years (October to September) reached 522 million and 889 million RMB respectively. Furthermore, revenue in the first three quarters of the 2019 U.S. financial year was 898 million RMB, surpassing the entire annual revenue for 2018, representing a year-on-year increase of 51.435%.

Though Q&K has maintained satisfactory growth in recent years, the company is still yet to record a profit.

The prospectus shows that Q&K recorded losses in both 2017 and 2018 financial years with net profits of -245 million and -499 million RMB respectively. By 30 Jun, 2019, combined losses from the first three quarters of the 2019 financial year totalled -373 million RMB, a year-on-year increase of 16.72%.

Q&K prospectus financial data

From this year's data alone, we can see that in the second quarter of 2019, Q&K's losses were 121 million RMB (approximately US$17.65 million). Losses in the last quarter totalled 103 million RMB. Operational losses in the same period last year totalled 117 million RMB. The company's operating margin was -39% for this year's second quarter, -51.5% for the same period last year and -35% in the last quarter.

Clearly, although Q&K has submitted its prospectus before that of its competitors, it has not yet been able to escape the predicament of continuous losses.

Challenges for long-term home rental market to escape the quagmire

The submission of a prospectus from Q&K does not mean that its IPO venture will be smooth sailing.

The suspension of the plan for an IPO by U.S. real estate company WeWork demonstrates that the capital market will no longer easily offer financial support for companies that are yet to be profitable.

In this regard, Mike Wilson, Chief U.S. Equity Strategist for Morgan Stanley, has said that the failure of WeWork's IPO signified the end of an era when he expressed his opinion that "the days of generous capital for unprofitable businesses is over." Before that, the US stock markets had been paying astounding valuation amounts for IPOs that were yet to see a profit.

Furthermore, and therefore, the failure of WeWork's IPO may also have an impact on the IPO venture of Q&K that likewise has yet to record a profit.

In addition, its prospectus indicates that Q&K has not been able to break away from its growth model of sacrificing profits for market share and thus lacks the capability for effective self-restoration. In order to satisfy its need for large funds, Q&K is relying mainly on financial support coming from financing leasing, loans for rent and credit limits granted by financial institutions including banks.

In 2018, the Chinese long-term home rental market, on the back of more than three years of rapid growth, suffered a wave of collapses resulting from the failure of most of the businesses to control internal organizational structures or fine-tune their operational models due to a desperate fight to grab market shares and apartment listings. Furthermore, capital chain problems were prevalent.

In the short span of only last year, several long-term home rental brands including Lejia, You Ai and Dingjia (Hangzhou), Yujian (Shanghai) and Haoyuan Hengye (Beijing) announced their collapses that resulted from such issues as broken capital chains and loans on rent.

This series of incidents fully demonstrates that in the current conditions of insufficient supervision and regulation, in the long-term home rental industry which advocates economy of scale, most players have chosen to sacrifice profit for market share.

Around the time Q&K submitted its prospectus, home rental brands Yueru and Guochang also collapsed. The cloud hanging over the industry still lingers. How to reach economy of scale while at the same time controlling costs is a test that every player in this competitive space has to undergo.

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This article was edited by the TMTPOST team.

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