The provider of wholesaling services for retailers has filed to list in Hong Kong, but its heavy reliance on parent company Wumart Group has left it with low gross margins
Key Takeaways:
- Retailing giant Wumart has filed to list its MDL Wholesale business in Hong Kong after spinning off its retail operations as a separate company
- Despite boasting an A-list of pre-IPO investors like Tencent and Lenovo, the company may fail to score high valuation due to its relatively small size
By Bai Xinrui
Despite its membership in the Wumart family, one of China’s oldest retailing groups, MDL Wholesale Ltd. has traveled a circuitous road to its recent application for a Hong Kong IPO.
Wumart’s legendary founder Zhang Wenzhong initially planned to merge his two core businesses, Wumart Supermarkets and MDL China, into Wumart Tech Group for a Hong Kong IPO in 2021, but ultimately failed. Now, he’s trying again with plans for a separate listing for MDL Wholesale, Wumart’s subsidiary that specializes in wholesale services for retailers.
Zhang is legendary in China’s retailing sector, though not devoid of controversy. After founding Wumart in 1994 and building up one of China’s earliest retail empires, he was later sentenced to prison in 2006 for fraud, bribery and misappropriation of funds, before his early release in 2013. He professed his innocence throughout and was eventually cleared of wrongdoing and acquitted in 2018.
Zhang’s Wumart was a revolutionary force in China’s retail scene as the country transitioned from a planned to market economy, notable for its use of self-developed point-of-sale (POS) and management information systems that are now common among major chains. But the retailing pioneer began to decline with Zhang’s imprisonment, and was further undermined by the rise of e-commerce giants like Alibaba and JD.com.
His wrongful imprisonment made Zhang even more determined to return to his former glory even as China’s retailing landscape was evolving rapidly. He famously told financial media Bloomberg that “everything will pass” in a 2021 interview, and to some extent Wumart has regained some of its luster since his return.
Still, the company faces huge challenges in the current retailing landscape where it not only competes with the likes of Alibaba and JD.com for general merchandise, but also newcomers like PDD, Meituan, Dingdong and Alibaba’s Freshippo in the grocery space.
According to MDL’s IPO application, first filed in late June and updated this month, the company began operating under the Wumart brand in 1994, and expanded its business to food service and distribution in 2008. It acquired MDL China from Germany’s MDL AG in 2020 to carry out retail operations under the Wumart and MDL China brands. But then it spun off the retail business through its sale to a controlling shareholder in 2024. That left MDL Wholesale as a provider of wholesale services in China to sellers of fast-moving consumer goods.
Even after the spinoff of Wumart’s retail business, MDL still boasts a string of A-list shareholders, including entities controlled by internet giant Tencent and leading PC maker Lenovo. Other major stakeholders including conglomerate China Everbright, insurer Dajia and banking major China Merchants Bank.
Retailer distribution reliance
MDL Wholesale’s revenue has been contracting, falling from 27.8 billion yuan in 2021 to 24.9 billion yuan last year. Its biggest breadwinner over that time has been its retailer distribution solutions, holding steady at about 60% of its revenue in the last three years.
The retailer distribution solutions business provides warehousing, inventory management and logistics solutions services using a network of two central and 16 regional distribution centers, as well as 100 regional fulfillment centers across China. Wumart Group is its largest customer, with MDL Wholesale providing services for Wumart’s 100 MDL-and 366 Wumart-branded large-format stores, as well as 304 Wumart convenience stores.
MDL is also working to lessen its reliance on Wumart stores by providing services for independent third-party chains in both food and non-food categories outside of Hubei and Hunan provinces. It can currently handle services for up to 34,000 different retail items, known in the industry as stock keeping units, or SKUs.
China’s broader wholesale market for fast moving consumer goods grew from 7.04 trillion yuan in 2018 to 9.9 trillion yuan in 2023, representing average annual growth of 7.1% over that time, according to third-party data in MDL’s listing document. The growth rate is expected to accelerate slightly to 7.4% between 2023 and 2028, with the market reaching 14.1 trillion yuan by 2028.
It’s worth noting that MDL Wholesale’s business from the Wumart family of stores isn’t very profitable, with gross margins varying between 3.4% and 3.7% over the last three years. It’s hoping to raise its overall profitability by developing other businesses. Its second largest revenue source from food services and distribution solutions, accounting for 14.2% of revenue, had a much higher gross margin 20.6% in 2023. And its third-biggest revenue source, welfare and gifting solutions, accounting for 14.1% of total revenue in 2023, also had a far higher gross margin of 17.7%. The two higher-margin businesses ultimately helped to raise the company’s overall gross margin to 10.7%, raising its adjusted net profit 4.4% last year to 430 million yuan.
Low valuation likely
Of the several logistics and supply chain companies listed in Hong Kong, only JD Logistics (2618.HK) and Kerry Logistics(0636.HK) are relatively large in terms of revenue and market value. That leading pair have forward price-to-earnings (P/E) ratios of 16.5 times and 8.8 times, respectively, meaning the smaller MDL is likely to trade below those levels. That means that based on MDL Wholesale’s profit last year of about 250 million yuan, and a potential P/E ratio of about 7 times, MDL might be valued at a relatively modest HK$1.9 billion ($243 million).
Investors are relatively reluctant to buy into new Hong Kong listings these days, given weak market sentiment, a sluggish Chinese economy and the potential for growing U.S.-China tensions in the run-up to this year’s U.S. presidential election. The IPO market has been notably weak, with 15 of 29 new listings falling below their offering price on their first trading day in the first half of this year. That means that even if MDL Wholesale’s listing is ultimately approved this year, its path forward could be anything but smooth.
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