On January 17, 2025, a significant twist occurred in the tech and baby product landscape as JuZhi Technology Innovation Co., Ltd. submitted its prospectus to the Hong Kong Stock Exchange, aiming to list on the main boardThe exclusive sponsor for this anticipated public offering is Xinhua HuifuJuZhi Technology, known for its excellence in the mother and baby electronic product sector, is making headway into the public market with its flagship brand, "HelloBaby." This brand has managed to secure the top position in the baby monitor category on Amazon, commanding a considerable share of the global market driven by a suite of high-performance features.

According to a report by Frost & Sullivan, JuZhi Technology emerged as the third-largest exporter of baby monitors from China to the United States in 2023, capturing an impressive market share of 14.6%. Its dominance is even more pronounced among online exporters, where it holds a remarkable 36.5% shareThese impressive figures have heightened interest in the company's listing.

However, growth comes with its own challengesJuZhi Technology's revenue streams have soared during the reporting period, with figures reaching 190 million RMB in 2022, escalating to 348 million RMB in 2023, and slightly increasing to 349 million RMB in the first nine months of 2024. The annual profits have also mirrored this upward trend, soaring from 34.82 million RMB to 71.76 million RMB within the same timeframeThe company has attributed its consistent revenue growth primarily to the escalating sales of baby monitors in the competitive U.S. market.

The majority of JuZhi's revenue, constituting a whopping 91.5% to 96.8%, comes directly from baby monitorsIn stark contrast, the company's sizable dependence on the U.S. market is concerningThe prospectus lays bare that revenue generated from North America surged from 125 million RMB in 2022 to a staggering 284 million RMB in 2023, accounting for a significant 81.3% of total revenue

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The revenue from the U.S. alone grew from 108 million RMB to 264 million RMB, representing about 75.7% of total incomeSuch heavy reliance on a single market could pose substantial risks to JuZhi's financial stability.

To expand its operations, JuZhi is urged to bolster its inventory in overseas warehouses due to long shipping durations and potential tariff risks associated with its current business modelAs outlined in their prospectus, the stock held by JuZhi ranged from approximately 82.72 million RMB to 115 million RMB during the reporting period, constituting more than half of its current assets and primarily comprising finished goods, work-in-progress, raw materials, and components.

While North America remains a steadfast market, Europe is also on the ascentA 2023 report noted that the European market for baby monitors boasted retail sales worth 470 million USD, with projections of a compound annual growth rate of 7.0%, potentially reaching 614 million USD by 2028. However, JuZhi Technology has struggled to capture this potential, with European revenues shrinking from 42.08 million RMB to 53.24 million RMB between 2022 and 2024, dropping from 22.1% of total revenue to 15.2%. This downward trend raises red flags regarding the company's market expansion strategy.

The company primarily transacts through third-party e-commerce platformsRevenue from these channels spiked as follows: 164 million RMB in 2022, 308 million RMB in 2023, and 329 million RMB in the first nine months of 2024. These figures highlight that approximately 86.2% to 94.2% of total revenue was funneled through these platforms during this period, with Amazon being a key playerRevenue from Amazon alone amounted to 161 million RMB to 326 million RMB, forming about 84.4% to 93.4% of total income across the same periods.

Despite efforts to branch out into Walmart's e-commerce and offline sales strategies, tangible results have been elusiveAccording to the prospectus, offline sales revealed a decreasing trend, tumbling to 20.20 million RMB from 26.30 million RMB between 2022 and 2024. The contributions from Walmart's platform also mirrored this downturn, descending from 3.50 million RMB to 2.88 million RMB.

Such overdependence on a singular sales channel raises red flags regarding the company's resilience against fluctuating platform policies or fierce competition

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A scenario where Amazon increases commission rates or alters search algorithms could deliver a catastrophic blow to JuZhi's profitsThe challenge intensifies with misadventures in breaking ground in Europe and other markets.

Diving deeper into cost structures, a striking disparity arises between research and development (R&D) expenditures and marketing costsDuring the reporting period, JuZhi's R&D costs hovered between 475.3K RMB to 687.5K RMB, making up less than 3% of total revenueIn contrast, sales and marketing expenses leapt from 39.33 million RMB to 67.92 million RMB, showcasing an astonishing gap where marketing expenditures outstripped R&D by nearly 10-fold.

The focus on marketing is evidently skewed, with significant portions dedicated towards platform fees and advertising expenditureThe affiliate sales commissions on third-party platforms absorbed nearly half of the overall marketing budget, coupled with substantial outlays on promotional activities aimed at enhancing brand presence on e-commerce and social media platforms, predominantly aimed at third-party platforms.

This excessive reliance on third-party platforms has propelled commissions to become a steep component of operating costsWhile this strategy aids in utilizing much-needed traffic to scale sales, it inadvertently inflates expensesJuZhi's aggressive pricing strategy adds another layer to this narrative, as the average price of baby monitors has plummeted from approximately 433.6 RMB to 386.8 RMB due to recalibrated pricing structures targeting market penetration.

This pricing maneuver has effectively escalated sales and broadened distribution channels, but it comes with its own pitfalls, including high return ratesAcross the reporting periods, product return rates lingered between 7.8% and 9%, representing a hefty financial burdenThis phenomenon is particularly visible within Amazon's marketplace during the reviewed span, where return rates oscillated around the 8% mark.

JuZhi Technology's dependence on third-party platforms represents a double-edged sword

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