NEW YORK -- As Chinese digital influencer incubator Ruhnn Holding prepares for a $200 million initial public offering on the U.S. Nasdaq market, analysts are wondering aloud how long its business model can last in China's cutthroat social media and e-commerce scene.
The plan for an American IPO, revealed by a document filed to the Securities and Exchange Commission this month, is the second time Ruhnn is seeking a listing. The company once traded on China's new over-the-counter market, but delisted in April 2018 for undisclosed reasons.
The Hangzhou-based company, which counts Alibaba Group Holding and venture fund SAIF Partners as major shareholders, manages more than 100 "key opinion leaders," or KOLs, who facilitated the sale of $328 million worth of merchandise in the nine months ended Dec. 31. Ruhnn's net revenue in the same period grew 14% to $124.5 million from the year before, but losses also deepened.
"It's notoriously hard to actually make money in e-commerce," said Arun George, an analyst at London-based Global Equity Research. "Ruhnn is trying to differentiate its e-commerce model by focusing on KOL."
"The funny thing here is despite being the largest KOL-based e-commerce player in China, their growth is slowing and losses are rising, which suggests that the KOL-based e-commerce model is not sustainable in the long term," George said.
Over the past few years, Chinese e-commerce has seen a convergence with social media, where social interaction and content-sharing play an important part in consumers' purchasing decisions. Pinduoduo, which encourages sharing by touting group discounts, is a big player in the space and now sports a nearly $30 billion market capitalization.
In contrast to Pinduoduo's peer-to-peer approach, Ruhnn sets out to monetize Chinese online celebrities' appeal to young consumers. The company provides KOLs with services from securing publicity opportunities to content production, and leverages their social influence to sell in-house products, chiefly clothing.
Ruhnn's business model, which combines KOLs' social media marketing prowess with the company's own supply chain, has enthralled some investors outside of China.
"While the [U.S.] continues to debate whether influencer marketing is even effective, China has an entire industry of influencer incubators who work end to end to turn individuals into big businesses," Li Jin, a California-based investment partner at American venture capital company Andreessen Horowitz, wrote in a Twitter thread from January.
The most successful KOL managed by Ruhnn, Zhang Yi, boasts more than 10 million followers on Chinese social media Weibo. Her online stores on Alibaba's e-commerce platform Taobao sold $15 million worth of merchandise within the first half-hour of Singles Day -- China's largest shopping event -- according to Chinese media reports.
Zhang, who now serves at chief marketing officer of Ruhnn and holds 15% of its shares, is both both a blessing and a potential danger for the company. According to Ruhnn's prospectus, sales from her online stores made up 53.5% of the company's revenue in the nine months ended Dec. 31, up from 50.8% in 2017.
This has led analysts to worry that despite its elaborate business model, Ruhnn is essentially a "one-woman shop."
"Even if it lists successfully, it faces a lot of challenges ahead," said Cao Lei, director of the China E-Commerce Research Center in Hangzhou. Cao warned that if key influencers are poached by competitors or suffer bad press, Ruhnn's business could take a big blow.
Ruhnn expects the KOL incubator market to expand to $30 billion by 2022, but as the influencer field becomes increasingly crowded, with competitors such as Tisu also on the scene, it will be harder for Ruhnn to replicate its previous successes.
"A lot of companies hide behind this 'growth' tag to justify rising losses," said Global Equity Research's George, pointing to the burst of the bike-sharing bubble in China. "I think investors are becoming more careful not to drink the Kool-Aid."
Jenny Chen in Hong Kong contributed to this report.