Yan Palace flocks to Shanghai as China’s first bird’s nest stock

Key Jtake away food :

  • Yan Palace has filed for an IPO in Shanghai that would make it the first listed maker of traditional bird’s nest natural food products
  • China’s securities regulator has asked the company to clarify its business model and competitive strategies as fierce competition has led to steep price cuts.

By Lau Ming

Bird’s nest soup has long been a Chinese delicacy, rich in nutrients and shown to promote cell growth and slow the effects of aging. This has benefited many users of the product over the years, although stock buyers have been largely excluded from the financial benefits of this traditional swallow’s nest dish.

This may soon change with the planned IPO in Shanghai by Xiamen Yan Palace Bioengineering Co. Ltd., which hopes to gobble up investor money by becoming China’s top bird’s nest stock. Like many popular health product vendors, Yan Palace has found its own strong tonic in e-commerce sales in recent years. But it still faces stiff competition, as well as growing regulatory scrutiny after the securities regulator asked it to clarify the rationale for its price cut and other strategies to outwit rivals.

Ironically enough, China itself does not produce edible bird’s nests, but rather imports most of the products and their ingredients. Official customs data shows China’s imported bird nests increased from 41.5 tons to 340.4 tons from 2016 to 2020, a more than seven-fold increase in just five years. Yan Palace was China’s biggest importer in the three years from 2019 to 2021, making it the top player in the industry during that time, according to its updated IPO. prospectus deposit Last week.

Bird’s nests are a rare and valuable food item but are difficult to manufacture and were only eaten by the wealthy in the past. Additionally, chronic concerns that some nests might be fake made it difficult for mass consumers to accept the product. But with advances in technology and better regulation, instant edible bird’s nest products, which are both economical and convenient, have grown in popularity among general consumers.

China’s bird’s nest market reached 40 billion yuan ($5.97 billion) in value in 2020 and grew at an annual rate of 33 percent, according to data cited in the prospectus. Yan Palace exceeded this rate, with its own net profit rising 54.4 percent from 78.7 million yuan in 2019 to 122 million yuan in 2020 despite the pandemic. Its profit rose another 41 percent last year to 172 million yuan, showing that traditional health food vendors may even have benefited from changing consumption patterns during the pandemic.

E-commerce has provided additional fuel for traditional specialty makers like Yan Palace, attracting a younger clientele who like to order their products online and have them delivered as takeaways. According to a white paper published by the Edible Birds Nest Market Committee of the China Association of Agricultural Wholesale Markets, people between the ages of 25 and 34 now account for more than half of bird’s nest consumers, 35 to 44 years representing another 25%. At the annual “Singles’ Day” shopping fest on November 11, bird’s nest and related products were top sellers in the health food category.

Lower prices

Anyone who thought bird’s nest soup was a simple affair might be surprised to learn that the company has quite a rich portfolio of products for different birds of a feather. The “Wanyan” series can be eaten instantly without cooking, while the “Xiandun” series needs to be reheated. And then there are also real dried nests for DIY enthusiasts. The “Wanyan” series is the company’s largest source of revenue, with 535 million yuan in 2019, 543 million yuan in 2020 and 682 million yuan in 2021, accounting for 56.6%, 41.9% respectively. and 45.6% of the total income of those years. .

The “Xiandun” series has seen rapid growth in revenue, but has shown signs of slowing down over the past year as actual sales figures increase. The growth rate increased from 10 times in 2019 to 2.4 times in 2020. Last year, the series products achieved total sales of 420 million yuan, representing a growth of only 17% as competition intensified. As it happened, Yan Palace slashed the product’s average price from 98.9 yuan in 2019 to just 52 yuan last year, eating into its margins.

While Yan’s Palace has clearly found a winner with the Birds Nests, others have also sensed an opportunity and are flocking to the product. One of these rivals is Xiaoxiandun, whose presence online is mostly specializing in nesting products that require some warming up. Xiaoxiandun’s rapid progress over the past few years has cast doubts on Yan Palace’s ability to maintain its leadership position.

Amid recent price wars to claim their market share, the China Securities Regulatory Commission (CSRC) asked Yan Palace to further explain its business model and competition strategies. In particular, he wants to know whether the company has attempted to increase sales by cutting prices below cost and whether its overall performance depends on its advertising business. The regulator also asked how the rise of new brands like Xiaoxiandun would affect Yan Palace and the entire industry.

High selling costs

Yan Palace spends a lot on sales and promotions, which have accounted for around 30% of its total revenue over the past three years. But it is certainly not the only one in this regard. natural food company Dong-EE-Jiao Co. Ltd. (000423.SZ) has also spent about a quarter of its total revenue on a similar business over the past two years, while the traditional Chinese medicine brand Tongrentang (600085.SH) spent about 20%.

Maintaining customer loyalty has also been difficult in a crowded market where many popular brands turn out to be just flavors of the month. To guard against such risks, Yan Palace combines online and offline business models, including 635 stores across China as of the end of last year. Given the high-end nature of the products and concerns over quality and safety, the company believes that being able to taste the products in the real world can help build consumer trust and loyalty.

Yan Palace plans to use half of the proceeds from its IPO to build an industrial park to accommodate its business ecosystem, the other half to upgrade its R&D centers. The company was already producing at 90% of its capacity last year and therefore needs to add new capacity as well as strengthen its automation, storage and logistics capabilities.

In terms of valuations, Tongrentang is the leader in the traditional Chinese herbal medicine industry with annual revenues over 10 billion yuan and a price/earnings ratio (P/E) of 44 times. Dong-EE-Jiao, who specializes in a very particular type of health food product, was close to this 41 times. By comparison, Yan Palace has priced its shares at a P/E of 32 times, perhaps seeking to attract investors at such a discount.

This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.

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