Chinese snack-maker IPO is a little too spicy

Nongfu Spring

21/05/2021 03:59

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
    HONG KONG, May 21 (Reuters Breakingviews) - Junk food can be
unhealthy in the financial sense too. Weilong Delicious Global
is aiming to go public in Hong Kong with its oily and salty
snacks. Solid sales growth and profitability pass the taste
test, but not enough to justify a super-spicy valuation.
    The chewy strips that account for over 60% of Weilong's top
line hit the spot for young Chinese consumers who frequent
street stalls after school with little pocket money. Thanks to
low production costs, Weilong generates a 20% net profit margin,
nearly twice as high as the domestic industry average, according
to research cited in the initial public offering documents.
Revenue in 2020 increased 22%, to 4.1 billion yuan ($637
million), from a year earlier.
    Weilong also recently attracted hungry investors. In March,
the company raised some $550 million from Hillhouse, Tencent
 0700.HK  and other backers who now collectively own a 5.9%
stake, based on Reuters reporting and the prospectus. That
implies a $9.4 billion valuation, or an eye-watering 73 times
last year’s earnings. U.S. potato chip maker Utz Brands  UTZ.N ,
which went public last August by way of a special purpose
acquisition company, trades at 44 times while Shenzhen-listed
nut purveyor Three Squirrels  300783.SZ  fetches 61 times.
    A recent food and beverage frenzy is giving Weilong extra
zing, especially as technology stocks lose some flavour from a
Beijing crackdown. The Liu brothers, who started the company in
a small central Chinese city in 1999, grabbed the top spot in
their specialised segment, but a share of less than 6% also
implies plenty of competition in a highly fragmented market. By
comparison, Nongfu Spring  9633.HK , which debuted in Hong Kong
last year on a similarly rich valuation multiple, claimed a
fifth of China’s bottled water sales.
    Successful branding and sleek packaging also contribute to
Weilong’s success. Higher distribution and selling expenses,
however, outpaced revenue growth last year. As public attention
on healthy eating grows, the company will have a tougher time
pitching its high-fat, high-carbohydrate products. And food
safety will be a consistent challenge. Milk tea chain Mixue said
this week it's cooperating with regulators after media reports
that it allegedly used expired ingredients. Such risk factors
could make Weilong’s IPO hard to digest. 
    Follow @ywchen1 https://twitter.com/ywchen1 on Twitter
    
    CONTEXT NEWS
    - Chinese snack maker Weilong Delicious Global disclosed
plans for its Hong Kong initial public offering on May 12. 
    - The company raised 3.6 billion yuan ($552 million) in
March from investors including CPE, Hillhouse, Tencent and
Yunfeng Capital, Reuters reported on May 13. They collectively
own about 5.9% of Weilong, the prospectus showed.
    - CICC, Morgan Stanley, and UBS are joint sponsors for the
IPO.
    - Weilong reported a 2020 profit of 819 million yuan on 4.1
billion yuan of revenue, according to the prospectus.           
    - For previous columns by the author, Reuters customers can
click on  CHEN/ 
 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Weilong prospectus    https://www1.hkexnews.hk/app/sehk/2021/103417/documents/sehk21051201294.pdf
China's spicy snack maker Weilong files for Hong Kong IPO -
Reuters News     urn:newsml:reuters.com:*:nL1N2N00AT
BREAKINGVIEWS-Bubble tea IPO can avoid bitter aftertaste   
 urn:newsml:reuters.com:*:nL1N2KP027
IFR story     urn:newsml:reuters.com:*:nIfp7S9f2k
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
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 ((yawen.chen@thomsonreuters.com; Reuters Messaging:
yawen.chen.thomsonreuters.com@reuters.net))