INVESTOR CONFIDENCE RISES AFTER LAIYIFEN AND ZHOUHEIYA’S IPOS
Market listings for two Chinese snack food companies have given private equity investors who took stock in return for cash an exit. Some investors say that in an environment where the opportunities for stock market listings are fewer and fewer, this is a way of injecting stimulus into investors.
LaiYiFen and ZhouHeiYa’s main business is snack food, and they have respectively listed on the Shanghai and Hong Kong stock exchanges. With venture capitalists more and more interested in sports and recreation, medicine, and cutting edge technology, snack food companies raising capital through IPOs has increased the confidence of food industry investors and led to predictions that mergers will soon happen. The food industry is often thought to be a sub-investment division riding a wave of consumer popularity with one group of venture capitalists who view it favourably and another group who think it’s ‘not sexy enough’, or too ‘provincial’.
Even if opinions vary, it’s undeniable that the leading snack food companies generate profits. Stock market prospectuses reveal that ZhouHeiYa made a net profit of approximately RMB 553 million in 2015, with a margin of 22.7%; and a net profit of RMB 381 million in the first half of 2016, with a margin of 27.4%.
Fund manager Wang Shuo said, “When I invested in ZhouHeiYa I thought it would make a lot of money. The income from one really good store was equal to the income generated by a specialist doctor: a 30m2 ZhouHeiYa store earns the same as 3000-5000m2 private clinic.” Wang looked back at his experience investing in ZhouHeiYa at the the Luxe.co HuaLiZhi International Fashion Investment Forum.
Wang commented that listed snack food companies will “soon have a lot of money,” “there will certainly be some buyouts”. Wang Shuo, a partner at Sequoia Capital, was previously employed by Tiantu Capital and took part in Tiantu’s 2010 RMB 60 million pre-IPO investment into ZhouHeiYa.
Tiantu’s investment into ZhouHeiYa is one example of venture capitalists buying food companies. Huang Hai, another investor responsible for lifestyle and early investments at FreesVC, said at the same investment forum that food stock keeping units are smaller so there is more room for price increases and transportation is convenient-traits help reduce the difficulty of starting up a food business.
Firstly, because stock keeping units are smaller, food products have an advantage over clothes and other products. You don’t need to be particularly concerned about problems arising from changing trends. Huang said that consumers are more direct in their food purchasing decisions, “other than tasty or not, there really isn’t that much to deliberate.”
Secondly, the cost of snack food is lower in comparison to apparel, “Something already seen in many fields is that I can take a product that only costs RMB 20 and increase the price to RMB 40-50. However, if you want to sell a RMB 200 product for RMB 400-500, then this is comparatively harder.” When incomes increase people tend to want to increase their quality of life and want to buy more high-quality clothing.
Huang Hai used examples including chains such as Starbucks and the Taiwanese bakery UMASSIF. The China Times said of the popularity of UMASSIF, “The price is three times that of ordinary bread, yet you still can’t stop people from queueing up and waiting to pay.”
Thirdly, developments in the packaging industry ensure that food products, which can go bad, can be stored for long periods and shipped long distances. Commodities like food, which “can circulate freely, ship easily, and can be stored for a long time,” are now seen by investors as “a fairly good category of investment based on indications from historic data and forecasts”.
Moreover, even though the probability that people’s tastes will change is low, as far as inventors are concerned, “inventing new products” will bring new vigour to the food market. Chen Momo, an investor in charge of consumption and culture projects at Vision Capital, said, “Take for example baby snacks. Previously mothers only fed babies breastmilk, formula, or purees. So considering that baby snacks help children to learn to use their teeth and chew and to practice hand to mouth coordination, then a new product has been invented.”
Emmaunel2016-11-25: In fact these companies aren’t very good. For example many LaiYifen stores are franchises and there aren’t many customers, so the IPO must have been to extract money and solve cash shortages.
Jenny MSylvia2016-11-24: Too expensive
圉湢哋①起趉2016-11-24 : You know how much profit they make?? Even one dish of traditional Chinese only makes about 30% profit, and cost is three times profit. Yet you can make 70% profit from the cheapest most ordinary hamburger, and profit is three times the cost. So tell me which one is the best investment?
❀ 无心丶2016-11-24: I don’t think ZhouHeiYa is as tasty as Juewei.
宏仁达家居2016-11-23: LaiYiFen? Never heard of them.
超人归来2016-11-23: Are they really profitable? There are indeed lots of LaiYiFen’s in Heifei, but there are so few customers you can hear a pin drop in the majority.