Key Takeaways:
- Yan Palace has filed for a Shanghai IPO that would make it the first listed maker of health food products based on traditional bird nests
- China’s securities regulator asked the company to elaborate on 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, strong in nutrients and shown to promote cell growth and slow down the effects of aging. That’s benefited many users of the product over the years, though stock buyers have been largely excluded from reaping financial benefits from this traditional dish made from swallows’ nests.
That could soon change with the planned Shanghai IPO by Xiamen Yan Palace Bioengineering Co. Ltd., which hopes to swallow up investor cash by becoming China’s first bird nest stock. Like many purveyors of popular health products, Yan Palace has found its own strong tonic in e-commerce sales in recent years. But it still faces cutthroat competition, as well as growing regulatory scrutiny after the securities regulator asked it to clarify the rationale behind its price-cutting and other strategies to out-flank its rivals.
Somewhat ironically, China itself doesn’t actually produce edible bird nests, but instead imports most of the products and their ingredients. Official customs data shows China’s imported bird nests surged 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 largest importer in the three years from 2019 to 2021, making it the industry’s top player during that time, according to its updated IPO prospectus filed last week.
Bird nests are a rare and valuable food product but are difficult to make and were only consumed by the rich in the past. What’s more, chronic concerns that some nests might be fake made it hard for the product to gain mass consumer acceptance. But with technological progress and better regulation, instant edible bird nest products that are both economical and convenient have grown in popularity among general consumers.
China’s bird nest market reached 40 billion yuan ($5.97 billion) in value in 2020, and was growing at an annual rate of 33%, according to data cited in the prospectus. Yan Palace has outpaced that rate, with its own net profit rising 54.4% from 78.7 million yuan in 2019 to 122 million yuan in 2020 despite the pandemic. Its profit grew another 41% last year to 172 million yuan, showing that purveyors of traditional health food products may have even benefited from changing consumption patterns during the pandemic.
E-commerce has provided extra fuel for makers of traditional specialties like Yan Palace, appealing to a younger crowd that likes to order their products online and have them delivered as takeout food. According to a white paper issued by the Edible Bird’s Nest Market Committee of the China Agricultural Wholesale Markets Association, people age 25 to 34 now account for more than half of bird nest consumers, with 35- to 44-year-olds making up another 25%. On the annual “Singles Day” shopping fest last Nov. 11, bird nest and related products were the top seller in the health food category.
Slashing prices
Anyone who thought that bird’s nest soup was a simple matter might be surprised to learn the company has quite a rich portfolio of products catering to different birds of a feather. The “Wanyan” series can be consumed instantly without cooking, while the “Xiandun” series need to be heated up. And then there are also actual dried nests for the do-it-yourselfers. The “Wanyan” series is the company’s biggest revenue source, raking in 535 million yuan in 2019 , 543 million yuan in 2020 and 682 million yuan in 2021, accounting for 56.6%, 41.9% and 45.6% of total revenue in those years, respectively.
The “Xiandun” series has grown rapidly in revenue but has shown signs of slowdown in the last year as actual sales figures get larger. The growth rate was down from 10 times in 2019 to 2.4 times in 2020. Last year, products under the series logged total revenue of 420 million yuan, representing just 17% growth as competition intensified. As that has happened, Yan Palace has slashed the average price for the product from 98.9 yuan in 2019 to just 52 yuan last year, pecking away at its margins.
While Yan’s Palace has clearly found a winner with bird nests, others have sensed an opportunity as well and are flocking to the product. One such rival is Xiaoxiandun, whose presence is mainly online specializing in nest products that requires some heating-up. Rapid progress by Xiaoxiandun in the last few years has cast doubts among some about Yan Palace’s ability to maintain its leading position.
Amid recent price wars to stake out their market share, the China Securities Regulatory Commission (CSRC) has asked Yan Palace to further explain its business model and competition strategies. In particular, it wants to know whether the company has attempted to drum up sales by cutting prices to below costs and whether its overall performance hinges on its advertising business. The regulator also asked about how the rise of new brands like Xiaoxiandun would affect Yan Palace and the whole industry.
High sales costs
Yan Palace spends heavily on sales and promotions, which have accounted for about 30% of its total revenue in the last three years. But it certainly isn’t alone in that regard. Health food company Dong-E-E-Jiao Co. Ltd. (000423.SZ) has also spent about a quarter of its total revenue on similar activity in the past two years, while traditional Chinese medicine brand Tongrentang (600085.SH) spent around 20%.
Maintaining customer loyalty has also been challenging in a crowded marketplace where many popular brands turn out to be just flavors of the month. To hedge against such risks, Yan Palace combines online and offline business models, including 635 stores across China by the end of last year. Given products’ high-end nature and concerns about quality and safety, the company believes that being able to sample the products in the real world can help to build up consumer confidence and loyalty.
Yan Palace plans to use half of its IPO proceeds to build an industrial park to accommodate its business ecosystem, with the other half to upgrade its R&D centers. The company was already producing at 90% of its capacity last year, and thus needs to add new capacity as well as step up its automation and storage and logistics capabilities.
In terms of valuations, Tongrentang is the leader in the traditional Chinese herbal industry with annual revenues exceeding 10 billion yuan, and has a price-to-earnings (P/E) ratio of 44 times. Dong-E-E-Jiao, which specializes in a very distinctive kind of health food product, was close to that at 41 times. By comparison, Yan Palace has priced its shares at a P/E of 32 times, perhaps seeking to attract investors with such a discount.
