A son who was lazy and in debt was kicked out by his father, only to become wealthy a decade later, leaving his father feeling embarrassed. Such stories are common in rural areas and also in the capital market. Today, I'll talk about Yangyuan Beverages, which is currently in the IPO process. You might not know Yangyuan Beverages, but its flagship product 'Six Walnuts' is known across the country. Yangyuan has a significant background: it was initially a wholly-owned subsidiary of Hengshui Laobaigan Group, but after privatization, it achieved a breakthrough from zero to nearly 10 billion yuan in 10 years. The 'father' company must regret abandoning such a profitable 'son'. Indeed, Yangyuan Beverages has lived up to expectations, achieving a 3000-fold growth in 10 years. Its two previous attempts to enter the capital market further demonstrate its profitability, though few know why those attempts failed. Now, on its third IPO attempt, there is much criticism in the media regarding its products and production capacity. As an FMCG, advertising investment is necessary, but Yangyuan's approach seems unique. Let's start with its advertising. Riding the 'Brain-Boosting' Wave Annual Growth Exceeding 100% Many FMCG experts say that heavy advertising in the early stages of a brand is to capture market share. That makes sense, but it depends on the specific situation. Yangyuan's only product is 'Six Walnuts', which has been its sole major product for 20 years, accounting for over 90% of total revenue, reaching 95.41% in 2015. It has undeniably become the top walnut milk beverage in China. Relying on a single product for 20 years is not a joke but a myth. Why such a favorable situation? Its prospectus reveals the marketing expenses over the years. From 2013 to the first half of 2016, the company's marketing expenses were astonishing: 260 million, 320 million, 380 million, and 280 million yuan respectively, accounting for 3.5%, 3.9%, 4.1%, and 6.9% of revenue. The annual selling expenses have consistently remained above 10%. Consumers might not see the pattern, but insiders would summarize it in one sentence: it's all about advertising. This simple and crude method is somewhat similar to the former 'Brain Gold'. During prime time, 'Brain Gold' spent real money to brainwash consumers. The advertising slogans are well-known. The industry judgment at the time was that once the ads stopped, 'Brain Gold' wouldn't sell. For selling products, the simpler and more direct, the better. 'Six Walnuts' has clearly learned a lot and upgraded the approach. Besides advertising, it sponsors educational programs. I found that it participated in CCTV's 'Challenge Impossible', Hunan TV's 'Learn Well', and Shandong TV's 'I Am a Teacher', mainly to implant the concept of 'Six Walnuts' and 'brain-boosting', making the audience think that to boost the brain, you should drink this product. With these hard and soft ads, from 2008 to 2010, Yangyuan's average annual revenue growth exceeded 100%, showing the immediate effect of advertising. Now, regarding this IPO, Yangyuan might have some plans. In 2015, total revenue was about 9.117 billion yuan, with net profit of 2.6 billion yuan. Its recent financial management scale has accumulated nearly 20 billion yuan, so it's not short of money. However, this IPO fundraising is unusual: it plans to raise 3.266 billion yuan, of which 2.9 billion yuan is for marketing network construction, and 1.9 billion yuan of that is for brand building, accounting for 58.1% of the total fundraising. In essence, it's for advertising. In comparison, Laobaigan Liquor (600559.SH) had revenue of only 2.336 billion yuan in 2015, with net profit attributable to shareholders of 75.0419 million yuan. Many Competitors How Can Six Walnuts Defend Its 'Kingdom'? Relying on the single product 'Six Walnuts' to dominate the FMCG industry for 20 years, not only leaving its 'father' Laobaigan far behind but also becoming the true leader in walnut milk beverages, the challenge now is not how to expand but how to defend its position. The plant protein beverage industry has developed for 20 years, and it's a period of innovation in the domestic beverage industry. Giants like Mengniu, Chengde Lulu, Yili, and Wahaha have already entered the walnut milk sector, and Yangyuan is facing direct competition. However, Yangyuan's performance is puzzling because, including myself, we feel that its R&D and innovation are too 'weak'. As mentioned, for 20 years, only one major product 'Six Walnuts' has been generating revenue. The R&D investment is embarrassing: in 2013, R&D expenses were only 1.29 million yuan; in 2014, 2.47 million; in 2015, it rose to 5.45 million; and in the first half of 2016, only 3.38 million. These R&D expenses account for less than 0.1% of revenue. Yangyuan has always emphasized sales channels and market share, showing its attitude towards product R&D is like a chicken rib. What exactly is 'Six Walnuts'? According to the prospectus, the cost of walnut kernels per can is only 0.4 yuan. Based on the average purchase price of 20 yuan per jin, each can of 'Six Walnuts' contains only 10 grams of walnuts. Despite this, the ex-factory price of over 2 yuan per can brings a 50% gross margin. But this is not a long-term strategy. Walnut milk is a niche market, and with many beverage giants entering, the future competition will be on product and strategy. Although Yangyuan's big single product strategy has opened up markets with depth, and it will continue to guide the company, with major beverage giants surrounding, the rapid growth will be constrained. In 2015, Yangyuan's net profit margin was about 30%, compared to Chengde Lulu at 17%, Wanglaoji at 5%, and Mengniu at 5%. Yangyuan's profits are quite good, and its cash flow is strong. As a company, it should be aware that fortune and misfortune are interdependent. Some might say that as long as the big single product occupies market channels and share, success is achieved. But without innovative products in the pipeline, can it defend its 'kingdom'? Source: Zebra Consumption (WeChat ID: banmaxiaofei) -END-