Following the recent craze over Luckin's coconut latte, which was jokingly said to be 'never available for purchase,' consumers' love for coconut drinks has sparked another round of market discussion. Now, another coconut juice company has been 'drunk' to an IPO. On June 2, Huanlejia Food Group Co., Ltd. (300997.SZ, 'Huanlejia') officially listed on the ChiNext board of the Shenzhen Stock Exchange. At the opening today, the stock price began to decline, unlike yesterday's surge of over 500%. As of the midday close, Huanlejia's stock price was reported at 28.07 yuan per share, down 9.45%, with a market value of 12.63 billion yuan. In less than two days, Huanlejia has experienced a 'tale of two extremes' in the capital market, and whether it can continue to be 'happy' on the capital road is a concern for investors. -01- 'Coconut Juice + Canned Fruit' Dual-Driven Overall Profitability Shows Signs of Fatigue Founded in 2001, Huanlejia's main products include coconut juice beverages, fruit juice beverages, canned fruit, and eight-treasure porridge cans. Among these, coconut juice beverages are the leading products, followed by canned fruit. According to 2020 financial data, these two categories accounted for 45.95% and 38.55% of the company's total revenue last year, respectively, together exceeding 80% of total revenue. In fact, Huanlejia only entered the plant protein beverage market in 2014 and quickly became a pillar product in a short time. For more than a decade prior, it had focused on canned products such as canned fruit. According to the industry survey results of the China Canned Food Industry Association, Huanlejia's canned fruit ranked in the top three in the industry for domestic sales volume and sales revenue from 2017 to 2019, holding a leading position in the industry. However, as consumers' health awareness has gradually increased in recent years, there is a widespread perception that fresh fruit has better nutritional value than canned fruit, which has constrained the development of canned fruit enterprises. To seek new profit curves, Huanlejia has gradually developed new categories, forming a product pattern with beverages as the main focus and canned goods as a supplement. Looking at the operating performance over the past three years, Huanlejia achieved revenues of 1.355 billion yuan, 1.424 billion yuan, and 1.247 billion yuan from 2018 to 2020, with a compound annual growth rate of -4.06%. Net profits were 161 million yuan, 207 million yuan, and 179 million yuan, respectively, showing weak growth and a decline last year. In response, Huanlejia explained that last year's operations were severely affected by the pandemic. Upon further analysis, issues such as product aging and insufficient risk resistance have gradually been exposed. From the perspective of gross margin, first looking at the comparison of beverage products with peers, Huanlejia's comprehensive gross margin in 2020 was 39.41%, which is lower compared to A-share comparable plant protein beverage companies Yangyuan Zhiye (603156.SH) and Chengde Lulu (000848.SZ). Data shows that the beverage products with the highest gross margins for Yangyuan Zhiye and Chengde Lulu are walnut milk and almond milk, respectively, with gross margins around 50%. These two products account for over 95% of sales, with high and stable sales proportions. Huanlejia's beverage product with the highest gross margin is coconut juice, with a gross margin of about 45%. However, coconut juice beverages only account for 70%-80% of the company's beverage product sales. The comprehensive gross margin is lower than the two companies mentioned above. Moreover, the 2020 revenues of these two companies were 4.427 billion yuan and 1.861 billion yuan, respectively, while Huanlejia's beverage product revenue was only 734 million yuan, far smaller in scale than its peers. (Source: Prospectus) Turning to the canned fruit field, where Huanlejia has been deeply involved for over a decade, its profitability does have certain advantages compared to other companies in the industry. Since there are currently no listed companies primarily engaged in canned fruit, to make the comparison more referential, data from Linjia Puzi, a New Third Board-listed company mainly engaged in canned fruit (with canned fruit sales accounting for about 80% in the past three years), is selected for comparison. Comprehensive comparison shows that as of 2020, the gross margins for Linjia Puzi's canned fruit and Huanlejia's canned fruit were 20.67% and 29.56%, respectively, showing a certain gap. However, in recent years, Huanlejia's focus on canned fruit has gradually shifted towards beverage products represented by plant protein beverages. Moreover, from the trend of food and beverage health, coupled with consumers' rapidly changing preferences for food and beverages, requirements for taste, quality, efficacy, and consumption experience are also increasing, and consumer demand is showing a trend of diversification and personalization. Therefore, Huanlejia's future focus should be on enhancing the profitability of its main products, especially the currently dominant coconut juice products, while continuously grasping the trends of the food and beverage market, predicting and meeting rapidly changing market demands in a timely manner, and developing marketable products to add growth and profit points. -02- Sales Model Too Single Excessive Capacity Expansion May Be Hard to Absorb Looking at the sales model, Huanlejia primarily uses distribution, with a small amount sold through direct sales and consignment. It is reported that in 2020, the number of contracted distributors cooperating with Huanlejia was 1,748, covering 31 provinces, municipalities, and autonomous regions nationwide, excluding Hong Kong, Macau, and Taiwan. From 2018 to 2020, Huanlejia's distribution revenue was 1.330 billion yuan, 1.389 billion yuan, and 1.193 billion yuan, accounting for 98.76%, 97.98%, and 96.08% of current main business revenue, respectively. The company relies heavily on distributors, and its sales model tends to be single. (Source: Prospectus) Nowadays, domestic online e-commerce has developed very comprehensively, and consumers have formed online consumption habits, especially for food and beverages, which is increasing year by year. E-commerce has become a channel that every food and beverage enterprise cannot ignore. Although the prospectus shows that Huanlejia has opened official flagship stores on Tmall and JD.com, and sells products through JD's self-operated channels, supermarkets, and other consignment channels, the proportion is too small and 'lags behind' comparable companies. In the future, it urgently needs to enrich its sales model to expand consumer touchpoints and reach. Looking at Huanlejia's fundraising projects this time, the focus is on the Smart New Retail Network Construction Project, the Annual Production of 136,500 Tons of Beverages and Canned Goods Construction Project, and the Marketing Network Construction Project to improve the company's marketing channels and expand production capacity. Specifically, the Smart New Retail Network Construction Project plans to purchase 50,000 self-service smart retail terminals to be placed in target sales markets, mainly for the sales and promotion of the company's beverage, canned goods, and other food products. This can enhance the company's retail business expansion capabilities. Although it still focuses on offline, it is also beneficial for enriching the company's sales channels. However, the intention behind the Annual Production of 136,500 Tons of Beverages and Canned Goods Construction Project may need to be questioned. Financial data shows that although Huanlejia's production and sales of canned goods and beverage products have maintained around 100% levels for three consecutive years, the annual capacity utilization rate indicates that Huanlejia's current capacity is already excessive. In 2020, the annual capacity utilization rate for canned products was only 46.34%, and for beverage products, it was only 30.82%. Even during the peak season, the highest capacity utilization rate was around 80%. (Source: Prospectus) To explain with more specific and understandable data, in 2020, Huanlejia's canned product capacity was 131,300 tons, but production was only 60,900 tons; beverage product capacity was 463,600 tons, but production was only 142,900 tons. Although the company explains that capacity utilization is lower during the off-season and there may be some idle capacity, to ensure market supply during the peak season, enterprises should configure sufficient capacity based on peak-season demand. However, the company's current capacity is already excessive. Adding another 136,500 tons of capacity may lead to greater waste of capacity resources in the future, thereby triggering operational risks. (Source: Prospectus)