Oishi, a childhood memory for a generation, is preparing to list on the Main Board of the Hong Kong Stock Exchange. Founded in the Philippines in 1966 and entering the Chinese market in 1993, the company had rumors of an IPO as early as 2008, but it wasn't until this year that it took action. However, the 'over half a century old' Oishi seems to be losing steam. During the reporting period, revenue growth stagnated and net profit showed a downward trend. Especially in the Chinese market, which accounts for two-thirds of its revenue, sales volume declined, performance dropped, and overcapacity became severe... The external environment is changing rapidly, and market competition is intensifying. Oishi, already lagging behind, has realized the crisis of fried foods and proposed a new direction of 'nutrition and health' before its IPO. Can it turn its fate around with a Hong Kong listing? -01- Idle Production Lines and Raising Funds to Expand Capacity? On November 8, Oishi (Global) Co., Ltd. (referred to as 'Oishi') submitted its IPO prospectus, planning to list on the Main Board of the Hong Kong Stock Exchange. Oishi's main business is crispy leisure food, with markets in China and Vietnam. According to a report by research firm Frost & Sullivan, the company was the largest producer of crispy leisure food in China (excluding potato chips and rice crackers) in 2017 and 2018, and also the largest in Vietnam. Currently, the company has 14 production bases in China and Vietnam, with products including 126 types of crispy leisure food, 53 types of candy, 32 types of beverages, and 10 types of biscuits (Vietnam only). In 2016, 2017, 2018, and the first half of 2019, the company's total sales volume was 142,900 tons, 139,100 tons, 137,600 tons, and 69,700 tons respectively, showing a continuous decline. During the reporting period, the company's revenue was $475 million, $479 million, $491 million, and $247 million, with net profits of $28.905 million, $22.963 million, $20.117 million, and $14.563 million respectively. While revenue growth nearly stalled, net profit shrank by 30% in two years. For this IPO, Oishi plans to use over 60% of the raised funds to expand capacity, with the remaining funds for new product development, marketing, and working capital. However, according to the prospectus, capacity is clearly not the key constraint on Oishi's development. The average capacity utilization rate of the company's 14 production bases in China and Vietnam is only about 60-70%, with some production lines below 30%. Against the backdrop of declining sales and overcapacity in existing production lines, what is the rationale for the company's plan to build new production bases in Fujian, China, and Bac Ninh and Can Tho in Vietnam? The product itself may be the primary issue that Oishi needs to address. The company has recognized the growth limitations of fried foods and plans to transition to healthy, nutritious leisure foods, intending to allocate over 20% of the raised funds for new product R&D. However, for a company that has long prioritized sales over R&D, finding the right consumer trends in a short time remains a challenge. As of the end of June 2019, the company had 11,568 employees, but only 16 R&D personnel. -02- Comprehensive Decline in Chinese Market Sales Oishi's predecessor was born around 1966 in the Philippines. After entering China in 1993, the Chinese market gradually became its core market. In 2018, the company's revenue was $491 million, with the Chinese market contributing $332 million, accounting for 67.61%. In recent years, although the Vietnamese market has grown faster, the Chinese market, with higher gross margins, remains the company's performance driver. In 2018, the gross margin in China was 31.5%, while in Vietnam it was 21.2%. Of Oishi's 14 factories worldwide, 10 are in China, located in Shanghai, Jiangsu, Hubei, Jiangxi, Fujian, Yunnan, Xinjiang, and Heilongjiang. In 2018, the average capacity utilization rate of fried food production lines in key regions of China was 52.5%, while in other regions it was only 30.3%. The reason for the long-term idleness of factories is simple: the company's sales volume in China has been declining year after year, from 87,200 tons in 2016 to 79,300 tons in 2017 and 71,500 tons in 2018, and 36,100 tons in the first half of 2019. Correspondingly, the company's revenue in the Chinese market has also shown a downward trend, from $339 million in 2016 to $329 million in 2017 and $332 million in 2018; in the first half of 2019, it was $164 million, a year-on-year decrease of 2.02%. In recent years, the trend in China's leisure food market has shifted from foreign companies like Want Want and Oishi to new comprehensive, omnichannel, IP-based snack brands like Liangpin Shop and Three Squirrels. Additionally, even in the crispy leisure food segment, Oishi faces competition from manufacturers such as Lay's (PepsiCo), Pringles (Procter & Gamble), and Kebike (Dali Foods). Having lost its leadership in the Chinese market, can Oishi gain recognition from the capital market with its Hong Kong listing? -03- Numerous Related-Party Transactions with the Sy Family Group Although most of its business is in China, Oishi is a wholly foreign-owned enterprise. Currently, members of the Sy family, including Shi Gongqi, hold the majority of Oishi's shares and hold key positions in the company's board and supervisory board. It is worth mentioning that besides Oishi, the Sy family also owns a vast FMCG portfolio, including Cola Cao, Great Lakes Juice, Rumu Juice, Minglang Juice, Xiao Carrot Juice, Chenguang Shrimp Chips, and the time-honored brand Shanghai Laotongsheng. Cola Cao was a childhood memory for the post-80s and post-90s generations, once disappearing from the market but recently re-entering major sales channels; Great Lakes Juice and Rumu Juice have always been regulars on the imported high-end shelves of major supermarkets; Laotongsheng is a century-old brand dealing in groceries, controlled by a Sy family member enterprise after restructuring in 2003. According to Qichacha, its second shareholder is Yuyuan Co., Ltd. Because the Sy family owns numerous businesses, various related-party transactions are quite frequent. One type involves sales channels. Some of Oishi's products need to be sold externally through the Sy Group. In 2018, external sales to the Sy Group amounted to $18.929 million, accounting for 3.85% of the company's revenue. Additionally, other FMCG products under the Sy Group, such as Great Lakes Juice, Rumu Juice, Minglang Juice, and Cola Cao, are distributed by Oishi in the Chinese market. The beverage segment in the company's revenue composition is basically all from such distribution business, accounting for about 3.5% of the company's revenue last year. Another type involves business operations. Oishi uses its production lines to provide OEM services to the Sy Group. The reason for OEM is simple: the company has severe overcapacity and needs to digest it. During the reporting period, the company's sales of raw materials, semi-finished products, machinery, parts, and OEM services to the Sy Group accounted for 1.9%, 3.1%, 4.1%, and 4.4% of total revenue, respectively. There is also a financial type. Oishi and the Sy Group have had significant related-party loans for a long time. As of the end of June 2019, the outstanding related-party loan balance from the Sy Group to Oishi was $21.9 million. During the reporting period, the company's interest income from related parties was $1.632 million, $1.249 million, $0.652 million, and $0.209 million, respectively. Source: Zebra Consumption (ID: banmaxiaofei) Tips will be paid 400-2000 yuan once adopted.