On the afternoon of March 27, Lotus Health (600186.SH) announced its intention to acquire at least 20% equity in Hangzhou Jinlingyang Enterprise Management Consulting Co., Ltd. At first mention, most people may find the latter unfamiliar, but if its product 'Zihaiguo' is mentioned, it should be more recognizable. In the past two years, Zihaiguo has developed well online. What sparks can the combination of the 'MSG King' and 'Zihaiguo' create?

Planned high-premium acquisition raises questions

According to public information, since its establishment, Lotus Health has been committed to the R&D, production, and sales of food and condiments, forming a green product structure led by MSG and chicken essence, combined with other condiment series and wheat flour series products. Its sales network covers all parts of the country.

Detailed announcements show that Lotus Health plans to acquire at least 20% equity in Hangzhou Jinlingyang Enterprise Management Consulting Co., Ltd. in cash, with the latter's actual controller Cai Hongliang (founder and chairman of Zihaiguo) facilitating Lotus Health to become the controlling shareholder of Hangzhou Jinlingyang Enterprise Management Consulting Co., Ltd. Lotus Health stated that this acquisition aims to improve the company's industrial layout and enhance future profitability, forming new profit growth points, in line with the company's long-term development strategy and the interests of the company and all shareholders.

It is worth noting that the transaction consideration is expected to be between 300 million and 600 million yuan, while Hangzhou Jinlingyang's net assets at the end of 2022 were approximately 140 million yuan, implying a premium rate of about 970% to 2000%. Such a high premium rate has drawn inquiries from the Shanghai Stock Exchange, which requires Lotus Health to further verify whether there are undisclosed agreements or other interest arrangements with the counterparty and related parties, and whether there is any transfer of benefits to the counterparty or related parties.

Points of convergence

Strictly speaking, Lotus Health belongs to the condiment category, while Zihaiguo belongs to the pre-made dishes category, with a gap between them. However, from an operational perspective, there are many reasons for Lotus Health's acquisition move.

MSG is Lotus Health's main product. But with the strong rise of compound condiments and differentiated consumer demand, industry concentration is increasing. Lotus Health has launched more new products to try to break free from its reliance on a single product.

Zihaiguo has had good development momentum in recent years. According to media reports, the Zihaiguo brand entered the market online in 2018 and quickly opened up the market through cooperation with many celebrities, being well-versed in marketing. During the 'Double 11' period in 2021, its total sales across all online channels exceeded 100 million yuan, ranking first for four consecutive years.

According to Lotus Health's financial report data, its offline channel scale is large, but in the past two years it seems to be making efforts in online channels. In 2021, Lotus Health's online sales revenue was approximately 9.91 million yuan, an increase of 231.22% year-on-year, while offline sales revenue was approximately 1.8 billion yuan, an increase of 9.75% year-on-year. In the first three quarters of 2022, the company's online sales were approximately 11.17 million yuan, an increase of 125.54% year-on-year, while offline sales were approximately 1.3 billion yuan, a decrease of 1.5% year-on-year.

First, in terms of products, Zihaiguo can enrich Lotus Health's product channels. Despite pursuing innovation, Lotus Health's MSG products still account for over 70% of total revenue, and it needs good products to drive performance growth.

Boldly predicting, Lotus Health's condiment product line and Zihaiguo's main products—hotpot base and seasonings—still have compatibility. There may be opportunities for deeper cooperation in product R&D and production, jointly launching healthier and more delicious products to meet consumer needs.

Second, in terms of channels, Lotus Health's online channels are developing at a multiplied speed, and Zihaiguo has a good online development foundation, so the two align in channel focus. From a brand marketing perspective, Lotus Health, as a time-honored brand, has deep brand heritage and loyalty, which can provide Zihaiguo with more stable brand support and market voice. At the same time, Zihaiguo, as a young internet-famous brand, can inject new vitality and a younger brand image into Lotus Health, enhancing brand appeal and market competitiveness.

Future prospects remain to be seen

Even though the imagination space is huge, this transaction is still in the preliminary agreement stage. 'As this matter is still in the planning stage, there is uncertainty as to whether the transaction can be reached.' Lotus Health stated that the company will disclose the subsequent progress of this acquisition in accordance with regulations.

In addition, judging only from the current performance of both parties, Lotus Health's revenue scale in recent years has been around 1 billion yuan, with net profit in the tens of millions. Hangzhou Jinlingyang Enterprise Management Consulting Co., Ltd.'s revenue scale in 2022 was around 800 million yuan, with net profit close to 20 million yuan. However, the latter also had total liabilities exceeding 500 million yuan as of the end of 2022.

Therefore, assuming Lotus Health truly acquires Hangzhou Jinlingyang Enterprise Management Consulting Co., Ltd., when it will recoup its investment, and whether it can truly promote mutual benefit and achieve stronger brand and business growth in the future, remains to be seen.