Chen Xiaojing January 16: Pagoda Group's listing just marked its first anniversary. It should have been a day of celebration, but the capital market was not kind. On that day, the company's stock price experienced a flash crash. Intraday declines reached 34%, and it closed down 30.17%, with over HK$2 billion in market value evaporating in a single day. Just a few days prior, the company had disclosed an ambitious ten-year plan, painting a grand picture of a 100-billion-yuan scale.
Stock Price Flash Crash On January 16, Pagoda Group (02411.HK) celebrated its first anniversary of listing, but for investors, it was a painful day. The stock opened slightly lower and then plummeted rapidly, with intraday losses exceeding 34% in the morning. After the lunch break, the stock remained under pressure, closing at HK$4.180 per share, down 30.33%, with total turnover of HK$108 million and a market value of HK$6.64 billion. Pagoda's official response to the sharp decline seemed bewildered. In response to media inquiries, they stated that the company's operations are normal and that stock price fluctuations are a normal phenomenon in the capital market.
Urban residents in China are likely familiar with Pagoda. Even if they haven't bought anything there, they have probably seen its stores in streets and alleys. Over 20 years ago, Yu Huiyong resigned from the Jiangxi Academy of Agricultural Sciences and started his own business, opening the first Pagoda store in Shenzhen. To expand its store network, Pagoda repeatedly refined its model, shifting from franchising to self-operated, and eventually back to franchising. Finally, it carved out a path in the large but fragmented Chinese fruit market.
As early as June 2020, Pagoda submitted an application to list on the Main Board of the Hong Kong Stock Exchange. In the same year, the ChiNext registration system was implemented, and the company changed its mind, hoping to IPO on ChiNext and filed for guidance. Unexpectedly, after more than a year, the company turned around again and submitted a prospectus to the Hong Kong Stock Exchange in May 2022, but soon news came that the prospectus had lapsed. After a delay of over two years, the company finally listed on the Main Board of the Hong Kong Stock Exchange on January 16, 2023.
On the first day of listing, the Hong Kong stock market gave Pagoda a warm welcome, with intraday gains exceeding 20%. It closed at HK$6 per share, up 7.25%, with a total market value of nearly HK$10 billion. However, it didn't take long for the company to fall below its issue price. Throughout 2023, Pagoda's performance on the Hong Kong stock market was volatile, with lows of HK$4.80 and highs of HK$6.68, but none were as thrilling as the flash crash on its first anniversary. It is unclear whether this was influenced by the expiration of lock-up periods for pre-IPO shareholders.
Notably, a few days earlier, Pagoda had just disclosed a share buyback plan, intending to repurchase no more than 10% of issued H-shares at a price not exceeding HK$5.96 per share, with planned funds not exceeding HK$634 million. On January 16, Pagoda was not the worst performer on the Hong Kong stock market; that dubious honor went to "Wang Yibo concept stock" Yuehua Entertainment, which fell 77.84% throughout the day. That company also faced its first anniversary of listing two days later.
A Difficult Business Selling fruit is a good business because everyone needs to eat, and the market is large enough. But it is definitely not an easy business, as evidenced by the frequent changes of owners and transfers at fruit stores around us. Pagoda is already the largest fruit retailer in China, with thousands of stores nationwide, yet its market share is only 1%. Because the company follows a premium fruit route, and fruits have high loss rates and logistics costs, coupled with the company's "three-no returns" policy to build reputation, the public impression of Pagoda is that the fruit quality is good but too expensive.
Even with the "expensive" reputation, it is difficult for Pagoda to make big money selling fruit. In 2021 and 2022, the company's revenue was 10.29 billion yuan and 11.31 billion yuan, respectively, with net profits attributable to parent of 230 million yuan and 323 million yuan, gross margins of 11.24% and 11.62%, and net margins of 2.19% and 2.71%. The fruit industry is strange: fruit farmers complain about low purchase prices, retailers as large as Pagoda have weak profitability, and on the other hand, citizens feel that fruit prices are getting more expensive and increasingly unaffordable. From the field to the terminal, who pockets the huge price difference? Some institutions have pointed out in research reports that fruits, as non-standard agricultural products, involve a highly fragmented and lengthy industrial chain from planting to sale, with each link requiring a certain profit, and by the time these fruits reach consumers, they become "assassins" (pricey items).
Pagoda hopes to leverage its scale advantages to lay out the entire industrial chain and solve industry pain points. It cooperates with fruit farmers on the planting side to promote product standardization; additionally, through brand empowerment and digital construction, it aims to reduce distribution links and losses. The idea is good, but the resulting problem is that the company's operations have shifted from a light-asset franchise model to a heavy-asset full-industry-chain model, causing a sharp increase in cost pressure. In 2019 and 2020, the company's cost of sales accounted for over 90% of revenue, and although it improved slightly afterward, it still exceeded 88%. With high cost of sales, the company could only squeeze profits by reducing selling and administrative expenses, finally achieving a net margin of 3.98% in the first half of 2023, a certain improvement compared to the same period in previous years.
A 100-Billion-Yuan Pie Pagoda's expansion relies on franchisees, but the company's main revenue source is not franchise fees, but sales of fruits and other products to franchisees. The number of franchised stores determines revenue scale, which in turn affects profits. As early as 2015, after receiving Series A investment from Tiantu, Yu Huiyong boldly stated that he would achieve 10,000 stores and annual sales of 40 billion yuan within five years. Reality, however, slapped him in the face. As of the end of June 2023, Pagoda had 5,958 stores, with expectations of possibly exceeding 6,000 for the full year. At the 2023 interim results meeting, Yu Huiyong revisited the 10,000-store plan, with a target completion date of 2027. A longer-term goal is to open 30,000 stores by 2042. At the beginning of 2024, Pagoda eagerly painted a 100-billion-yuan pie, planning to achieve 100 billion GMV in ten years. To this end, the company proactively disclosed three "three-year plans" to focus on developing the group's retail, "To B", and category businesses, while also expanding international operations. Yu Huiyong believes that if relying solely on retail, in an ideal state, Pagoda can achieve at most 10% market share, and of the remaining 90% market, at least 70% consists of small "B" businesses that lack full-category supply chains and end-to-end procurement, which will be the focus of Pagoda's To B business layout. Pagoda stated that if the ten-year plan is smoothly implemented, it will help achieve the strategic goals of "quality first choice, global leadership, global fruit king", ultimately becoming a globally leading agricultural ecological technology platform company.
As soon as the words were spoken, the stock price crashed first.
PS: March 14-16, 2024, the 9th China FMCG Innovation Conference & the 2nd China FMCG Hard Discount Conference & the 2nd China FMCG Distributor Conference will be grandly held in Chengdu! This conference will revolve around the theme of "Supply Chain Revolution". Over 3 days, with 1 main forum and more than ten sub-forums and closed-door exchange meetings, we will gather with thousands of FMCG brand owners, distributors, retail innovators, and industry service providers from across the country in Chengdu to discuss the challenges, opportunities, changes, and solutions in the era of supply chain revolution. In this era of supply chain revolution, a new business era will be born. We hope every participant will still have a place in this wave, and we believe this will be a worthwhile meeting!
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