In 2016, during a media interview, Meituan's Wang Xing talked about the '4321' rule in the business world: many niche sectors go through a process of 'many to 4, 4 to 3, 3 to 2', and finally, in a duel of titans, the leader wins. Many industries follow this competitive rule, such as the frozen food industry we are most familiar with. While well-known frozen food companies like Sanquan, Synear, Wanchai Ferry, and Longfeng were quietly fighting in supermarkets, Anjoy Foods (603345.SH), which started in Xiamen, used a 'rural encirclement of cities' path to complete the '4321' journey over more than a decade. After listing in 2017, it overtook Sanquan and secured the position of 'frozen food leader'. Since 2017, Anjoy has been favored by investors, with its market value growing from a low of 4.9 billion yuan to a high of 67 billion yuan. The Q3 report released recently shows that from January to September this year, Anjoy achieved total operating revenue of 8.156 billion yuan, just one step away from the target of 10 billion yuan in revenue. Compared with peers, Sanquan's 5.335 billion yuan, Haixin's 1.095 billion yuan, and Longda Meat's 6.509 billion yuan, Anjoy is more than one step ahead. But becoming No.1 does not mean there is no crisis. Anjoy's impressive Q3 results did not elicit a strong market reaction. The heavy business model of frozen food, frequent shareholder reductions, and aggressive pre-made dish strategy are challenges behind Anjoy's 'becoming No.1'. A key trend is that Anjoy, which already earns hard money, is becoming less profitable. The article mainly addresses three questions: ** 1. How did Anjoy Foods stage a comeback as a 'ten-bagger in three years'?** ** 2. Why is the 'frozen food leader's' profitability declining?** ** 3. Can the aggressive pre-made dish business bring new imagination for a second growth curve for Anjoy?** Surprise Attack: The Victory of 'Rural Encirclement of Cities' Before Anjoy rose, the story of the 'two strong rivals' in frozen food was a tug-of-war between two Henan natives. Sanquan founder Chen Zemin, who gave up a doctor's iron rice bowl to join the business wave, made China's first frozen tangyuan with 15,000 yuan borrowed. With the title 'Father of Chinese Frozen Tangyuan', he spent over a decade rolling out an A-share 'first frozen food stock' with great glory. On the other side, his fellow Henan native Li Wei founded Synear. While shouting 'surpass Sanquan within three years', he, a former journalist, spent over one million yuan to invite Mao Amin as spokesperson, simply because she happened to sing the hit song 'Synear' (Missing). Reviewing the development of the two frozen food giants, their stories are as exciting as 'business wars' in novels. Since the late 1990s, Sanquan and Synear have been in a tug-of-war over product imitation and innovation. Synear, relying on an aggressive 'capacity first, channel outsourcing later' approach, surpassed Sanquan in 2003. But the good times did not last; over-expansion and loss of control over the channel system quickly backfired. Sanquan, with a 'channel first, capacity later' approach, used a regional subsidiary direct sales model and acquired Longfeng, surpassing Synear again after 10 years, solidifying the frozen food industry structure. Sanquan had almost no rivals in sight until Anjoy appeared. Frankly speaking, compared with the brilliant entrepreneurial stories of the giants, Anjoy was 'born at the wrong time'. Anjoy's predecessor was Huashun Minsheng Food Group, which initially produced tangyuan and wontons like Sanquan, but the giants were already far ahead, and Anjoy could not make up for its deficiencies in capacity, products, and channels. How to break the deadlock? Anjoy's rise benefited from a surprise attack in strategy, channels, and products. First, on the product side, Anjoy avoided fierce competition in the rice and flour market, took a different path to seize the dividend of the rise of hot pot ingredients, then proactively initiated price wars to quickly gain market share and achieve scale. From the rice and flour market to the hot pot ingredient market, a key figure to mention is Anjoy Foods General Manager Zhang Qingmiao. In fact, when entering the hot pot ingredient market, Anjoy's Xiamen factory had annual sales of about 200 million yuan, while the Wuxi factory producing rice and flour products had annual sales of 280 million yuan—the former was losing money, the latter profitable. Logically, the latter should have been expanded. But at that time, Zhang Qingmiao keenly realized that the overall maturity of the hot pot ingredient industry lagged behind rice and flour products by about 5-10 years. Therefore, even though the Xiamen factory was losing money in the short term, it had long-term advantages, so the group decided to focus on hot pot ingredients. A significant background is the prosperity of mass catering in China. Frozen food is no longer limited to the C-end but is gradually penetrating the hot pot industry, which has standardized characteristics. From 2008 to 2015, the traditional hot pot market's retail sales grew at a compound annual growth rate of 15%, with downstream demand expansion driving upstream capacity expansion. The shift in product focus quickly reflected in Anjoy's sales. By 2009, the group's overall sales reached 950 million yuan, with hot pot ingredients accounting for 600 million yuan. In addition to the product surprise attack, the 'rural encirclement of cities' channel strategy also allowed Anjoy to successfully avoid direct competition with the giants. Unlike Sanquan and Synear's strong position in traditional supermarket channels, Anjoy focused its channel development on wet markets, small and medium restaurants, and other channels ignored by the leaders. Why? The biggest reason is that as a typical closed channel, traditional KA channels are difficult to enter, and pricing power often lies with the retail end. A typical case is Sanquan, which established a direct sales model, spent huge human and financial costs, and only gradually diluted channel costs by increasing the proportion of high-end products. The small B channels Anjoy targeted are different. Due to their large scale and high dispersion, they value product cost-effectiveness and standardization. Small restaurants and mom-and-pop shops require as many SKUs as possible and as low prices as possible. This is a broader market, but also a tough bone to chew. The giants are unwilling to do it because of low profits and the extreme test of the frontline team's 'combat capability'. This is precisely Anjoy's advantage. Anjoy has built an internal culture of 'do it with heart, do it now', emphasizing close service, wolf-like spirit, and iron army culture. At the same time, it adopts 'local conditions' channel strategies in different regions, such as intensive distribution in areas like Suzhou, Wuxi, and Changzhou, and a combination of supermarket distributors and agricultural wholesale distributors in some provincial capitals. The growth in distributor network data can corroborate the results of this strategy. The Q3 report shows that Anjoy's distributor count has reached 1,799, with distribution channels accounting for nearly 80% of total revenue. In other words, Anjoy's 'rural encirclement of cities' channel strategy has been validated. The surprise attack in products and channels brought Anjoy not only increased market share but also the confidence to challenge the giants. After completing its product and channel layout, Anjoy proactively initiated price wars during the downturn of the frozen food industry to further expand market share. Then, riding the wave of consumption upgrades, it raised prices through product upgrades. By then, it was too late for peers to catch up. Hidden Worries: Declining Profitability Despite years of dormancy and achieving the miracle of a 'ten-bagger in three years' with excellent fundamentals, Anjoy has recently faced continuous reductions by major shareholders. In September this year, Anjoy's largest shareholder, Guoli Minsheng, reduced its stake from 40% to 30%, and the fifth largest shareholder, Allianz Global's Allianz China A-share Fund, reduced its holdings by 1.5858 million shares. At the same time, Anjoy's key figures, General Manager Zhang Qingmiao and Deputy General Manager Huang Qingsong, have also reduced their shares multiple times. Deputy General Manager Huang Qingsong was even criticized by the Shanghai Stock Exchange for illegal share reduction. The reason behind this is that Anjoy's profitability is declining. Reviewing financial reports, it is not difficult to find that Anjoy's return on equity (ROE) fell from 19% in 2020 to 14% in 2021. By quarter, the single-quarter ROE also shows a downward trend. In 2022, Q1/Q2/Q3 were 2.88%, 2.10%, and 2.02%, respectively. In the past, Anjoy's ROE growth was mainly driven by net sales margin, but currently, Anjoy's net sales margin has shown weakness. Although Anjoy's single-quarter net sales margin in Q3 this year reached 8.54%, a year-on-year increase of 4.91%, compared quarter by quarter, it failed to reach Q2's 8.72% and Q1's 8.96%. The gross margin shows the same trend. From Q1 to Q3 2022, Anjoy's sales gross margin fell from 24.2% to 21.06%. The reasons behind this are, on the one hand, the frozen food industry itself is a hard business, susceptible to upstream raw material price increases. On the other hand, Anjoy's dish products business, mainly pre-made dishes, has a low gross margin that drags down overall profitability. From the revenue structure, Anjoy's main revenue contributor is still surimi products, accounting for about 33%. Although the revenue growth of dish products is significant, its gross margin in 2021 was only 14%. On the other hand, hidden worries also exist in specific businesses. Frozen food often has many SKUs and is easily imitated. Sanquan and Synear have contributed to a 'category melee' around youtiao, zongzi, dumplings, wontons, and pumpkin pies in previous business wars. The experience of predecessors verifies that the product threshold in the frozen food industry is not high. Most later players rely on rapid imitation and price advantages to capture consumer minds. Anjoy is no exception, with over 300 frozen food categories, indeed higher than peers in quantity. But this also caused Anjoy's inventory problems. In 2020, Anjoy's inventory volume increased by 50.17% year-on-year to 84,900 tons. By the end of 2021, the inventory of major products was rising, especially the inventory of dish products, which increased by nearly 90% compared with the previous year. In addition to surging inventory, Anjoy's home base—the hot pot ingredient market—is also highly competitive. Although the hot pot ingredient market is an increment for frozen food, according to a research report by Guolian Securities, its market fragmentation remains strong. The top five frozen hot pot ingredient companies in the domestic market are Anjoy, Haixin, Haihabang, Huifa, and Shenglong. Anjoy only holds about 5% of the market share, while the second-ranked Haihabang has reached 4%. In recent years, Anjoy has tried to optimize its product structure and move towards high-end. For example, it launched 'fresh-lock packaging' and 'delicate packaging', but these 'arbitrage-style innovations' at the product end do not have moat advantages. Because after Anjoy proposed the concept of 'fish ball fresh-lock', brands including Sanquan, Haixin, and Huifa quickly followed. In essence, Anjoy is not enjoying the dividends of so-called product innovation, but like early Sanquan, it relies on the cost effect of economies of scale. An undeniable fact is that frozen food is such a hard business that relies on scale. Even after surpassing the leader, Anjoy still finds it difficult to firmly sit on its 'iron throne'. Changing Fate: The Imperfect Pre-made Dish Business After realizing the limitations of the industry, like most frozen food leaders, Anjoy bet on the pre-made dish business to start a second growth curve. Judging from this year's Q3 financial reports, frozen food companies with the 'pre-made dish concept stock' label have undoubtedly seen their performance rise. Haixin Food's Q3 profit surged 274.68%, and the pre-made dish business has become a 'lifeline'. Although it has not yet turned losses into profits, Huifa Food still regards pre-made dishes as a key engine for its performance growth. Looking at the pre-made dish layout of frozen food companies, Anjoy is particularly aggressive in strategy, carrying the important mission of 'creating another Anjoy'. Currently, the strategies for frozen food companies to enter pre-made dishes can be roughly divided into three categories: • One is OEM, where frozen food companies integrate the upstream supply chain themselves. • One is mergers and acquisitions, where they acquire upstream enterprises to leverage raw material advantages. • One is self-production, which involves building the entire industry chain from R&D, production to branding. Anjoy's strategy is to have it all. From the self-produced 'Anjoy Kitchen' to the M&A route with Xin Hongye and Xin Liuwu, to the OEM model 'Frozen Products Gentleman', Anjoy's layout in pre-made dishes covers almost all current industry strategies. Objectively speaking, Anjoy's main advantage in pre-made dishes is actually 'channel synergy'. At the investor communication meeting, when answering the question about the composition of 'Frozen Products Gentleman' distributors, Anjoy stated that 'traditional Anjoy distributors of hot pot ingredients or pastries' are the largest and highest proportion customer group in the channel expansion of Frozen Products Gentleman. And these distributors are also the 'core main force' in Anjoy's channel system. But even with channel advantages, the pre-made dish market is still in the education stage. According to 2021 financial data, the gross margin of dish products is only 14%. How to make the 'core main force' truly earn money from pre-made dishes still tests Anjoy's B-end operational capabilities. In addition, on the C-end, how to accurately grasp consumer needs and produce hit products places higher demands on Anjoy's product R&D capabilities. After all, compared with the arbitrage-style innovation of frozen products, the profoundness of Chinese culinary culture and the complexity of cuisines mean that although the trillion-yuan pre-made dish market has broad prospects, it is indeed an imperfect business because consumer tastes are changing rapidly. How to create another Anjoy? This is the new proposition facing this frozen food leader after becoming No.1. Whether the aggressive pre-made dish strategy can be the only solution is a question that no one can answer at present.