Click to read the original article for details. Liziyuan, which carries the "taste of childhood" for many Chinese, is finally going public! When we were children, our wish was to grow up quickly; when we grow up, we always miss the taste of childhood. The small roadside shops we used to frequent are rarely seen now. Do you still remember the "taste of childhood"? Recently, Zhejiang Liziyuan Food Co., Ltd. ("Liziyuan") disclosed its initial public offering prospectus, planning to raise 691 million yuan. After more than two decades of ups and downs, growing from three cows to nearly one billion in revenue, this brand carrying the "taste of childhood" for many Chinese is finally making a push towards the capital market! According to the prospectus, as of November 7, 2018, Moutai Jianxin Investment had injected a total of 73.7809 million yuan into Liziyuan, and now ranks as the fifth largest shareholder with a 5.68% stake. Moutai Jianxin is a partnership partially funded by Kweichow Moutai, so roughly speaking, the invincible Moutai can also be considered a shareholder of Liziyuan. When mentioning Liziyuan, many people immediately think of the advertising slogan "Fresh and fresh, Liziyuan" from years ago. Liziyuan was established in 1994, headquartered in Jinhua City, Zhejiang Province, known as the "Hometown of Southern Dairy Cows". Its most famous product is "Sweet Milk Beverage". Liziyuan Sweet Milk was also a hugely popular drink in the 1990s, comparable to Want Want and Wahaha AD Calcium Milk, accompanying many southern children as they grew up. When we were children, coming home from school and watching cartoons with a bottle of Liziyuan Sweet Milk was one of the happiest moments of the day. Unlike most Chinese milk, Liziyuan Sweet Milk doesn't taste particularly thick, because the milk itself is very light, and Liziyuan doesn't add thickeners. Many people who grew up drinking Liziyuan milk later find Mengniu, Yili, and others too thick to accept. Whether out of nostalgia or investment value, let's take a look at this Liziyuan that carries the "taste of childhood". Labeled as "Rustic", Attempting to Change with the Launch of Internet-Famous "Stinky Milk" For over two decades, Liziyuan Sweet Milk has not undergone much packaging redesign, always maintaining the look from memory: a transparent plastic bottle with a colorful large logo plastic film. This packaging strategy that emphasizes nostalgia is not hard to understand; similar products like Want Want Milk and Wahaha AD Calcium Milk also don't change their packaging. However, as times change, these old-brand drinks have gradually been labeled as "rustic" by the market, seeming to carry a strong retro style that appears out of place with the trendy packaging of Heytea, Lelecha, and Starbucks. Earlier this year, the "rustic" Liziyuan finally had a breakthrough and experimentally launched a drink called "Stinky Milk", which, as the name suggests, is actually a durian-flavored milk product. Completely different from the classic sweet milk packaging style, Stinky Milk features a bright goose-yellow base with cute cartoon characters, clearly catering more to young people's preferences. It's worth noting that Stinky Milk also downplays the presence of the Liziyuan logo on the packaging, aiming to focus consumers' attention on the product itself rather than the brand. In terms of price, each bottle of Stinky Milk sells for about 8 yuan, slightly higher than Liziyuan's sweet milk at less than 5 yuan, and the target demographic has also shifted, likely focusing more on high-end areas in first- and second-tier cities. Earlier, Liziyuan was also bidding for this new drink because Stinky Milk's sales channels don't fully overlap with the company's previous ones. In recent years in the consumer industry, there are many examples of old domestic brands trying to keep up with fashion and shed the "old-fashioned" label. Last year, Want Want collaborated with fashion brands to launch a series of Want Want sweaters, sneakers, etc., transforming from "Li Ziming from Class 2, Grade 3" to "Trendy Want Want". Additionally, White Rabbit candy launched lipstick, Li Ning made its way to Fashion Week, and others are attempting to leave their mark in the fashion circle as old domestic brands. After all, nostalgia will eventually be exhausted, and relying solely on people's reminiscence cannot sustain performance growth in the long run. Without changing the "rustic" image, there's a high chance of being eliminated by the market. Liziyuan's innovative attempts are key steps for the company's long-term survival. Insufficient Self-Owned Production Capacity Weakens Profitability, Primary Purpose of IPO Fundraising From 2016 to 2018, Liziyuan's operating revenue was 453 million, 602 million, and 787 million yuan respectively, with corresponding net profits attributable to the parent company of 102 million, 90.17 million, and 124 million yuan. It can be seen that in 2017, the company's net profit growth declined; in 2018, revenue approached 800 million yuan, but net profit remained just over 100 million yuan, showing slightly weak profitability. During the reporting period, Liziyuan's comprehensive gross margin was 40.42%, 34.93%, and 37.45% respectively. The weak trend in gross margin significantly weakened the company's profitability. In 2017, due to insufficient self-owned production capacity, the proportion of outsourced processing products rose from 29.02% to 42.45%. Since outsourced processing products include reasonable profits and related taxes of the processing enterprises, the average unit cost increased. Additionally, prices of major raw and auxiliary materials such as milk powder and cartons also rose. From 2016 to 2018, Liziyuan's self-owned capacity utilization rates were 99.8%, 173.13%, and 170.67% respectively; it cooperated with a total of 15 contract manufacturers, with outsourced processing ratios of 37.54%, 42.82%, and 28.88% respectively. Comparing with the average gross margins of other listed dairy companies, it can be found that the industry trend over the past three years has been basically consistent, mainly due to general adjustments in raw material prices. However, Liziyuan's gross margin decline in 2017 was particularly noticeable, with insufficient self-owned capacity dragging it down. Solving the capacity issue is precisely the main purpose of this IPO. According to the prospectus, the funds raised from the IPO will be mainly used for the expansion of the "Annual Production of 104,000 Tons of Milk Beverage Production Project" in Hebi, Henan, and the "Annual Production of 70,000 Tons of Milk Beverage Production Project" in Qujing, Yunnan. After these projects are completed and put into operation, Liziyuan will add 174,000 tons of production capacity per year. It is worth noting that from 2016 to 2018, Liziyuan's sales volumes were 105,700 tons, 132,500 tons, and 162,400 tons respectively, meaning its new capacity will be twice the current market sales volume. If the production-sales ratio continues to remain close to 100%, whether its performance growth can keep up with capacity growth is worth pondering. Product and Sales Regions Are Relatively Single, Poor Risk Resistance Breaking down Liziyuan's operating revenue composition, the company's main business primarily involves selling milk beverages (i.e., sweet milk beverage series), milk-flavored beverages, and compound protein beverages, accounting for over 99% of total operating revenue. Other business revenue mainly comes from selling waste cartons, plastic packaging, and leasing self-owned properties, which has little impact on the company's profitability. From 2016 to 2018, Liziyuan's sales revenue from milk beverages was 426 million, 578 million, and 760 million yuan respectively, accounting for 94.29%, 96.12%, and 96.71% of the company's main business revenue, serving as the core source of revenue and profit, with a compound annual growth rate of 33.53%. Liziyuan Sweet Milk is a classic product that has been selling well for over 20 years, and its steady compound annual growth rate demonstrates its industry position. However, the nearly 97% revenue contribution from milk beverages indicates that Liziyuan is highly dependent on Sweet Milk. In the short to medium term, the big single product sales strategy helps the company establish brand image, quickly expand into new markets, and increase market share; however, in the long term, if market factors such as consumer preferences undergo major changes, it will have a significant impact on the company's operating performance. This is also the reason why Liziyuan launched the high-end Stinky Milk mentioned earlier. To break the single product situation, in addition to Stinky Milk, Liziyuan recently released 18 new products across 4 series at once, specifically including coffee beverages, room-temperature yogurt, and Ecolean packaged milk beverages. At the same time, Liziyuan also faces the issue of overly concentrated sales regions. As can be seen from the table above, the company's milk beverage sales in the East China region are significantly higher than in other regions, maintaining a proportion of around 70%, followed by Central China and Southwest China. Given that the Southwest region is one of the fastest-growing areas for Liziyuan's milk beverage sales, with potentially greater future development potential, the capacity expansion projects for this IPO are also located in Central and Southwest China, helping the company gradually achieve a national layout and mitigate the risk of regional concentration. Unavoidable Food Safety Hazards From the 2008 melamine incident to now, Chinese people's confidence in domestic milk is still being rebuilt. Food safety is an unavoidable topic for dairy companies. The author searched the internet and found many negative reviews about Liziyuan's product quality. For example, on Weibo, there are many complaints about diarrhea after drinking Liziyuan. According to the Jiangnan Metropolitan Daily, on the evening of November 22, 2018, a pregnant woman in Ganzhou purchased a bag of 100% fresh milk at the Liziyuan Milk Ganzhou Marketing Center, and she noticed that the production date on the packaging was November 23, making it a "premature milk". The advertising slogan "Fresh and fresh, Liziyuan" seems perhaps a bit too "fresh"? Subsequently, 153 bags of "premature" Liziyuan bagged pure fresh milk at the marketing center on Shengfotan Front Lane in Ganzhou were exposed. The manufacturer's sales representative in Ganzhou stated that the production date was marked in advance according to the distributor's requirements, but the salesperson at the marketing center said they had not made such a request to the manufacturer. In any case, such "premature milk" can lead to the market having milk that is already expired but still being sold, seriously harming consumers' rights and brand reputation. On Tmall Supermarket, there are also many feedbacks about "watered down", "unfresh dates", "milk spoiled", and "diarrhea after drinking". In the milk beverage industry, Liziyuan will also face encirclement from national large enterprises such as Yili, Mengniu, and Wahaha, as well as nationally distributed companies like Bright, New Hope Dairy, Yantang, Junyao, and Xiajin. As of the end of 2017, there were 238 milk beverage enterprises above designated size in China. In any case, it's not wrong to capitalize on nostalgia or to launch innovative products to keep up with trends, but food safety is always a hurdle that companies must overcome. Only by ensuring 100% quality and safety can Liziyuan's future capital path go further. Source: IPO那点事 (ID: ipopress) Data support: 勾股大数据