Click to read the original article for details "Spicy strip leader" Weilong has pressed the "restart button" on its IPO process. According to documents updated by the Hong Kong Stock Exchange on June 27, Weilong has passed the listing hearing. This leisure food giant lurking underwater is only one step away from listing. Weilong's journey has been full of twists and turns; this is its second time passing the listing hearing. Previously, it submitted prospectuses twice in May and November last year, but the IPO ultimately did not materialize within the six-month validity period stipulated by the HKEX. Future Consumer learned from an investor that Weilong's previous IPO suspension was mainly due to poor market conditions. Compared to a year ago, Weilong's planned fundraising amount has significantly shrunk. According to reports, this IPO plans to raise $500 million, only half of the $1 billion rumored in the market when it first filed last year. However, this has not overshadowed capital's enthusiasm for the company. At the end of March last year, Weilong completed a Pre-IPO financing of $549 million, which was also its only external financing in 21 years since its establishment, with a valuation exceeding RMB 60 billion at that time. It remains to be seen how much recognition Weilong will receive in the capital market through this IPO. Compared to a year ago, market sentiment is even more depressed. According to East Money Choice, the Shenwan Leisure Food Index has fallen about 20% over the past year. The only good signal may be that its leading position could bring a valuation premium ahead of the industry. Over the past two decades, Weilong's industry position in the leisure food sector is unparalleled: it holds two trump card categories with annual retail sales exceeding RMB 1 billion, and four major products with annual sales exceeding RMB 500 million, including signature large/small gluten spicy strips, as well as new products like konjac snacks and Kiss & Burn. Being able to survive such a long cycle is rare in the entire consumer goods market. When the prospectus was first disclosed in May last year, Future Consumer interpreted Weilong's model and generated the following core viewpoints: _ _1. Weilong is not young anymore, but its profitability is still first-class in the industry; 2. After three years of running new categories, some have become "dark horses," while others have performed poorly; 3. Online and direct sales are new highlights, but they need to handle the conflict between online distributors and brand self-operated channels; 4. There is still a gap to cross between rigid demand and high frequency for leisure food brands. __ The updated prospectus mainly supplements the 2021 operating situation. Clearly, the growth curve continues to rise. Compared to the previous two years, Weilong's total revenue increased to RMB 4.8 billion in 2021, with a compound annual growth rate of 19.1% over the past three years. Retail terminals also expanded from 570,000 in 2020 to 690,000 in 2021. But the prospectus also reveals some challenges this giant is facing. In 2021, food and beverage companies generally experienced a wave of supply chain price increases. Some consumer goods companies with brand power chose to raise prices to cope with this pressure, but Weilong is clearly not among them. The gross margin of seasoned flour products, mainly the trump card spicy strips, fell by 1.7% in 2021, which also dragged Weilong's overall net profit margin down by 2.7% year-on-year to 17.2%, with adjusted net profit increasing by less than RMB 100 million compared to last year. Spicy strip growth continues, and the "double high" gross and net margins still hold, but the signs of slowing growth are becoming more apparent. Weilong needs to step out of its product comfort zone, find more potential bestsellers, and more importantly, make more achievements in new channels such as online and direct sales. The following is Future Consumer's interpretation of the company's prospectus in May 2021: This may be the company that young people can understand most easily, and it can be called a generation's snack memory. The prospectus shows that 95% of Weilong's users are under 35 years old, namely the post-80s, post-90s, and post-00s groups, and the largest user group is those aged 25 and below, mainly post-00s or even younger. Young users have always been the favorite of consumer brands, and leisure food brands with such high concentration as Weilong may be rare. This may also explain why a large number of top-tier star institutions rushed in before the IPO. Future Consumer previously reported that before filing, Weilong completed a Series A financing of $549 million on April 1, 2021, attracting investments from CPE Yuanfeng, Hillhouse, Tencent, Yunfeng Capital, Sequoia Capital China, Hosen Capital, and Oceanpine Capital. Weilong is not the scarcest target in the market—the leisure food market is not short of brands; it has always been a fragmented and chaotic market. According to Frost & Sullivan, by retail sales, the market share of the top 15 leisure food companies in China in 2020 was 22.4%. Increasing the concentration of leisure food brands is a long and arduous task. (Leisure food market concentration, according to the prospectus) However, the more you look at the sub-sectors of leisure food, the higher Weilong's scarcity indeed becomes. The above report states that by retail sales, Weilong's market share in China's leisure food market, spicy leisure food market, and seasoned flour products market in 2020 was 1.2%, 5.7%, and 13.8%, respectively. In the latter two markets, Weilong's market share is several times that of the second place, and both exceed the sum of the market shares of the 2nd to 5th companies. (Seasoned flour products market concentration, according to the prospectus) In short, Weilong, which is not prominent in the overall leisure food market, has firmly secured the top position in spicy leisure food. This is Weilong's most brand-recognizable barrier and an important pricing reference for secondary market investors. But compared to a large number of listed companies in the secondary market, what is Weilong's true quality? 1 A "money-making machine" that doesn't like to spend Weilong is not young anymore, but its profitability is still first-class in the industry. According to the prospectus, Weilong's net profit margins for 2018, 2019, and 2020 were 17.3%, 19.4%, and 19.9%, respectively. According to Frost & Sullivan, the average net profit margin of China's leisure food industry in 2020 was about 10%. In other words, Weilong's profitability is twice the industry average. We selected five major listed leisure food companies for further comparison: Qiaqia, Yanjin Shop, Three Squirrels, Bestore, and Ganyuan Foods. Their net profit margins in 2020 were 15.2%, 12.35%, 3.07%, 4.36%, and 15.27%, respectively. Weilong's net profit performance is still better overall. Is Weilong's gross margin higher? Not necessarily. According to the prospectus, Weilong's gross margin in 2020 was 38%, roughly equivalent to Ganyuan Foods, which had a gross margin of 40.08% in 2020; better than Qiaqia, Three Squirrels, and Bestore (with gross margins of 31.89%, 23.9%, and 30.47%, respectively), but worse than Yanjin Shop's 43.83% in the same period. Note: Gross margin performance of major listed leisure food companies from 2018 to 2020, produced by Future Consumer A decisive factor is lower selling expenses. In 2020, Weilong's distribution and selling expenses were RMB 371 million, accounting for 9% of revenue; in the same period, Qiaqia, Three Squirrels, Bestore, Yanjin Shop, and Ganyuan Foods had selling expenses as a percentage of revenue of 9.76%, 17.48%, 19.89%, 24.06%, and 17.48%, respectively. With a gross margin level on par with the industry on one side and lower selling expenses on the other, Weilong's profitability is thus cultivated. It can be seen that Weilong's marketing strategy is indeed relatively conservative. In 2020, promotion and advertising expenses were only RMB 46.7 million, while Three Squirrels spent as much as RMB 961 million on platform services and promotion in the same period. In other words, Three Squirrels' revenue in 2020 was 2.4 times that of Weilong, but its promotion-related expenses were as much as 20 times Weilong's. However, Weilong's gross margin has also improved significantly over the past three years, further boosting its profit space. In 2019 and 2020, gross margins achieved year-on-year growth of 31.3% and 24.8%, respectively. This is mainly related to two factors: price increases and product mix adjustments. According to the prospectus, Weilong raised prices for some seasoned flour products and some soy products in 2020. At the same time, Weilong also adjusted the product mix of vegetable products, soy products, and other products, discontinuing some low-margin soy products and other products. Successful price increases indicate that Weilong's brand is relatively strong, including Weilong's distribution model of "payment before delivery" for distributors. But price increases obviously cannot be used indefinitely; Weilong needs to tell new stories to the capital market in terms of products and channels. 2 New stories beyond spicy strips: vegetable products and e-commerce Weilong's story began with spicy strips, which are also their product pillar, classified under seasoned flour products, mainly including large/small gluten, large/small spicy sticks, Kiss & Burn, and other products. These products contributed 78.6%, 73.1%, and 65.3% to total revenue in 2018, 2019, and 2020, respectively. While revenue maintained growth, the revenue contribution ratio showed a declining trend year by year. New categories are rising. Three years ago, "vegetable products" and "soy products and others" were on the same starting line, but three years later, the market performance of the two categories has greatly diverged. Vegetable products, including konjac snacks and seaweed, have become a "dark horse," with revenue contribution rising from 10.8% in 2018 to 28.3% in 2020, and sales revenue nearly quadrupling in three years. In the first quarter of this year, vegetable products grew 147.6% compared to the same period in 2020. However, soy products and other categories performed poorly overall, with both revenue and revenue contribution declining over the past three years. Among them, revenue from this category fell from RMB 290 million in 2018 to RMB 260 million in 2020. Note: Weilong's gross profit and gross margin by category over the past three years, from the prospectus At this point, Weilong has two categories with annual revenue exceeding RMB 1 billion (seasoned flour products at RMB 2.69 billion, vegetable products at RMB 1.168 billion), and four products with annual revenue exceeding RMB 500 million (spicy strips, spicy sticks, etc.), indicating that they have found a certain successful pattern for category expansion. On the other hand, Weilong's channels are still relatively single, with the vast majority still offline. According to the prospectus, as of the end of 2020, Weilong cooperated with 1,900 distributors to open 570,000 retail terminals. By sales, offline channels contributed 90.7% of revenue as of the end of 2020, and these mainly relied on offline distributors for sales, with offline direct sales or other forms of offline sales accounting for a very low proportion. Note: Weilong's sales and proportion by channel, according to the prospectus Weilong indeed performs outstandingly in penetrating lower-tier markets. According to the prospectus, among the 570,000 retail terminals covered, about 70% are located in lower-tier markets. Lower-tier cities are also the largest market for spicy leisure food. According to the prospectus, sales in lower-tier cities accounted for 63.3% of the total in 2020, and the compound annual growth rate in lower-tier cities over the next five years will reach 11.8%, better than the 6.9% and 8.1% growth rates in first- and second-tier cities. In recent years, Weilong has also changed its distributor strategy, implementing a strict distributor management system. From the beginning of 2018 to the end of 2019, the number of Weilong distributors increased significantly from 982 to 2,592, a clear leap. But in the past 2020, the number of Weilong distributors decreased by a net 642. In the future, this optimization may continue. This is necessary and urgent. Currently, Weilong's performance in e-commerce direct sales is average, and it is still a newcomer. Revenue from online self-operated stores accounted for only 3.7% of total revenue in 2020, which is even lower than the 3.9% in 2018. This is a number that needs improvement, after all, e-commerce is the fastest-growing area in the entire leisure food sector. In addition, expanding online direct sales channels is also helpful for new product development and testing. Weilong has previously tested new products such as spicy pork floss cakes, spicy strip hot pot, and gift boxes online. But this requires Weilong to handle the conflict between online distributors and brand self-operated channels—to make online direct sales successful, distributor optimization is a necessary prerequisite. 3 Category competition is more about frequency competition Supported by a population of over 1.4 billion, the leisure food market is huge, but the categories are also relatively messy. Leisure food mainly includes two billion-level categories: nuts and seeds, candy/chocolate and preserved fruits, as well as multiple hundred-billion-level categories such as crispy snacks, bread and pastries, biscuits, dried meat and jerky, seasoned flour products, vegetable products, and dried tofu products. Three Squirrels' nuts, Qiaqia's melon seeds, Taoli Bread's bread and pastries, Weilong's spicy strips, and Bestore's jerky... Leisure food giants have significant business proportions in their respective advantageous categories, but in new category development, they are inevitably squeezed by competitors. Investors may face choice difficulty. In fact, the secondary market gives different leisure food valuations with high volatility. According to Wind, as of the close on May 13, the CITIC Leisure Food Index PE (TTM) was 32.29 times, but excluding loss-making targets, the PE (TTM) of the 17 listed companies in the index ranged from 2.9 to 72.4 times, showing clear market polarization. Consumers also face similar difficulties; it is hard to find a highly recognizable brand in leisure food. Consumption frequency may be a better reference indicator. According to Three Squirrels' prospectus, in 2018, the proportion of online consumers who made 3 or more purchases within the year was 15.3% overall, with most making 3 purchases, and only 3.1% making more than 5 purchases. Note: Proportion of online consumers with multiple repurchases for Three Squirrels from 2016 to 2018, chart from Ping An Securities According to a survey of over 2,000 people by Frost & Sullivan, as many as 81.9% of respondents said they consume leisure snacks at least once a week, and 34.6% said they consume at least 2-3 times a week. In other words, there is still a gap to cross between rigid demand and high frequency for leisure food brands. Weilong has a large post-00s user base in the leisure food industry, indicating that this brand can continuously occupy the taste memories of younger people and children at a very early stage. But its next challenge is how to convert this memory into sustained repurchase habits. Source: 36Kr (ID: wow36kr)