Wolon Foods IPO: Fierce competition in the nut market and declining market share

Our reporter Wang Jinchen

Small nuts, create a big market
.

Recently, Qingdao Wolon Food Co.
, Ltd.
(hereinafter referred to as "Wolon Food"), which started with "Daily Nuts", disclosed its prospectus and intends to be listed on the main board
of the Shanghai Stock Exchange.

As a rising star in the snack track, Wolon Foods has created a fairly good market
share of nuts.
From 2019 to 2021, the company achieved operating income of 1.
165 billion yuan, 889 million yuan and 1.
108 billion yuan respectively, and net profit attributable to the parent was 131 million yuan, 88.
7085 million yuan and 120 million yuan
respectively.

Wolon Foods' product system is mainly built
around nut foods.
During the reporting period, the revenue of its mixed nut products accounted for 92.
14%, 85.
73% and 75.
74%
of the main business income, respectively.
Although this proportion is decreasing year by year, there is still a risk
of dependence on a single product.

In this IPO, Wolon Foods intends to raise 700 million yuan, which will be used for the construction of intelligent production transformation and intelligent warehousing and logistics center, brand image and omni-channel sales network construction project and supplementary working capital
.

Market share declined

According to the data, Wolon Foods is mainly engaged in the research and development, production and sales
of its own brand snack foods.
The main products include mixed nuts, single nuts and baked goods containing nuts
.

Founded in 2016, Wolon Food is an out-and-out junior
compared to other famous snack companies.
But surprisingly, Wolon Foods quickly became popular with the "Daily Nuts" brand and ranked at the top of the mixed nut industry market in 2019 and before, becoming a rising star
in the snack market.

In recent years, the market share of Wolon Foods has declined, and its operating performance has also shown a fluctuating trend
.
Due to the impact of the new crown epidemic, its main business income in 2020 fell by 24.
23% year-on-year, and until 2021, the operating performance of Wolon Foods has not returned to the pre-epidemic level
.

According to the prospectus, from 2019 to 2021, the company's operating income is about 1.
165 billion yuan, 889 million yuan and 1.
108 billion yuan respectively, and the net profit attributable to the parent is about 131 million yuan, 88.
7085 million yuan and 120 million yuan
respectively.

In 2020, Wolon Foods not only experienced a significant decline in operating performance, but also experienced a cliff-like decline
in cash flow.
During the Reporting Period, the net cash flow generated by Wolon Foods' operating activities was approximately $174 million, -$13.
0327 million and $205 million
, respectively.

Wolon Foods said that the main reason for the sharp decline in its cash flow from operating activities in 2020 was due to the large cash expenditure in the current period
due to the year-end stock-based production and the advance reserve of some raw materials at low prices.
In this IPO, Wolon Foods intends to raise 120 million yuan to supplement liquidity
.

According to public information, from 2015 to 2021, the market scale of China's mixed nut industry as a whole maintained a rapid growth trend
.
In 2021, the market size of China's mixed nut industry will be about 11.
5 billion yuan, an increase of about 16%
from 9.
9 billion yuan in 2020.

Although Wolon Foods has seized part of the nut market, its market share has continued to decline
under the fierce industry competition.

According to the survey of the Prospective Industry Research Institute, in 2019 and before, Wolon Foods had a high
market share in the mixed nut industry.
From the perspective of the market share of China's mixed nut industry in the past three years, the top 5 enterprises include Wolon Food, Three Squirrels, Qiaqia Food, Good Shop and Hundred Herb Flavor
.

In 2019, the market share of Wolon Foods reached 13.
0%, ranking at the forefront
of the industry.
In 2021, its market share has slipped to 7.
2%, which has declined
.
Correspondingly, in 2020 and 2021, Three Squirrels and Qiaqia Food occupied a favorable position
with a market share of 10.
2% and 9.
7% respectively.

There is a risk of a single product structure

It is reported that the core product of Wolon Foods is a mixed nut product represented by the "Daily Nuts" series, and during the reporting period, the revenue of this product accounted for 92.
14%, 85.
73% and 75.
74% respectively, showing a downward trend
year by year.

However, the proportion of revenue of such products is still high, and there is a risk of
a single product structure.
Wolon Foods said that if competition in the market for such products intensifies or consumer preferences change in the future, it may adversely affect
the company's production operations and performance.

The single risk of the product structure of Wolon Foods may not be unrelated to
its low R&D expenses.
According to the prospectus, Wolon Foods has 15 R&D personnel, accounting for only 2.
04% of the total number of employees, and its R&D expense ratio is also much lower than that of
its peers.

From 2019 to 2021, the R&D expenses of Wolon Foods were 376,300 yuan, 1,576,100 yuan and 1,884,500 yuan respectively, accounting for 0.
03%, 0.
18% and 0.
17%
of operating income, respectively.
During the Reporting Period, the average R&D expense ratios of comparable companies in the industry were 0.
80%, 0.
93% and 0.
86%
respectively.

Taking 2021 as an example, the R&D expenses of Wolon Food that year were 1.
8845 million yuan, only accounting for about 0.
17% of the operating income, and the sales expenses in the same period were as high as 216 million yuan, accounting for about 19.
50% of the operating income, and the marketing expenses were about 115 times the R&D expenses.

In terms of production technology, there are only two core technologies independently developed by Wolon Foods, and although it has developed ten items such as salt-baked nuts and children's nut bars, it is still in the experimental stage
.

Corresponding to Wollon's R&D expenses are its high selling expenses
.
During the Reporting Period, the company's sales expenses were approximately RMB190 million, RMB179 million and RMB216 million respectively, accounting for 16.
34%, 20.
10% and 19.
50%
of the current operating income.
Among them, the total publicity and promotion fees and e-commerce platform fees accounted for 71.
9%, 82.
26% and 79.
73%
respectively.

Wolon Foods said that due to the increase in competing products of the company's products in recent years, the company gradually strengthened the construction and promotion of offline channels during the reporting period, and generally increased the expenditure
on publicity and promotion fees.
The e-commerce platform fee is mainly the company's promotion fee
on the e-commerce platform.

The IPO raised 210 million yuan of Wolon Foods intends to use 210 million yuan for brand image and omni-channel sales network construction projects, including online and offline sales network construction and brand image building costs
.

On the one hand, Wolon Foods has gained a certain first-mover advantage in the market by relying on the "Daily Nuts" series, but on the other hand, the company is facing problems such as single product structure, low R&D expense rate, and competition from similar brands such as Qiaqia Food and Three Squirrels
.

The reporter sent an interview letter to Wolon Foods on issues such as research and development expenses and food safety, but as of press time, no reply
has been received.

Responsible Editor: Zhang Jiazhen Review: Peng Zonglu