New stock preview | Behind Newman's six consecutive increases: The lucrative business of DHA cannot hide the vulnerability of "middlemen" operations.

The Hong Kong Stock Exchange disclosed on September 30th that Newman's Own Health Food Holdings Limited (referred to as "Newman's Own"), a retail distributor of DHA products for mother and baby, has applied to list on the main board of the Hong Kong Stock Exchange, with China Tong International as the exclusive sponsor. It is worth noting that this is the sixth time the company has submitted documents to the Hong Kong Stock Exchange since April 2019. It is important to note that Newman's Own, as a company in the popular "big health" track with the concept of "golden brain", has shown impressive financial data with high growth and high gross profit margins. However, even for a company like this, the road to listing has been filled with challenges. It should be noted that Newman's Own is only an importer of algae oil DHA, and the company's core product, algae oil DHA, is imported from suppliers. In addition, the company does not have a research and development or production department, relying mainly on algae oil DHA products to make money. It is evident that there is no core technological advantage, leading to a long and difficult journey for the company to list on the Hong Kong Stock Exchange. The growth of Newman's Own as a "porter" of DHA products is slowing down. The prospectus shows that Newman's Own mainly engages in the marketing, sales, and distribution of finished nutritional products in China. The company's nutritional products are sold under exclusive brands (namely "Newman's Own" and "Nemans" in English), which can be broadly divided into five main categories, including algae oil DHA, probiotics, vitamins, multivitamin nutrients, and algae calcium products. The business of Newman's Own is heavily reliant on the Newman's Own brand. Newman's Own suppliers use an OEM model to manufacture Newman's Own nutritional products and/or attach the Newman's Own brand label to the nutritional products. The algae oil DHA product is the company's main product, accounting for a large portion of revenue during the reporting period. For the 2021 financial year, 2022 financial year, 2023 financial year, six months of 2023, and six months of 2024 (referred to as the reporting period), the sales of the company's algae oil DHA products accounted for approximately 91.9%, 92.7%, 94.7%, 93.5%, and 96.2% of total revenue. According to Frost & Sullivan, the Chinese mother and baby algae oil DHA market can be further divided into products launched by international players and products launched by domestic players, with domestic players' products further divided into products using locally sourced or imported algae oil DHA raw materials. In 2023, domestic brands using imported algae oil DHA raw materials accounted for 28.5% of the total retail value of algae oil DHA products in China, with the company accounting for approximately 20.5% in 2023. In terms of the retail value of algae oil DHA products made from imported raw materials, Nemans is the largest domestic brand. It is worth noting that, as a "porter" of algae oil DHA products, the performance growth of Newman's Own has been weakening. From 2021 to 2023, the company's revenue was approximately RMB 338 million, RMB 367 million, and RMB 427 million, respectively; while the net profit for the same period was approximately RMB 120 million, RMB 88 million, and RMB 159 million, respectively. The steady growth in revenue and Newman's Own's price reductions to promote growth are not unrelated. From 2021 to 2023, the sales volume of the company's algae oil DHA products was 1.347 million units, 1.48 million units, and 1.918 million units, with a significant increase in 2023. Also in that year, the average selling price of the company's algae oil DHA products dropped significantly. In 2023, the average selling price of Newman's Own algae oil DHA products was RMB 210.7 per unit, compared to RMB 233.1 per unit in 2021, RMB 235.7 per unit in 2022, consistently above RMB 230 per unit. However, reducing prices to stimulate growth is not a one-off solution, as evidenced by Newman's Own's declining growth momentum in the first half of 2024. In the first half of 2024, the company's revenue was RMB 146 million, a 24% year-on-year decrease; and the net profit was RMB 45.281 million, a 41.4% decrease year-on-year, indicating a more significant decline. More importantly, due to the impact of price reductions, Newman's Own's profit margin has declined significantly. During the reporting period, the company's gross profit margin was approximately 73.04%, 74.38%, 75.22%, and 71.85%, respectively; while the net profit margin was approximately 35.45%, 23.83%, 37.36%, and 31.00%, respectively. Despite the decline in profit margins, the company still sees "excessive profits" from its algae oil DHA products. Observations show that the price reductions did not significantly reduce Newman's Own's inventory. At the end of 2022, the company's inventory was RMB 69.36 million, a 1.8-fold increase year-on-year, accounting for approximately 17.2% of total assets; at the end of 2023, it was RMB 62.3 million, with no significant decrease in inventory. From 2022 to 2023, the company's inventory (including milk powder products) scraped reductions and provisions amounted to approximately RMB 41.3 million and RMB 5.4 million, respectively. In this context, once there is a significant fluctuation or abnormal demand in the company's finished products, a change in customer tastes and preferences, or the introduction of new products in the market, it may lead to a decrease in demand and excess inventory of specific products, inevitably exposing the company's inventory to the risk of obsolescence and slow turnover. In addition, the company may need to scrap reductions and/or provisions for its inventory, leading to a decrease in net profit. The Chinese health products industry will continue to grow rapidly The above data may be a true reflection of Newman's Own's future performance growth, transitioning from "price-driven" to "quantity-driven". On the bright side, the Chinese health products market is expected to maintain long-term growth, providing industry companies with a broad growth space. As the Z generation becomes the main reproductive group with a more scientific approach to nutrition, the mother and baby products market is expected to become more segmented and specialized. With the growing awareness of health and the increasing demand for dietary supplements, the nutritional products market is expected to continue growing at a compound annual growth rate of 6.9% from 2023 to 2028, reaching RMB 142.1 billion by 2028. At the same time, the general market for adults and the elderly is expected to grow at a moderate pace. Among them, mother and baby DHA, as one of the main tracks in the health products market, has maintained long-term rapid development. The retail sales value of this market increased from approximately RMB 57.335 billion in 2018 to approximately RMB 112.59 billion in 2023, with a compound annual growth rate of 14.5%. It is expected that with the support of China's stable economic development, the growth momentum of the mother and baby algae oil DHA market is expected to continue, and the market size will reach approximately RMB 171 billion by 2028.444 billion yuan, with a compound annual growth rate of 8.8% from 2023 to 2028.Because the industry in which the company operates has good development prospects, NUS also revealed in its prospectus the hope of using the power of the capital market to seize market opportunities to expand its business, raise funds to expand its product portfolio, and at the same time increase brand awareness, status, and market presence. However, NUS's business model, which focuses on end sales and brand operation without engaging in product research and development, still has a strong level of uncertainty. The company chooses to cooperate with foreign manufacturers, entrusting them to produce NUS products and then importing them back to sell at a higher price domestically. As a "porter" of algae oil DHA, NUS cannot control the quality of products provided by overseas suppliers. Additionally, if overseas suppliers stop supplying, it will have a significant impact on the company. NUS also admits in its prospectus that it cannot guarantee the continuous stability of algae oil raw material suppliers, nor can it guarantee that there are no quality issues with the algae oil raw materials. The company relies on indirect supply of algae oil DHA raw materials from algae oil raw material suppliers, and any shortage, interruption, or delay in supply poses risks to the company's business, financial condition, and operating performance.