New Stocks Outlook | Liuli Orchard: Three Consecutive Increase in Performance, Hidden Concerns Behind Why Did the Gross Profit Margin of Fist Products Decrease for Three Consecutive Times?

"Are you okay? If you are, then eat Liuliu plum." This once catchy slogan, coupled with Yang Mi's facial expressions, has now led the Liuliu plum parent company to embark on its journey to go public. On April 16, Liuliu Orchard Group Co., Ltd. (hereinafter referred to as Liuliu Orchard) submitted its prospectus to the Hong Kong Stock Exchange, planning to list on the main board, with CITIC SEC and Guoyuan as joint sponsors. This comes after Liuliu Orchards withdrawal of its A-share listing application in 2019, once again making a push into the capital market. According to public reports, after Liuliu Orchard disclosed its A-share prospectus in 2019, concerns were raised in the market about its single product structure and dependence on distributors. Has the operational risk for the company been alleviated this time around? A glimpse into this may be found in the prospectus. Behind three consecutive years of revenue growth Main product gross profit margin on a downward trend The prospectus shows that Liuliu Orchard is the leading enterprise in China's fruit snack industry and a leader in plum products. According to data from Frost & Sullivan, by 2024, the company ranked first in retail sales in China's fruit snack industry, with a market share of 4.9%, and ranked first in China's natural jelly industry (by retail sales) with a market share of 45.7%. The outstanding market ranking has also led to good financial performance. From 2022 to 2024, Liuliu Orchard's revenues were approximately RMB 1.174 billion, RMB 1.322 billion, and RMB 1.616 billion respectively; during the same period, the annual profit and other comprehensive income were approximately RMB 68.432 million, RMB 99.231 million, and RMB 148 million, respectively. Looking at the revenue sources, dried plum snack products are the main revenue pillar for Liuliu Orchard. As of December 31, 2024, this product accounted for 60.3% of the current revenue. In addition, in 2019, Liuliu Orchard introduced plum frozen products to seek a second growth curve. From 2022 to 2024, plum frozen products contributed 19.6%, 23.5%, and 25.4% of the revenue respectively, with the average selling price per kilogram of plum frozen products decreasing from RMB 27.2 in 2022 to RMB 18.6 in 2024, resulting in an increase in sales volume from 8.5 thousand tons in 2022 to 22 thousand tons in 2024. However, the gross profit margin of the main products has shown a downward trend. The gross profit margin of Liuliu Orchards dried plum snack products decreased from 39.6% in 2022 to 32.1% in 2024, and the gross profit margin of its western plum products decreased from 36.7% in 2022 to 32.4% in 2024. The gross profit margin of the new product category plum frozen also showed a slight decrease compared to 2023. In terms of specific products, the dried plum snacks focused on "volume over price," with average selling prices of RMB 39.4/kg, RMB 38.7/kg, and RMB 35.2/kg respectively; and sales volumes of 20.5 thousand tons, 21.7 thousand tons, and 27.6 thousand tons respectively during the same period. The key issue is that Liuliu Orchard is predominantly focused on plum products, reaching the ceiling of the vertical market segment. During the reporting period, plum products accounted for an average of 92.28% of the company's main business revenue, with less than one tenth attributed to fruit-dried and other products. This also makes the company's performance more significantly affected by fluctuations in upstream raw materials. As of December 31, 2024, raw material costs accounted for 74.6% of the total costs. From 2022 to 2024, Liuliu Orchard's raw material costs continued to rise, reaching RMB 489 million, RMB 576 million, and RMB 771 million, representing 41.7%, 43.5%, and 47.7% of the total revenue during the same periods. The increase in raw material costs may be one of the reasons for the slight decline in the company's main business gross profit margin. In terms of channels, the company's direct sales have gradually risen, replacing distribution as the primary sales channel. Direct sales contributed revenues of RMB 3.0 billion, RMB 4.40 billion, and RMB 9.57 billion respectively, accounting for approximately 25.5%, 33.3%, and 59.2% of total revenue; while distribution contributed revenues of RMB 8.74 billion, RMB 8.82 billion, and RMB 6.59 billion respectively, representing about 74.5%, 66.7%, and 40.8% of total revenue. It is worth noting that Liuliu Orchard faces the risk of depending on top customers. From 2022 to 2024, revenues from the top five customers accounted for 12.7%, 14.2%, and 33.1% of total revenue, while revenues from the largest customer accounted for 4.6%, 3.4%, and 14.1% of total revenue. Depending on customers has also led to an increase in accounts receivable and a lengthening of turnover days. As of December 31, 2022, 2023, and 2024, Liuliu Orchard's trade accounts receivable and bills receivable were RMB 79 million, RMB 81 million, and RMB 163 million respectively, with trade accounts receivable and bills receivable turnover days of 22.6 days, 23.4 days, and 28.9 days respectively. The hidden concerns over maintaining high growth Plum frozen products may become the second growth curve Looking back at the growth path of the leading leisure snack company, it is nothing but "single product - multiple categories - full category + full channel". Currently, Liuliu Orchard has achieved growth through plum products. To maintain high growth, it must expand its product categories. Plum frozen products are a successful case of Liuliu Orchard's product diversification. Currently, plum frozen products also have the highest gross profit margin for Liuliu Orchard, reaching 49.2% in 2023, but slightly decreasing to 47.8% in 2024. In terms of the competition in the jelly market, as a traditional jelly brand, Xi Zhi Lang occupies nearly half of the market share and has opened a noticeable gap with the second-ranked Want Want China and the third-ranked Liuliu Orchard. Liuliu Orchard, ranking third, introduced the "plum frozen" series as a preliminary success in the "second growth curve". However, the revenue share of plum frozen products in its main categories is still only 25.4%. How to expand the plum frozen segment will be a problem that Liuliu Orchard needs to solve quickly. Furthermore, Liuliu Orchard also aims to replicate the success of plum frozen products in other diversification cases. For example, in February of this year, Liuliu Orchard held a spring new product launch in Hefei, introducing natural plum essence soft candy "Damai Da" in five flavors including grape, orange, and mango. According to Liuliu Orchard's plan, it will also launch plum products in the seasoning field.taste seasoning.However, the products of Liuliu Orchard also face competition from major snack giants such as Bestore Co., Ltd., Three Squirrels Inc., and Shanghai Laiyifen, who have entered the dried fruit and preserved fruit race by launching plum product lines. Liuliu Orchard will face competition pressure from snack giants in all categories. In addition, fluctuations in raw material prices and seasonal factors will continue to have a significant impact on the company. The prospectus reveals that from 2020 to 2024, the price of Chinese green plum has increased from 2400 yuan/ton to 2600 yuan/ton; on the other hand, the price of imported plums used to make Liuliu Orchard's plum products has also increased from 16200 yuan/ton in 2020 to 20700 yuan/ton in 2024 due to adverse weather conditions and reduced production. Liuliu Orchard stated in the prospectus that although the company strives to purchase raw materials from different geographic regions to reduce the risk of rising raw material costs, it cannot completely eliminate this risk. In cases of severe raw material shortages, the company may be forced to purchase raw materials at inflated prices or seek lower-quality alternatives, both of which may lead to a sharp increase in production costs and a decrease in product quality. Perhaps for the purpose of stabilizing raw material costs, the funds raised this time will primarily be used to expand the production capacity of dried plum snacks, plum frozen products, and product ingredients; increase brand awareness, expand sales networks, and explore international markets; recruit research and development personnel and advance research and development plans; and use for operating funds and general corporate purposes.