Preview of US-listed stocks | Limited production capacity hampers development, Mingdong Hong (ORIS.US) performance remains robust despite the plan of existing shareholders to sell their shares.

After the failed attempt to list on the main board of the Hong Kong Stock Exchange in 2021, Fujian Dong Hong Tea has finally announced its latest news after more than two years of rest and recuperation. However, the chosen listing venue this time is the US stock market. It is learned that Fujian Dong Hong Tea submitted its prospectus to the SEC on October 13th, applying for listing on NASDAQ under the code "ORIS". It is worth noting that the company had initially submitted a confidential application to the SEC on March 22, 2023. In terms of performance, Fujian Dong Hong Tea has shown steady development. Its revenue in 2021 and 2022 was $22.368 million and $24.306 million respectively, with net profits of $9.383 million and $11.853 million in the same period. By the first half of 2023, its revenue reached $15.071 million, a year-on-year growth of 2.08%, but net profit declined by 4.53% to $8.499 million. However, what is more noteworthy than its performance is Fujian Dong Hong Tea's share issuance plan. There have been many reports in the market stating that Fujian Dong Hong Tea plans to issue 4 million shares at $4 per share in its IPO, aiming to raise $16 million. This understanding is somewhat deviating from the company's actual issuance plan. According to the prospectus, Fujian Dong Hong Tea plans to issue 3 million shares at a price of $4 each (excluding the overallotment option), raising $12 million in this IPO. As for the remaining 1 million shares, they are actually being sold by existing shareholders. The sale of shares by existing shareholders is conditional on Fujian Dong Hong Tea completing this offering, and the sale price will be determined based on market conditions. This sale plan will be valid within 180 days after the completion of the listing, and the proceeds from the share sale will belong to the selling shareholders. The fact that existing shareholders have already planned to sell their shares before a successful listing can be seen as a sign of lack of confidence in the company's future development to some extent. Based on similar cases in the past where existing shareholders sold their shares, it is often difficult for companies to raise their valuations during the IPO, and the stock price performance after listing is mostly unsatisfactory. Is Fujian Dong Hong Tea, with its healthy performance, an exception? The answer can be found in the company's prospectus. Stable growth in sales volume drives continuous revenue growth Fujian Dong Hong Tea is a comprehensive tea product supplier in China. The company has been engaged in tea production and sales since March 2014, and has been deeply involved in the tea industry for over 9 years. Through years of accumulation, Fujian Dong Hong Tea has completed vertical integration of its business, covering tea planting, processing, and sales of tea products to Chinese tea operators and end customers. This vertical integration business model sets Fujian Dong Hong Tea apart from other players in the industry, as most companies in the industry are mainly engaged in one or more links in the value chain of primary and refined tea production, processing, and sales. Fujian Dong Hong Tea covers both upstream and downstream of the industry. In terms of product categories, Fujian Dong Hong Tea's main tea products include primary tea (white tea and red tea) and refined white tea and red tea. Among them, primary white tea has become the core product of Fujian Dong Hong Tea. From 2021 to the first half of 2023, primary white tea accounted for 81.3%, 83.2%, and 83.7% of the company's total revenue respectively. According to the prospectus, Fujian Dong Hong Tea's tea gardens are located in Tuorong County, Ningde City, Fujian Province. Up to now, the company has signed contract management and planting rights agreements for tea gardens covering approximately 7.212 million square meters in Fujian Province. According to a report by CITIC Group, Fujian accounted for 67.2% of the total production of white tea in mainland China in 2021. Clearly, Fujian is the location of China's white tea industry cluster. It is worth noting that in 2020, Fujian Dong Hong Tea ranked tenth in Ningde City with a tea garden area of 5.136 million square meters, and currently the tea garden area has increased by more than 2 million square meters, indicating that Fujian Dong Hong Tea's market size has continued to expand, and its industry ranking may have reached a new level. In terms of performance, the growth of Fujian Dong Hong Tea's revenue is mainly driven by the increase in tea sales volume. According to the prospectus, the average selling prices of processed white tea and red tea remained stable in 2021 and 2022, but the sales volume of processed white tea and red tea increased by 8.59% and 1.1% respectively in 2022, leading to an overall revenue growth of 8.66% for the company in 2022. The stable selling prices of its main products have enabled Fujian Dong Hong Tea to maintain a consistently high gross profit margin. In 2021 and 2022, its gross profit margins were 51.33% and 52% respectively. Based on revenue growth, stable gross profit margins, and cost reduction and efficiency improvement measures taken by the company, Fujian Dong Hong Tea's net profit increased significantly by 26.32% in 2022. However, the situation has changed slightly in the first half of 2023. In terms of sales volume, the sales of Fujian Dong Hong Tea's various products have steadily increased. The sales volume of processed white tea, red tea, and refined tea increased by 19.82%, 0.96%, and 1088.3% respectively (the sharp increase in sales volume of refined tea is mainly due to the low base). However, except for a significant price increase in refined tea, the prices of Fujian Dong Hong Tea's main products, processed white tea and red tea, decreased by 13.89% and 7% respectively, which dragged down the growth in total revenue from sales volume. Therefore, the company's revenue only increased by 2.08% in the reporting period. It is worth noting that although the prices of its main products decreased, Fujian Dong Hong Tea maintained a relatively stable gross profit margin of 61% in the first half of 2023 by increasing the sales volume of refined tea, compared to 61.76% in the same period of 2022. However, due to the increase in sales and marketing expenses, financial costs, and listing expenses, the net profit of Fujian Dong Hong Tea decreased by 4.53% to $8.499 million. Looking at the balance sheet, Fujian Dong Hong Tea's asset structure is excellent. As of June 30, 2023, the company's total assets amounted to $62.922 million, with total liabilities of $4.438 million, resulting in a debt ratio of only 7.05%. About half of the total assets of $62.922 million consist of cash and cash equivalents. The outstanding balance sheet is directly related to Fujian Dong Hong Tea's high profitability. In the first half of 2021 to 2023, Fujian Dong Hong Tea's net profit margins were 41.95%, 48.77%, and 56.4% respectivelyBehind the high profitability lies the vertical industrial chain layout of Min Dong Hong.The red and white tea market demand is steadily growing, but the limited production capacity is restricting the company's development. If we consider the steady growth of Min Dong Red in the tea industry's development trend, we can see that the company's expansion relies on the continuous prosperity of the tea industry. According to the Zhushi Consulting report, China has been the world's largest tea producer since 2006. Specifically, the tea production in China has increased from approximately 2.2766 million tons in 2015 to approximately 2.9177 million tons in 2020, with a compound annual growth rate of about 5.1%. It is expected that China's tea production will increase to approximately 3.5118 million tons by 2025, with a compound annual growth rate of 3.8% from 2020 to 2025. The tea industry is still experiencing stable growth. White tea and red tea are the two major growth engines in China's tea industry. According to Zhushi Consulting data, due to the expansion of the white tea consumer market and improvements in agricultural technology, the market size of white tea in China increased from 22,000 tons in 2015 to 55,700 tons in 2020, with a compound annual growth rate of 20.4%. It is expected that the market size of white tea will continue to grow at a rate of 18.2% from 2020 to 2025. The compound annual growth rate of the red tea market from 2020 to 2025 is 10.4%. Although lower than the growth rate of the red tea market, both are significantly higher than the overall tea market growth rate. It is under the long-term stable growth trend of the white and red tea market demand that the prices of white tea and red tea have been steadily rising based on the demand growth. Market players can achieve steady growth in income and net profit by increasing sales volume and controlling costs. In its prospectus, Min Dong Red stated that in recent years, the company has been unable to meet all the purchase orders from customers. The unaccepted purchase order amounts for 2021, 2022, and the first half of 2023 were $12.69 million, $14.26 million, and $6.88 million, respectively. It can be seen that the main problem currently faced by Min Dong Red is inadequate production capacity. Despite having a debt-to-equity ratio of only 7%, the company has not leveraged this to expand its scale. While this reflects the company's cautious style, it is relatively rare in the business world. Sometimes, seizing opportunities in the industry and making substantial investments is the key to becoming a industry leader. In terms of the overall competitive landscape of the industry, as of 2020, there were over 50,000 players in the Chinese tea industry, and the market competition was fierce and sufficient, with the majority being small and medium-sized enterprises. With a tea plantation area ranking among the top ten in Ningde, one of Fujian's largest tea production cities, Min Dong Red has achieved a certain scale. In order to break free from the shackles of market competition and become an industry leader, Min Dong Red needs to comprehensively enhance itself, including industry-specific knowledge, scalable and mechanized production capabilities, management capabilities, cost control capabilities, branding capabilities, and continuously expanding high-quality tea plantation scale. Overall, against the backdrop of sustained and stable growth in the demand for white and red tea markets, Min Dong Red has achieved high profitability through the layout of its vertical industrial chain. In a situation where the prices of its main products remain stable, the company has achieved steady performance growth through increasing sales volume. Furthermore, the company has a high-quality asset structure, but its biggest problem currently is the inadequate production capacity. If Min Dong Red successfully lists on Nasdaq this time, the funds raised are expected to accelerate the expansion of Min Dong Red and further enhance the company's brand, benefiting its growth. However, the specific effects still need to be continuously observed based on the performance of the company's management. The planned sale of shares by existing shareholders undoubtedly represents the biggest flaw in Min Dong Red's strong fundamentals.