Author | Li Xin
Edit | Ding Di
The Beijing Stock Exchange is about to usher in the first share of pet food.
With the continuous improvement of living standards, more and more people have begun to keep pets, and the pet economy continues to ferment, which has also spawned a series of popular tracks such as pet food, pet grooming, and pet medical treatment.
Pet food is the largest segment of the pet industry. iResearch consulting report shows that under the characteristics of just demand, high consumption frequency, high repurchase rate, and strong user stickiness, China's pet food consumption accounted for 54.7% of pet consumption in 2020.
In 2015, Lusi shares (hereinafter referred to as "Lusi") were listed on the New Third Board. In March 2021, Luce's application for listing on the selected layer of the New Third Board was accepted. In the near future, Luce North Exchange will pass the meeting, or will become the "first share of pet food on the North Stock Exchange"
Prior to this, the Shenzhen Stock Exchange already owned pet food listed companies such as Zhongpet Shares and Petty Shares. In contrast, what competitive advantages does Luce have? What are the risks?
The R&D expense ratio is higher than that of its peers
Luce is a company focusing on research and development, production and sales of pet food, the main products include dried meat, biscuits, canned, clean bone, etc., of which the revenue from dried meat accounts for more than 80% of the year.
Luce sells its own brand products overseas and domestically through online + offline channels. Overseas markets are its main sales position, and overseas business revenue will account for 83.73% in 2020.
In terms of production mode, Luce adopts the form of "OEM + independent production". Among them, the overseas market business mainly relies on OEM, and Luce is only responsible for designing and developing new products, which are produced by foundries and directly affixed with its brand trademark for sale. With this relatively light operating model, Luce has expanded its pet food business to several countries and regions in Europe, the Americas and Asia.
The rapid development of the pet food industry in recent years has provided prerequisites for Luce's performance growth and business scale expansion.
According to Dongguan Securities Research Report, from 2015 to 2020, the size of the mainland urban pet (dog and cat) consumer market increased from 97.8 billion yuan to 206.5 billion yuan, with an average annual compound growth rate of 16.12%. At the same time, according to PwC's forecast, driven by the continuous increase in adoption rate and consumption upgrading, the pet market size will maintain rapid growth in the next five years, and the annual growth rate is expected to remain at 24%-28%. Pet food consumption, as the largest pet spending at present, is expected to have room for further improvement.
In 2020, Luce's revenue increased by 22.37% year-on-year to 420 million yuan, and the net profit attributable to the mother increased by 30.97% year-on-year to 38.77 million yuan.
It is worth noting that the net interest rate of Luce is higher than that of comparable companies such as Zhongpet shares and Petty shares, and in 2020, the net interest rates of Zhongpet shares and Petty shares are 6.78% and 8.70%, respectively, and Luce shares are 9.32%. One of the big reasons is that Luce's sales expense ratio is lower than comparable companies. Taking 2020 as an example, the sales expense ratio of Zhongpet shares and Petty shares is 8.25% and 4.25% respectively, while Luce is only 2.18%.
Figure 1: Luce revenue and year-on-year growth rate; source: Wind, 36Kr
Figure 2: Net interest margin comparison; Source: Wind, 36Kr
Figure 3: Comparison of sales expense ratios; Source: Earnings, 36Kr
In the context of the low proportion of sales expenses, Luce's research and development expense rate is much higher than that of its peers. In 2020, Luce's R&D expense ratio was 3.18%, and both Zhongpet and Petty were less than 2%. As of the end of 2020, Luce's R & D staff is 149 people, and the proportion of R & D personnel is 10.21%. The proportion of R&D personnel in Zhongpet shares and Petty shares is 4.57% and 3.29% respectively, which is much lower than that of Luce.
For pet food companies, higher R & D investment is the key to enhancing product strength, and high-quality product strength is conducive to the creation of brand image, especially in the context of increasingly fierce competition in the industry, excellent product strength will be expected to build long-term competitive barriers for Luce. At the same time, R&D investment is also one of the key assessment items of the Beijing Stock Exchange for innovative small and medium-sized enterprises.
Figure 4: Comparison of R&D expense ratios; Source: Earnings Report, 36Kr
risk
From the company's fundamentals, Luce has risks such as relying on a single product structure and declining domestic sales revenue.
Rely on a single product structure
According to the form, function and nutritional composition, the current pet food can be divided into three categories: staple food, snacks and nutritional products. According to iResearch, staple foods account for the largest share of the pet food market, reaching 75%. This means that due to the attributes of just demand and high frequency, the market plate of the pet staple food track is significantly larger than that of snacks and nutritional products.
Dismantle Luce's product structure, although it sells a variety of products such as jerky, biscuits, cans, etc., these are pet snacks, of which there is a higher dependence on dried meat as a snack to generate income. Pet snacks are not essential, and the basic production, nutrition and health care functions it covers are also easily replaced by staple foods and nutrients.
In contrast, the product layout of Zhongpet shares and Petty shares is more comprehensive. According to the annual report, the main products of Pet Shares include pet snacks, pet canned food, pet staple foods, pet supplies and health care products, accounting for 76.67%, 13.92%, 6.36% and 0.67% of revenue in 2020, respectively; pet food and pet supplies, the main products of Petty Shares include pet food and pet supplies, which are divided into animal skin bite glue, plant bite glue, nutritious meat snacks, staple foods and wet food, accounting for 33.32%, 31.92%, 21.12% and 9.21% of revenue in 2020, respectively.
Figure 5: Revenue structure of Luce products; Source: Earnings Report, 36Kr
Figure 6: Revenue structure of Zhongpet shares; source: financial report, 36Kr
Figure 7: Revenue structure of Petty's products; Source: Earnings Report, 36Kr
A single category layout, especially in the absence of pet staple food products, may limit the growth space of Luce in the future. In this context, Luce has also gradually increased the layout of the staple food business. According to the prospectus, Luce intends to use the raised funds of 79.6 million yuan for the annual output of 30,000 tons of pet staple food project.
Compared with mature markets such as the United States and Europe, the mainland pet staple food market is in a period of rapid growth. According to euromonitor statistics, the market share of the top five companies in the mainland pet staple food market in 2020 accounted for 23.2%, of which Mars (including royal, Baolu and other brands) has a market share of 11.1%, and the market share of the remaining single enterprise is relatively scattered and in a state of complete competition.
This means that in the domestic market, the pet staple food business that Luce is working on has a large incremental space. If Luce's own brand promoted in China can rely on the pet snack business to establish a strong brand influence, it will lay a good foundation for the development of its pet staple food business. However, with comparable companies achieving steady growth, Luce's domestic sales revenue has shown a downward trend.
Domestic sales revenue declined
At present, the major pet food listed companies in the mainland regard the overseas market as the main sales position. Taking 2020 as an example, Luce's overseas sales revenue accounted for 83.73%, Zhongpet shares reached 75.73%, and Petty shares reached 85.14%.
However, looking forward to the future, compared with overseas markets, the domestic pet food market is still an incremental market and has more room for growth.
From the perspective of penetration rate, according to iResearch Consulting report, in 2020, the penetration rate of pet food in the United States and Japan, where the industry has a long history, will be as high as about 90% and 88.5%, respectively, while China is only 19%.
Overseas and domestic brands have increased their domestic business by expanding their product lines and increasing sales channels. In addition to the offline channels of large supermarkets and distributors mainly concentrated in Shenzhen, Beijing, Shanghai, Chengdu, Zhengzhou and other cities, Lusi has also opened official online stores on e-commerce platforms such as Tmall and JD.com.
Even so, in the face of intensified competition in the domestic market, Luce's domestic sales continued to decline. In the first half of 2021, Luce's domestic sales revenue fell sharply by 13.57% year-on-year, while the domestic sales revenue of Zhongpet shares and Petty shares increased by 33% and 18.9% year-on-year in the same period.
Figure 8: Comparison of the year-on-year growth rate of domestic sales revenue; source: financial report, 36Kr
The domestic fragmented market pattern has intensified the competitive pressure. In the case of ensuring product strength, enterprises need to establish brand recognition through marketing promotion, and then accumulate word of mouth and form a brand effect. However, at present, Luce's promotion funds, resources, and promotion efforts are limited, resulting in its failure to establish a strong brand influence, consumer loyalty to the brand is low, it is difficult to form a high-frequency repurchase, coupled with the pet food market entrants continue, so Luce's domestic sales revenue continues to decline.
summary
Under the background of consumption upgrading, pet food is a sunrise track in a period of rapid growth, and the industry boom continues to be high.
At present, Luce is still mainly engaged in overseas market business, and more abundant overseas orders support its stable growth. However, compared with overseas, the domestic pet food market penetration rate is lower, the industry growth rate is faster, and the incremental space is greater, so in recent years, the head enterprises are actively laying out the domestic market, dividing up the industry growth dividend, and also expanding the category and obtaining more profit channels.
The high R&D investment ensures Luce's product strength to a certain extent, but in the face of fierce competition in the domestic market, Luce also needs to exert marketing to enhance brand influence. At the same time, increasing marketing investment may also affect Luce's short-term performance.
Resources:
iResearch: 2021 China Pet Food Industry Research Report
Dongguan Securities: "Big Consumption New Third Board Series Research No. 15 - Lusi Shares"
CITIC Construction Investment Securities: Pet Series Study No. 1: What are the characteristics of the overseas pet food and supplies market? 》
*Disclaimer:
The content of this article is representative of the views of the author only.
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