"The gross profit margin of Mingyue Lens Online Direct Sales into Mirrors exceeds 74%, and e-commerce channels may become the next growth point."
This article is the 97th original article of Yuanqi Capital
Analyst) Kyle
<h1>Core content</h1>
1. Why is the glasses industry "profiteering"?
2. Competitive pattern of domestic lens market?
3. Has the development of Mingyue lens encountered a bottleneck?
On March 18, Bright Moon Lens updated its prospectus and once again launched an impact on the GEM. Previously, there was only one listed company in the A-share glasses industry, but recently there was IPO news from the glasses companies, in addition to Mingyue Lenses, Vision New Materials, Shanghai Connect, Micron Group, etc. have also submitted tables to the exchange.
According to statista, a global research organization, from 2014 to 2018, the global eyewear product market grew from $112.170 billion to $125.674 billion, with a CAGR of about 2.65%. According to Euromonitor, the domestic glasses product market size increased from 64.489 billion yuan to 83.328 billion yuan in the same period, and the CAGR was as high as 6.62%, far exceeding the global level, and it is expected that the domestic glasses market will reach the 100 billion level in 2023.
<h1>The illusion of "windfall profits" in the eyewear industry </h1>
The eyewear industry consists of upstream suppliers of raw materials, midstream lens and frame manufacturers and downstream eyewear retailers. Upstream enterprises are responsible for providing resin, glass and other production raw materials and professional production equipment for the midstream, and will also provide mirror dispensing equipment for the downstream; the midstream produces lenses, frames and other products, and provides technical support and other services for the terminal; the downstream usually includes chain glasses enterprises, glasses retail stores, hospitals and e-commerce platforms, providing consumers with optometry dispensing, purchase consulting and other services.
After the production of eyewear products is completed, there are many paths from the manufacturer to the downstream, mainly in three ways: direct sales, distribution and consignment sales. Direct sales are sold directly by manufacturers to downstream chain enterprises or retail stores, or set up their own stores to sell products directly. Distribution and consignment are for some intermediate enterprises to provide a source of goods, let them help sell, the difference is that consignment sales can be sold after the product is sold and then liquidate the payment.
Since then, the eyewear industry has been labeled as a "huge profit" and has formed a deep-rooted impression in people's minds. Taking the more common 1.67 refractive index aspherical resin lenses as an example, the Mingyue Lens Prospectus shows that the gross profit margin of the company's product from 2017 to 2019 was 43.91%, 55.43% and 52.84%, the gross profit margin of the dealer was 45.03%, 38.39%, 39.72%, and the gross profit margin of the terminal retailer was as high as 88.96%, 88.47% and 88.63%.
Obviously, the impression of "huge profits" comes from retailers. The difference between the various middlemen in the sales network must be accumulated to the consumer's head, and after layers of increased weight, the final price of the glasses product far exceeds its production cost.
But in the end, manufacturers and stores can not achieve too high net interest rates, after deducting production costs, the overall net profit margin of Mingyue Lens in these three years is 6.92%, 10.66% and 17.58%, and as a terminal sales chain company Dr. Glasses (300622. SH) was only 11.07%, 10.39%, 9.55%. Although the downstream gross profit margin is high, but many expenses such as labor and rent dilute profits, with the rise of rental labor and other costs in recent years, the net profit of dr. Doctor has shown a downward trend.
Whether from the perspective of the industrial chain or the gross profit margin, upstream and midstream enterprises are providing support and services for the downstream. Terminals can directly understand the needs and preferences of consumers and the spending power of customer groups, which is especially important for manufacturers in the production mode of production by sales. Although the aura of "huge profits" has been removed, the C-end market is still a must for lens companies.
<h1>
Technology is the first productive force </h1>
Eyewear products can be classified as lenses, frames, sunglasses, contact lenses and reading glasses, the main products in the domestic market are lenses and frames, with a market share of 37.9% and 37.5% respectively. Glasses is a particularly high technical barriers industry, because different business lines need to be equipped with different technologies, most of the market practitioners are only engaged in one of them, for example, Micron Group is mainly engaged in the design and production of frames, while Mingyue is mainly engaged in lenses as the main product.
Mingyue Lens is a veteran domestic lens enterprise, founded in September 2002, since its inception has been focusing on lens, frame, mirror, lens production raw materials and other products research and development, design, production and sales, lens as its core products. From 2017 to June 2020, the company's revenue was 426 million yuan, 509 million yuan, 553 million yuan and 247 million yuan, and lenses contributed 86.65%, 85.48%, 81.33% and 79.90% of the main business respectively. Statista data shows that in 2019, China's lens sales were 222.12 million pieces, and Mingyue accounted for 13.05% of them, second only to Wanxin Optics (which has been acquired by France's Essilor), and leading sales in the mainland.
The company currently has a lens production capacity of 38.51 million pieces, and the capacity utilization rate from 2017 to June 2020 is 95.72%, 99.43%, 83.02% and 64.41% respectively. The capacity utilization rate in the first two years was high, and there was an abnormal decline in 2019, which was explained in the prospectus as the company appropriately reduced the output of some products in order to optimize the product structure; in 2020, due to the impact of the epidemic, the capacity utilization rate further declined, and the company's sales volume fluctuated accordingly, respectively, 3544 tons, 3851 tons, 3321 tons and 1232 tons.
According to the prospectus, Mingyue's financing will have about 300 million yuan for the high-end plastic lens expansion project, after the project is put into operation, the company's lens production capacity will be increased by 16.5 million pieces / year, in addition to the conventional plastic lens expansion and technology upgrade project, R & D center construction project and marketing network and product display center construction project. It is worth noting that in the case of low capacity utilization and declining market sales, the newly expanded capacity may take some time to digest.
Plastic lenses are currently the most commonly used lenses, the production of its substrates need to go through two key steps of polymerization and polymerization curing, and most of the core technologies are mastered by Japan, South Korea, Germany and other countries. Polymer resin materials after polymerization to generate prepolymers, the process of the formulation and production process of basic chemical raw materials is a difficult point, polymerization and curing after the formation of substrates, the need for fine control of reaction time, temperature, raw material ratios and so on.
Mingyue Lens has been cooperating with the South Korean KOC Group since 2006 to jointly develop and produce resin raw materials, and after many improvements, it has been able to mass-produce prepolymers with refractive indexes of 1.56 and 1.60 to achieve self-sufficiency and output to other manufacturers, while the prepolymers with refractive indexes of 1.67, 1.71 and 1.74 [see further reading at the end of the article] Most domestic manufacturers, including Mingyue, still need to purchase from Japanese companies such as Mitsui and Mitsubishi.
In terms of research and development, Mingyue still focuses on lenses, and as of June 30, 2020, the company has 11 lens research and development projects including 1.71 excess lens resin and resin material process research and development. From 2017 to 2019, the company's R&D expenditure investment was 15.2044, 1535.41 and 16.2662 million yuan, respectively, and the absolute value was increasing year by year, but with the rapid growth of revenue scale, its R&D expenses accounted for a downward trend in revenue, respectively, 3.57%, 3.01% and 2.94%.
Squeeze from international giants and local competitors: Essilor, ZEISS and Connett </h1>
According to the "China Glasses Lens Industry White Paper", the top ten lens companies in 2019 accounted for nearly 80% of the national lens sales, and the head enterprises had international brands represented by Essilu and Carl Zeiss and domestic brands represented by Mingyue and Wanxin, and international brands still occupied an advantage, with Essilu's sales accounting for as high as 22.4%. In terms of sales, Wanxin led the run with a market share of 13.3%, followed by Mingyue, and local companies pulled back a city in terms of sales, and international brands accounted for a relatively low proportion of sales due to their high unit price. In general, the heading phenomenon of the lens industry is more obvious, and the market competition is fierce.
Some of Essilor's brands (Source: Public Information)
Born in France, Essilor has a history of more than 170 years, as an internationally renowned lens company, it has an absolute right to speak in the industry, and in 2018, it was even more powerful after the merger with the world's largest frame manufacturer Luxottica Group SpA. In 2019, the company reported its first consolidated financial report, with sales up 3.2% year-on-year, positive growth in net sales, profitability and free cash flow, and expected to generate synergies of 420-600 million euros over the next five years.
Essilor has been taking the localization strategy in the process of globalization, domestic lens companies usually produce in the form of ODM, lack of independent brand influence, low brand premium, often caught in the price war and other competition that is not conducive to the development of the industry, so some enterprises with a certain scale in the industry will choose to joint venture with foreign investors, and the wishes of both sides coincide.
The cooperation between Essilor and Wanxin Group is a very typical case of international brand localization, and Wanxin Optics, a subsidiary of Wanxin Group, is one of the largest plastic lens production bases in Asia, and its lens sales are second to none in the domestic market. In 2010, Wanxin Optics chose to accept the investment of Essilor Group, ESSILOR INTERNATIONAL (ESSILORINTERNATIONAL) directly held 30%, and indirectly held 50% through ESSILOR (China), as the actual controller, Wanxin Group only accounted for 20% of the shares, but Wanxin can still maintain the original production and operation model, on the one hand, Wanxin can get technological improvement and brand premium in a short period of time, and Essilor can also quickly open the Chinese market with the help of Wanxin sales channels, win-win cooperation.
The strength of Essilor is beyond doubt, as of 2018, the company has more than 9500 patented technologies, more than 500 R & D personnel, and has five major R & D centers around the world, which has flagship brands such as Wanli Road, Diamond Crystal, Omnivision, Aizan, Tyrannosaurus, etc. During this period, the companies that were acquired by it also include Well-known brands such as Orti Optics, Wanxin Optics, Tianhong Optics, etc. The expansion plan of Essilor Empire is advancing rapidly.
Characteristics of ZEISS lenses (Source: Century Daming Glasses Franchise Store, Taobao Store)
In terms of technology, we have to mention Carl Zeiss, ZEISS has more than 100 years of accumulation in the field of optical technology, and its products are involved in a wide range of fields, cameras, lenses, medical devices, etc. Lenses are only part of its health care module.
With strong scientific research strength and professional endorsement, ZEISS has become a technical benchmark in the industry, and the important parameter of lenses, Abbe number, was invented by its founder. In addition, ZEISS has 30 production sites and 25 R&D centers, and the company's lens coating technology can greatly improve lens functionality and is sought after by the industry. Unlike most Chinese brands that rely on coating to achieve UV protection, ZEISS lenses already have this function on the substrate, coupled with ZEISS color-changing technology, which can help users better adapt to light changes.
ZEISS A series lens price (source: Century Daming glasses franchise store, Taobao store)
ZEISS also has its own layout in terms of pricing and marketing, taking single-light lenses as an example, ZEISS has a total of 6 series, A series, Qingrui series, anti-blue light series, 3D BoRui series, Mingrui series, Zhenrui series. A series is entry-level, a pair of lenses price range of 580-3880 yuan, has been able to meet the needs of different gears, and the three-dimensional BoRui is the dividing line of ZEISS lens stalls, from then on the series will provide customized services, the price is also 4000 yuan to start. The starting price of 580 yuan will not reduce its own brand status, but the premium is not too high, the high-end customization experience further enhances the brand image, and ZEISS's offline glasses stores in China are also very extensive, and are generally sold as the most high-end products in the store.
The international lens giant has its own global strategic layout and product competitiveness, brand image, technical support and market have a huge first-mover advantage, causing great pressure on the domestic rising star, and local brands are also facing various competitions.
Cornett lens characteristics (Source: Lee's sister's optical shop, Taobao store)
Shanghai Connect, which has recently been traded by Hong Kong stocks, is also a local lens manufacturer, formerly known as A-share listed company Qitian Technology (300061.SZ), and at the end of 2018, Qitian Technology sold its lens business as a whole. According to Frost & Sullivan, In 2020, Connett's plastic lens production is the first in China, and according to export value, Connett is the largest lens exporter in China.
Connett mainly produces refractive index 1.499, 1.56, 1.60, 1.67 and 1.74 resin lenses, in terms of technological breakthroughs than Mingyue to be more advanced, has been able to large-scale production of 1.74 refractive index lenses, revenue scale also has certain advantages, 2018-2020, Connett's total revenue was 854 million yuan, 1.059 billion yuan and 1.093 billion yuan.
However, Connet's business model has certain risks, and Mingyue, the company's resin monomer and other raw materials need to rely on Japan and other countries to import, while products rely on exports, both ends are overseas, international relations are more risky, especially after experiencing the epidemic, Connet may also consider turning to seize the Chinese market.
According to its prospectus, customer revenue in China accounted for 14.7%, 16.0% and 23.8% of total revenue in 2018-2020, with rapid growth, and plans to take market offensive measures such as setting up physical stores, participating in industry exhibitions, cooperating with suppliers, customer visits, and online channel development, and is expected to set up 10 physical stores in Shanghai from July 2021. The price advantage of Connaught lenses is obvious, according to the investigation of Yuanqi Capital, the aspherical lenses of 1.74 degrees and above in a Taobao store only need 480 yuan for a pair, while the mingyue lenses with the same attributes are 1898 yuan, and the bright moon with the domestic market will usher in a strong competitor.
In the face of pressure and attack from many sides, where should Mingyue Lenses go?
Cooperation and game with channels </h1>
Mingyue Lens Sales Network (Source: Mingyue Lens Prospectus)
As can be seen from the figure, Mingyue's sales network is very perfect, there are more types of cooperative customers, and the penetration of the sinking market is deeper, providing an effective guarantee for its market position, which is also the last moat for local enterprises.
Distribution is one of the main sales methods of lenses, and from 2017 to June 2020, the proportion of distribution revenue to lens revenue was 25.49%, 27.76%, 33.17% and 38.37% respectively. After screening, the dealer will be included in the company's cooperation list, and the cooperation model between Mingyue and the dealer is outright sales, and the inventory pressure is directly transferred to the dealer. In the past four years, the number of dealers has been 105, 95, 91 and 89, and the number is gradually decreasing, but the proportion of dealer channel revenue in the main business has increased steadily, 22.09%, 23.73%, 26.98% and 30.66% respectively.
Dealer structure after screening and precipitation gradually optimized, the last four years of Mingyue lens cooperation in the top ten dealers, cooperation time of more than 5 years of 9, 4 or even more than 10 years, the company and dealers stable cooperation relationship, the former top ten dealers sales accounted for distribution revenue ratio is also maintained at about 50% perennial.
After the distribution contract reaches a certain scale, the company will give the dealer a corresponding rebate. The specific manifestations of rebates are supply price discounts and sales incentives, such as distribution contracts greater than 10 million yuan in 2017 can enjoy 90% off the supply price and up to 14% sales incentives. However, in recent years, the company has gradually tightened the incentive policy, in 2019 began to cancel the supply price discount, the most high-end rebate target in 2020 has been raised from 10 million yuan three years ago to 13 million yuan, in order to indirectly increase the sales price of Mingyue lenses, strengthen consumers' brand awareness of Mingyue, is part of the company's brand strategy. However, Yuanqi Capital has reservations about this move, canceling the discount and raising the rebate threshold means squeezing the profits of dealers, and the cost and difficulty of the channel to achieve the same sales performance as in the past are higher and more difficult, which is very unfavorable to the promotion and development of the brand.
Mingyue's direct sales model includes online and offline, offline direct sales of products for lenses and frames, terminal glasses stores, glasses chain enterprises, e-commerce companies, etc. through the signing of annual cooperation agreements with the company to reach cooperation, and according to their own actual needs to place orders from the company. At present, in addition to Taiwan, there are cooperative stores of Mingyue Lenses in all provinces and cities across the country, of which there are more than 200 terminal stores in Liaoning, Jiangsu, Jiangxi, Hunan, Hubei, Shaanxi and Sichuan provinces. The number of e-commerce companies authorized to cooperate on the three major platforms of Tmall, Taobao and JD.com is 30, 45 and 14 respectively. In addition to authorized cooperation, Mingyue will also open its own direct store, and the company has opened a Mingyue lens experience store in Danyang International Glasses City to provide intuitive brand feeling.
Under the direct sales model, online customers are the only type of steady growth, Mingyue Lenses currently has its own official flagship stores on Tmall, JD.com, xiaomi youpin, and the main sales products have changed from lenses to mirrors, and direct e-commerce has become the main sales channel of mirrors. At present, the company's mirror products mainly include the "Jingye" series and the "Xuanjing Pedi" series, of which the "Jingye" series is sold in online channels, from 2017 to June 2020, the proportion of the revenue of the mirror is 6.85%, 54.65%, 97.70% and 99.17%, respectively, gradually replacing the "Jingjing Peidi" series sold in offline stores and becoming the company's main mirror products.
Yuanqi Capital noted that in different sales models, the gross profit margin of the product is very different, in 2019, the gross profit margin of the lens product offline direct sales, distribution, consignment sales and online direct sales channels of the gross profit margin were 56.45%, 54.39%, 23.23% and 94.88%, respectively, and the comprehensive gross profit margin of all channels was 53.76%. The gross profit margin of the lenses sold directly online is a no-brainer, and the gross profit margin of the mirror is also 74.58%, and the e-commerce channel may become the next growth point of Mingyue Lenses.
The construction of domestic lens enterprise brands and channels is difficult </h1>
In the future, the competition in the eyewear industry itself may tend to be white-hot, Micron Group is China's third largest frame OEM and ODM manufacturer, mentioned in its prospectus, the next step of development will consider finding suitable target companies for mergers and acquisitions, target companies include sunglasses or frame companies that can produce synergies in their business, the development direction is relatively low price and simple frame structure of products, which means that Micron Group sees the huge potential of the downstream market and will lay out this.
In terms of lenses, international giants have their own magic, lenses have become a technology-driven industry, anti-blue light, anti-ultraviolet rays, color change and other differentiated needs have also improved the functional requirements of lenses. According to the company's official website, Essilor and ZEISS have even begun to provide specialized medical services, increasing medical attributes to the service content of lenses, Essilor Group provides services such as myopia prevention and vision testing, and at the same time carries out science related to eyes and vision, ZEISS has developed into laser vision correction, surgical optical instruments and other fields with its own professionalism.
Even with a perfect sales network, surrounded by many internationally renowned brands, it is not easy for domestic traditional enterprises to build their own brands and channels, Mingyue Lens obviously understands its own situation and has been exploring and trying new strategies and development directions.
This may be seen in terms of price and sales. The main sales channel before Mingyue was terminal optical stores and glasses chain enterprises, which meant more sales and publicity costs, and from 2017 to 2019, Mingyue's sales expenses increased from 49.2815 million yuan to 104 million yuan, doubling. Recently, the peer Vision New Materials in the same CHINext IPO queue chose to cooperate with dealers, saving a lot of sales expenses, resulting in Mingyue, although it far exceeded vision new materials in terms of revenue scale, the net profit did not open the gap.
In 2018, the sales volume of Mingyue lenses increased by 8.6% year-on-year, but the increase in product pricing was not large. On this basis, Mingyue made a sharp increase in product prices in 2019, with an average increase of about 26% in private label prices, and as a comparison, Vision New Material products rose by only 8.5%. In the case that the C-end brand image is not yet solid, this strategy seems to be a bit hasty, and the market has also given negative feedback, although the annual revenue in 2019 is growing, but lens sales have fallen off a cliff to 33.21 million pieces, even below the 2017 level of 35.44 million pieces.
Perhaps in view of this, in recent years, e-commerce channels have become the focus of competition for major enterprises because of their high gross profit advantages, at present, Mingyue has its own flagship stores on Tmall, JD.com, Xiaomi Youpin and other e-commerce platforms, mainly selling mirror products, Mingyue's e-commerce cooperation customers have grown rapidly, from 65 in 2017 to 120 in 2020, and e-commerce has achieved initial results.
Offline, Mingyue initially set up a brand experience store in Danyang Glasses City, directly contacting consumers, which not only enhances brand awareness, but also deepens the understanding of consumers, but because the cost of self-operated physical stores is too high, it has developed into an authorized cooperation experience store model, according to the company's official website statistics, the total number of experience stores has reached 1865, laying a good foundation for Mingyue's self-built C-end sales network.
But in the construction of brands and channels, Mingyue still has a long way to go, perhaps like Essi road to increase the promotion of the C-end, or perhaps like ZEISS in the field of technology has its own core competitiveness, the former Mingyue has not yet had a mature brand development strategy to match, the latter is quite challenging at the technical level, which road is a long way to go.
【Extended reading】Refractive index refers to the ratio of the propagation speed of light in vacuum and the propagation speed of light in the lens material, under the same diopter, the higher the refractive index, the thinner the edge of the lens, which is an important parameter to measure the quality of the lens. As of the date of the prospectus, the company's technology can achieve the production of lenses with refractive indexes of 1.56, 1.60, 1.67 and 1.71, lenses with refractive indexes of 1.56 and 1.60 can be produced in large quantities, refractive indexes of 1.67 need to be mass-produced in external customized forms, and the refractive index of 1.71 is still in the laboratory preparation stage.
In addition to the refractive index, the Abbe number (dispersion coefficient) is another important parameter for measuring lens quality. The larger the refractive index, the smaller the Abbe number, the more severe the degree of dispersion, the Abbe number usually needs to be controlled between 30-60, so it is not necessarily better for products with high refractive index.