Recently, baking raw material company Ligao Food Co., Ltd. submitted a prospectus to the China Securities Regulatory Commission, intending to list on the A-share GEM. Thanks to the rapid development of the frozen baking business, Ligao Food's performance has grown steadily in the

Recently, baking raw material company Ligao Food Co., Ltd. (referred to as "Ligao Food"), submitted a prospectus to the China Securities Regulatory Commission, intending to list on the A-share GEM. Thanks to the rapid development of frozen baking business, Ligao Food's performance has grown steadily in the past three years, and has established cooperation with baking, catering and supermarket chain brands such as Weidumei, Caidiexuan, Yonghui Supermarket , Carrefour , Hema, Haidilao , and is interested in entering overseas markets in the future.

However, business expansion has also laid hidden dangers for Ligao Food. In the past three years, Ligao Food's inventory has been large, and the growth rate of cream business has slowed down. Although the frozen baking business it bets on has good prospects, there are still obstacles to meeting customers' diversified needs.

business expansion increases operating risks

prospectus shows that Ligao Food was established in 2000 and is mainly engaged in the research, development, production and sales of baked food raw materials and frozen baked food. The controlling shareholder and actual controller are Peng Yuhui, Zhao Songtao and Peng Yongcheng. The three of them are relatives and have signed a joint action agreement. They currently hold a total of 46.60% of Ligao Food's shares.

From 2017 to 2019, Ligao Food's revenue was RMB 956 million, RMB 1.313 billion and RMB 1.584 billion, respectively, and its net profit attributable to shareholders was RMB 43.9942 million, RMB 52.3086 million and RMB 181 million, respectively. Judging from the data in 2019, the revenue share of frozen baked goods, cream, fruit products and sauces accounted for 46.66%, 24.01%, 12.13% and 6.85% respectively.

In this IPO, Ligao Food plans to issue no more than 42.34 million shares. The funds raised will be mainly used for the expansion project of Sanshui production base, the construction and technical transformation project of Changxing production base, and the construction project of Weihui City frozen pastry and pastry and bread food production base. At present, Ligao Food has successively invested and established 4 production bases in Foshan Sanshui, Guangzhou Zengcheng and Nansha, Zhejiang Changxing, East China, and other places, and plans to start the construction of Henan Weihui production base.

In the next three years, Ligao Food aims to have 6 large production bases and 4 technology R&D centers in South China, East China, North China and overseas. The product specifications are expected to exceed 1,000 types, and it is intended to enter the overseas market based on catering, supermarkets, hotels and other channels.

However, as the business scale continues to expand, the operating risks related to Ligao Food have also increased. As of the end of 2019, Ligao Food had a total of 1,700 distributors, and the distribution model revenue accounted for 83%. Ligao Food reminds that the huge scale of dealers has made it increasingly difficult for companies to manage dealers. If management does not keep up with the pace of business expansion, market order may be chaotic and product sales may be blocked. In addition, the continuous expansion of business scale has also brought greater difficulties to Ligao Food's business decision-making, production management, inventory turnover, quality control, and capital allocation.

prospectus shows that Ligao Food's inventory value is relatively large, with 100 million yuan, 122 million yuan and 117 million yuan from 2017 to 2019, accounting for 43.02%, 39.28% and 26.47% of current assets, respectively. Ligao Food reminds that the company has many types of products, and due to product costs and market competition conditions, a small number of products have low gross profit margins. If market competition intensifies and market demand changes in the future, resulting in a sharp decline in product prices or poor product sales, it may increase the scale of inventory depreciation, which will have an adverse impact on the company's performance.

Cream revenue growth slowed down

Euromonitor International data shows that my country's cake market sales in 2019 were 98.17 billion yuan, and retail sales in 2024 are expected to exceed 160 billion yuan. Based on the calculation of the cake cost composition, the size of my country's cream market has reached 8.835 billion yuan to 11.78 billion yuan, and is expected to exceed 14 billion yuan in 2024.

Ligao Food believes that with the popularity of casual drinks such as tea and coffee, cream is constantly expanding its application range. While providing baking raw materials, Ligao Food also developed terminal product solutions for customers, driving the growth of the company's related products. However, from the perspective of the competitive environment, Ligao Food has many competitors in terms of cream products and product solutions.

As early as 2016, Fonterra, the largest dairy company in New Zealand, launched the " Anjia Professional Dairy Professional Partner" business in the Chinese market, providing customers with high-quality cream products and supporting professional solutions. The catering business is Fonterra's second largest source of revenue and one of the fastest growing businesses. Cream accounts for about 90% of the Chinese beverage market, covering more than 300 cities across the country. The cooperative brands include Beijing Daoxiangcun, Wufangzhai, Guangzhou Restaurant , Xibei, Haidilao , Xiabu Xiabu , etc.

The three baking chain brands interviewed by the Beijing News reporter recently said that they mainly use Anjia animal cream. Nanqiao Food Group (Shanghai) Co., Ltd., which is listed as its main competitor by Ligao Food, had a cream revenue of 290 million yuan in 2017. Another competitor, Shanghai Hairong Food Technology Company, had a revenue of 490 million yuan in fat-grained cream in 2018.

Judging from the types of products displayed on the official website, Ligao Food mainly produces self-produced vegetable butter and creamy vegetable butter mixed cream, and has also represented a French-made "Lelai" cream. From 2017 to 2019, Ligao Food’s cream revenue was RMB 268 million, RMB 344 million and RMB 380 million, respectively, and the growth rate has dropped from 28.4% to 10.5%.

A founder of a chain baking brand in Beijing told the Beijing News reporter that most baking stores in first-tier cities currently choose animal cream, especially when making birthday cakes, "big brands basically do not use vegetable cream." However, some industry insiders said that due to the long storage time and the difficulty of animal cream is easy to set, some baking stores that purchase semi-finished cakes still use vegetable cream.

Wang Li (pseudonym), a chain baking brand owner in Zhejiang, said that in the past, domestic baking stores used more plant cream, mainly because the price of animal cream is high. In recent years, with the rise of "private cakes", products have price space, and chain cake shops have also kept pace. Choosing animal cream has gradually become an industry trend, and animal cream is almost monopolized by Australian and European brands. "As far as I know, Ligao cream has retreated to the third and fourth-tier markets, and many domestic cream companies, including it, are trying to deal with the crisis, such as agents for imported cream brands."

In response, Ligao Food responded to a reporter from the Beijing News on the evening of May 6 that the plant-based cream has good whipping and strong stability, and is the most used cream product in cake making in my country at present; cream-containing plant-based cream has the advantages of both thin cream (animal cream) and plant-based cream, with the middle price, and the market demand has grown rapidly in recent years; the position of thin cream is high-end, and is currently in its infancy in my country. With the upgrading of consumption, the company has developed creamy fat-containing butter, which has grown rapidly in recent years and has occupied a certain market share.

bet on frozen baked food

In 2014, Ligao Food acquired 251% stake in Guangzhou Aokun Food Co., Ltd., and since then entered the frozen baked food industry, and took this as a focus. From 2017 to 2019, its frozen baked goods revenue was RMB 358 million, RMB 550 million and RMB 738 million, respectively, with an average annual growth rate of more than 40%, and its revenue accounted for nearly 50%.

As of the end of 2019, Ligao Food has 21 automated production lines for frozen baked foods, and has established large production bases in Nansha, Guangzhou and Changxing, Zhejiang, with an annual production capacity of 43,100 tons. Its main customers include Qianji Xicake, Weidumei, Caidiexuan, Yonghui Supermarket, CR Vanguard, Carrefour, Hema Fresh, Haidilao and other baking, catering, and supermarket chain brands.

Ligao Food believes that frozen baked goods have the scale and standardization characteristics of pre-packaged products, and are basically the same as fresh and taste of fresh baked products, which solves the investment cost problem of baking stores' own central factory building. At the same time, fresh baked baked goods can be expanded to supermarkets, catering, beverage stores, convenience stores, e-commerce and other channels.

Wang Li believes that although frozen baked products have broad prospects, they are mostly limited to basic products such as egg tarts, donuts, wife cakes, etc. On the one hand, these basic products are all being made, with serious homogeneity, no obvious distinction between taste, and the supply cost is not much different from homemade cost; on the other hand, the demand for basic products is large, which can meet the large-scale production needs of Kaigao Food Factory.Because of this, the larger and larger the Ligao Food frozen baking factory, the less it cannot meet the differentiated needs. Medium and large chain baking brands still need to build their own central factories.

A baking store owner who cooperated with Ligao Food confirmed to the Beijing News reporter that some of the semi-finished products of its stores will choose Ligao for supply, mainly focusing on popular products such as egg tarts and donuts. However, their own special products will not be handed over to Ligao. "We are also discussing the possibility of exclusive products with Ligao, provided that it must meet a certain amount of demand."

From the perspective of business scale, Ligao Food is in the leading position in the frozen baking industry, but it is not the only one. In June 2018, baking oil supplier Nanqiao Food Group (Shanghai) Co., Ltd. submitted an A-share prospectus, showing that in 2017, its frozen dough revenue was 55.8709 million yuan. In addition, food manufacturers in the frozen baking industry also include Zhejiang Xindi Jiahe, Dongguan Black Rose, Nanjing Beicheng, Jiujiang Jinwanlai, etc., and the frozen pastry segments are highly competitive. In response, Ligao Foods said it will tap the market potential of frozen bread.

"Starting high started early, with a solid market foundation and price advantage. It takes a certain amount of time for baking stores to find alternatives. Nanqiao's technical strength and cold chain foundation are relatively good, but the price is high. Other brands focus on some regional markets in central and eastern China. This is the current general situation of the frozen baking industry." Wang Li said.

Regarding how to meet the market's diversified demand for frozen baking products, Ligao Food responded to a reporter from the Beijing News that it will use the advantages of R&D, technology, quality control and service to increase production capacity investment, increase R&D efforts, optimize production processes and formulas, continuously develop new categories according to market demand, expand and sink channel resources, integrate industrial chain resources, and build the company into a highly competitive R&D and production base for baking raw materials and frozen baking foods.

Beijing News reporter Guo Tie Picture source Official website screenshot

edit Li Yan Proofreading Li Ming