This is an English adaptation of a FoodBud historical article originally published on September 9, 2021.
FoodBud reviewed an interview by ChinaVenture with Song Xiangqian of Jiahua Capital. The discussion ranged from excesses in consumer investing to Jiahua’s preference for disciplined, long-duration bets.
Song argued that parts of the investment industry had become too focused on arbitrage, inflated valuations and commission-driven fundraising. On consumer brands such as Genki Forest, Perfect Diary and Florasis, he said they were innovative companies, but whether they were strong innovative companies would require time: they needed both good products and the ability to sustain profitability as lasting brands.
On foodservice, Song said he would not casually invest in a single product category such as Sichuan cuisine, Hunan cuisine or hot pot. In his view, tastes change and restaurant formats carry high uncertainty; Jiahua instead looks for brands that could still be embedded in everyday life 20 years later.
Jiahua Capital has been selective. In 15 years, it had invested in just over 30 projects, with a focus on mass-market consumer names including Qiaqia, Babi Food, Dongpeng Drink, Laoxiangji and Wenheyou.
Babi Food was founded in 2001, began scaled production in 2004 and listed in 2020. It is often described as China’s first listed steamed-bun company.
According to Babi Food’s 2021 interim report:
The company cited three main performance drivers: faster store expansion and higher store count, increased per-store ordering, continued rapid growth in group-meal customers and sales, and management optimization that reduced costs and improved efficiency.
Babi’s core business is a breakfast-store model selling buns and other flour-based products, with an average ticket of RMB 5. In the first half of 2021, operating cost reached RMB 450 million, up 74% year on year, faster than the 68.1% growth in revenue. The company attributed this partly to sharp increases in raw material prices. Gross margin fell 2.53 percentage points to 24.78%.
Babi Food’s sales model is mainly franchising, supplemented by company-owned stores and group-meal sales. Its group-meal channel supplies finished or semi-finished flour products to factories, companies, schools, hospitals, government bodies, restaurants and group-meal customers, but still accounted for a relatively low share of revenue.
By contract revenue:
Regionally, East China accounted for 91.6% of revenue. Expansion in South China and North China remained limited.
At the beginning of 2021, Babi Food acquired Wuhan local brands Haolike and Zaoyidian to start expanding beyond East China, but the impact of national expansion was still small at the time.
Babi Food disclosed the acquisition terms for the Wuhan brands.
Party A was Zhongyin Babi Food Co., Ltd. Party B consisted of Wang Yong, Wang Zhulin, Ding Jianfeng and Chen Xiangjun.
Backgrounds of the sellers:
The target company’s valuation depended on performance after 12 months of formal operation:
Payment was structured in three stages:
Babi also agreed to provide working-capital support. Subject to Party B’s normal performance of obligations, Party A would provide the target company with staged working-capital loans of not less than RMB 10 million and not more than RMB 15 million for one year, according to store-expansion needs. Party B would provide guarantees and assume joint liability.
If the target company met acquisition conditions after 12 months of operation, the loan interest rate would be the People’s Bank of China benchmark lending rate for the same period, and Party B’s guarantee liability would be released after completion of the acquisition. If the target company did not meet the acquisition conditions, interest during the loan period would be calculated at 15% annually, with Party B jointly liable for principal and interest repayment.
From Babi Food’s own operating performance, the first-half report was less impressive than the headline profit growth suggested. Revenue was RMB 595 million, while total operating cost was RMB 516 million. Without nearly RMB 200 million in investment income, the financial statement would have looked much weaker.
In late July 2021, Babi Food issued an earnings forecast stating that the main reason for the expected profit increase was fair-value gains from its indirect holding in Dongpeng Beverage (Group) Co., Ltd. through Tianjin Junzheng Investment Management Partnership. The company expected this to increase net profit by about RMB 140 million to RMB 150 million.
According to the interim report, Babi Food’s investment in Dongpeng Drink generated RMB 200 million in investment income in the first half.
Public information showed that Tianjin Junzheng was Dongpeng Beverage’s second-largest shareholder, holding 36 million shares, or 9%. Dongpeng Beverage’s prospectus showed that on April 28, 2017, Tianjin Junzheng acquired 8.5% of Dongpeng Limited for RMB 297.5 million.
In Tianjin Junzheng’s ownership structure, Babi Food was a limited partner, contributing RMB 20.3265 million, or 5.71% of Tianjin Junzheng’s capital. Jiahua Capital appeared to be the leading party behind Tianjin Junzheng, and Qiaqia Food was also present in the structure. In effect, Jiahua Capital was leading Babi Food into the Dongpeng investment.
On May 27, 2021, Dongpeng Beverage listed on the A-share market. Its shares rose 44% that day, taking market capitalization above RMB 26.6 billion. Dongpeng Beverage became one of the most closely watched stocks of the year, recording 13 consecutive daily limit-up sessions after listing. Babi Food was among the beneficiaries.
Note: IPO, valuation, earn-out and forward-looking figures in this article are historical and reflect disclosures and expectations cited in 2021.