This is an English adaptation of a FoodBud historical article originally published on October 14, 2021.
Using a supply chain entity as the listed vehicle is a common route. In Wallace's case, the company's gross margin was only around 5%.
FoodBud cited Narrow Door Canyan data showing that, as of October 4, 2021, Wallace had 19,894 existing stores.
Wallace was named after its founders. In the 1990s, as KFC and McDonald's drove the rise of Western-style fast food in China, brothers Hua Huaiyu and Hua Huaiqing in Fuzhou, Fujian saw the opportunity. They pooled RMB 80,000 and opened a small shop outside Fuzhou Normal University selling Western-style fast food, incorporating their surname into the brand name Wallace.
Wallace's development can be read in three phases:
Huashi Food's main business is the wholesale and retail of prepackaged frozen food and products required by Western-style fast-food operators. Its product scope includes frozen goods such as dressed chicken, leg meat and chicken wings; seasoning and prepared products such as salad dressing, ketchup, black pepper powder and spicy powder; and restaurant equipment such as water purifiers, ice machines and worktables.
Its business model is centralized procurement. Huashi Food supplies ingredients, equipment and other items to fast-food stores, handling unified price inquiry, centralized procurement acceptance and distribution. This made raw material supply the company's absolute core business.
According to Huashi Food's 2020 annual report, raw material supply generated RMB 3.493 billion in annual operating revenue, accounting for 99.99% of the total. The remaining less than 0.01% came from consulting service revenue. Huashi Food owns the Wallace trademark and charges an RMB 10,000 consulting service fee by providing customers with unified Wallace-branded fast-food store design, renovation plans and pre-opening guidance.
In the first half of 2021, Huashi Food recorded revenue of RMB 2.42 billion, up 104.53% year on year. Net profit attributable to company shareholders was RMB 78.39 million, up 196.51% year on year.
Operating costs for the half year were RMB 2.29 billion, accounting for 94.6% of total revenue. Gross margin was only about 5%.
By business segment, revenue came from dry goods, frozen goods and equipment. Frozen goods and dry goods generated first-half revenue of RMB 1.3 billion and RMB 980 million, respectively.
The company's main subsidiaries included trading companies in Fujian, Shandong, Zhejiang and Jiangsu.
Wallace founder Hua Huaiyu held 32% of Huashi Food.
Huashi Food had delivered solid performance in recent years and remained profitable.
From 2016 to 2020, annual operating revenue was RMB 1.108 billion, RMB 1.645 billion, RMB 2.326 billion, RMB 2.550 billion and RMB 3.494 billion, respectively, representing growth of 71.82%, 48.52%, 41.38%, 9.63% and 37%.
Net profit over the same period was RMB 21.5404 million, RMB 34.9798 million, RMB 50.7556 million, RMB 54.6041 million and RMB 92.0947 million, respectively, representing growth of 121.02%, 62.39%, 45.10%, 7.58% and 68.66%.
Although both revenue and net profit growth had been slowing, Huashi Food rebounded strongly in 2020 despite the pandemic's heavy impact on the restaurant industry. Growth returned to double digits and the company delivered its best results to date. The company attributed the counter-cyclical growth to higher market demand and the addition of new customers, an explanation that had appeared repeatedly in Huashi Food's 2017 to 2020 annual reports.
In 2019 and 2020, when performance grew sharply year on year, Huashi Food's top five customers changed substantially. Only Shanghai Wojin Trading Co., Ltd. remained from the previous group. The share of total sales contributed by the top five customers fell from 12.26% to 8.68%.
Among the four new major customers, equity look-through data from Tianyancha showed that Chen Jinjun, the actual controller of the second-largest customer, Shandong Rongxia Trading Co., Ltd., also served as a supervisor of a wholly owned Wallace subsidiary.
In 2020, the top five customers accounted for 8.68% of sales revenue and contributed RMB 300 million in revenue.
The top five suppliers accounted for 22.36% of procurement value.
The second-largest supplier, Shandong Weiku Food Co., Ltd., was a controlled subsidiary of Shanghai Rongda Industrial Co., Ltd. Seven shareholders overlapped between Shanghai Rongda and Huashi Food. Hua Huaiyu and Ling Shubing together held 64% of the shares and were the ultimate beneficiaries.
Hua Huaiyu and Ling Shubing were jointly the controlling shareholders and actual controllers of Huashi Food, and since November 2015 had formed a five-year concert-party relationship. Ling Shubing is Hua Huaiqing's wife, making her Hua Huaiyu's sister-in-law.
The fifth-largest supplier, Fujian Nanwang Environmental Protection Technology Co., Ltd. (Nanwang Technology), also had Wallace family members in its shareholder list. Their cumulative shareholding was 27.74%, second only to Nanwang Technology's actual controller and related parties.
Wallace was Nanwang Technology's second-largest customer. In 2020, related-party transactions between Nanwang Technology and Wallace accounted for 16.06% of Nanwang Technology's revenue, mainly from sales of food packaging such as paper boxes, paper tubes and paper cups to Wallace.
FoodBud noted market talk that many institutions in the industry were highly interested in Wallace, had offered a valuation of RMB 40 billion, and were preparing for a listing in another venue.
Note: listing, valuation and IPO-related figures are historical, based on information in the original October 14, 2021 article.