This is an English adaptation of a FoodBud historical article originally published on November 6, 2021.
For restaurant operators, packaging is no longer a small back-office line item. As local Chinese chains expanded, FoodBud argued in 2021 that the supply chain behind them could also produce larger public companies, not only in ingredients but also in packaging.
Food materials typically account for 30%-40% of a restaurant brand's costs. For tea-drink brands such as Nayuki, packaging costs were also material: Nayuki's external packaging cost as a share of revenue rose from 6.1% in 2018 to 9.2% in 2020.
The article's central question was whether restaurant demand could support scaled packaging suppliers with pricing power, or whether these businesses would remain low-margin manufacturers dependent on major accounts.
By material, packaging is commonly divided into paper, plastic, metal, and glass. Paper packaging has long held a major position, but China's paper-packaging sector remained fragmented. At the time, the five major listed domestic paper-packaging companies cited were Hexing Packaging, MYS Group, YUTO Tech, Jinjia Group, and Dongfeng Co.
Plastic packaging was also highly fragmented and competitive, with local producers competing against multinational peers. Listed or major players cited included Yongxin, Amcor China, Zijiang Enterprise, Tongchan Lixing, Wangzi New Materials, Zhuhai Zhongfu, Southern Packaging, Plas Packaging, Hongyu Packaging, and Haishun New Materials.
Hexing Packaging, a leading paper-packaging company, reported revenue of RMB12.668 billion in the first three quarters of 2021, compared with RMB12.0 billion for 2020.
Against that backdrop, Nanwang Technology, a supplier supported by large restaurant customers including Wallace, McDonald's, and KFC, had filed to list on Shenzhen's ChiNext board. Its core products were eco-friendly paper bags and food packaging.
Nanwang Technology filed its prospectus in June 2021. It had previously been listed on China's NEEQ market from October 11, 2016 to December 25, 2020.
The company develops, produces, and sells paper packaging products. Its eco-friendly paper bags are used for takeout packaging in apparel, footwear, snacks, foodservice, supermarkets, department stores, and pharmacies. End customers named in the prospectus included Xtep, Yishion, Erke, Anta, Aokang, Uniqlo, Nike, Adidas, Muji, Coach, Uber Eats, Meituan, Heytea, Maxim's, Laiyifen, Haidilao, and Shuyi Tealicious.
Its food-packaging products are paper inner packaging that meets direct food-contact standards, used in QSR, coffee and tea drinks, bakery, snack, and venue channels. Named end customers included KFC, McDonald's, Starbucks, Wallace, Mixue Bingcheng, Joyoung Soymilk, Babi Food, Touhao Zhoupu, and Yonghe King.
From 2018 to 2020, Nanwang reported revenue of RMB513 million, RMB692 million, and RMB848 million, up 34.72% in 2019 and 22.66% in 2020. Net profit was RMB56.6257 million, RMB63.9901 million, and RMB66.0464 million. Eco-friendly paper bags contributed more than half of main-business revenue in each year.
The company's top five customers accounted for RMB290 million, RMB379 million, and RMB462 million of sales in 2018-2020, or roughly 55% of revenue. Yum China-related Bisheng Food was the largest customer in each year, contributing at least 20% of revenue.
Wallace, through Huashi Food and related parties, was Nanwang's second-largest customer and a related party. Nanwang's sales to Wallace were RMB80.375 million in 2018, RMB100 million in 2019, and RMB136 million in 2020.
The relationship was unusually important. In 2018, Huashi Food, the NEEQ-listed Wallace entity and Nanwang's second-largest shareholder-related party, became Nanwang's second-largest customer, contributing RMB80.48 million, or 15.68% of revenue. Sales to Bisheng Food were RMB132 million, or 25.71%. Together, the two accounted for 41.39% of Nanwang's 2018 revenue.
By revenue increase, Nanwang's sales to Huashi Food rose by at least RMB70 million in 2018, since Huashi Food had not been among Nanwang's top five customers in 2017 and the fifth-largest customer's revenue that year was RMB10.47 million. Sales to Bisheng Food rose by RMB116 million. The two increases totaled RMB186 million, equal to 73.52% of Nanwang's revenue increase that year.
In 2019 and 2020, Huashi Food remained Nanwang's second-largest customer, contributing RMB105 million and RMB136 million.
As of the prospectus disclosure date, Huashi Food-related parties indirectly controlled 27.74% of Nanwang, making them the company's second-largest shareholder on a combined basis. Huashi Food's actual controllers were Ling Shubing and Hua Huaiyu, who together held 64% of Huashi Food as of the end of the first half of 2021.
The article detailed several related shareholding links, including Huian Chuanghui, Huian Huaying, and individuals Huang Rong, Chen Xiaofang, and Chen Zhengli. On a related-party basis, Wallace-linked shareholders held 27.74% of Nanwang, less than 10 percentage points below actual controller Chen Kaisheng's 36.47% stake.
Since 2018, Wallace, as both second-largest shareholder-related party and second-largest customer, had contributed more than RMB300 million of cumulative revenue to Nanwang.
One issue highlighted by FoodBud was disclosure consistency. In Huashi Food's 2018 annual report, Nanwang did not appear among Huashi Food's top five suppliers. Huashi Food's top five suppliers that year were Shandong Jujiuyuan Food, Shandong Zhongke Food, Jiangsu Yike Food Group, Lamb Weston Xuechuan Food Hebei, and Simplot China, with purchase amounts of RMB131 million, RMB101 million, RMB95.20 million, RMB73.31 million, and RMB65.49 million.
Based on Nanwang's disclosed 2018 sales to Huashi Food, Nanwang should have ranked between Huashi Food's third- and fourth-largest suppliers by amount. The two companies' 2018 purchase and sales disclosures therefore did not align. In 2019 and 2020, Huashi Food's NEEQ annual reports did list Nanwang as its fifth-largest supplier, with purchases of RMB95.32 million and RMB134 million, broadly close to Nanwang's sales figures though not identical.
Nanwang planned to raise RMB627 million in the IPO: RMB389 million for an intelligent factory project with annual capacity of 2.247 billion green paper packaging items, and RMB238 million for a paper-products packaging production and sales project.
After completion, the first project would add 2.247 billion units of annual eco-friendly paper-product packaging capacity. The second project would add 598 million eco-friendly paper bags and 389 million food-packaging units per year. Both projects had a planned construction period of two years.
For the first project, Nanwang reported green paper-product packaging capacity of 2.846 billion, 3.958 billion, and 5.105 billion units in 2018-2020, with utilization of 91.73%, 94.33%, and 87.93%. The planned added capacity of 2.247 billion units would bring total capacity to 7.352 billion units, a 44.02% increase. FoodBud noted that the three-year average capacity growth rate was 34.025%, below the planned expansion rate, and that 2020 utilization had already fallen below 90%, creating a capacity-absorption risk if utilization declined further.
For the second project, Nanwang reported eco-friendly paper-bag capacity of 438,000 units, 588,000 units, and 1.020 billion units in 2018-2020, with utilization of 93.95%, 93.94%, and 91.25%. The planned addition of 598 million units per year was roughly in line with the historical average growth rate of 53.86%, but utilization had started to decline in 2020.
Food-packaging capacity was 2.408 billion, 3.371 billion, and 4.084 billion units in 2018-2020, with utilization of 91.33%, 94.40%, and 87.10%. The planned new food-packaging capacity was 389 million units per year.
Margins were under pressure. Nanwang's gross margin was 26.31%, 26.49%, and 20.76% in 2018-2020, while net margin was 11.03%, 9.25%, and 7.79%.
Direct materials accounted for more than 70% of operating cost, with base paper as the main input. From 2018 onward, after the benefit of supply-side capacity cuts faded, leading paper companies competed more aggressively on price. White cardboard fell from RMB7,500 per ton to RMB6,250 per ton between April and July 2018, a decline of more than RMB1,200 per ton, or 18.98%.
Nanwang's average purchase price for base paper was reported as RMB62.8544 million per ton, RMB58.6116 million per ton, and RMB55.1258 million per ton in 2018-2020. Despite falling raw-material costs, Nanwang's gross margin continued to decline. Its average selling price for eco-friendly paper bags fell from RMB67.28 per 100 units in 2018 to RMB61.96 in 2019 and RMB51 in 2020, a sharper decline than raw-material prices.
Period expenses, including sales, administrative, and finance costs, were about RMB44.08 million in 2017, or 16.93% of revenue. In 2018, they rose 50.11% to about RMB66.17 million, but the expense ratio fell to 12.89% because revenue grew faster. By 2020, period expenses reached about RMB130 million, or 15.33% of revenue.
R&D spending grew more slowly than other expenses. Nanwang recorded RMB11.12 million of R&D expense in 2017, or 4.27% of revenue. In 2018, R&D expense rose by RMB2.85 million to RMB13.97 million, up 25.63%, while revenue rose 97.19%, lowering the R&D expense ratio to 2.72%. R&D expense was RMB19.89 million in 2019 and RMB24.66 million in 2020, equal to 2.88% and 2.91% of revenue.
FoodBud emphasized that supply-chain companies face cash-flow and collection risk. As revenue grows, receivables often grow with it.
Nanwang's accounts receivable book value was RMB68.21 million, RMB97.696 million, and RMB127 million in 2018-2020, equal to 15.03%, 14.14%, and 14.62% of total assets. Receivables turnover was 8.70 times, 8.34 times, and 7.52 times.
Receivables as a share of revenue rose over the three-year period from 14.27% to 16%. More than 97% of receivables were less than one year old. Customer settlement periods ranged from 30 days to 45, 60, and 90 days.
In 2020, the top five receivable customers accounted for 54% of total receivables. The top three were Bisheng Food, Wallace, and Meituan. Wallace, as a related party, accounted for RMB22.56 million of receivables in 2020, or 17.6%.
Bad-debt provisions as a share of receivables declined year by year from 2018 to 2020, staying roughly in the 5%-7% range.
On prepayments, Nanwang mainly prepaid base-paper suppliers. Prepayments at the end of 2019 fell by RMB4.109 million from the end of 2018 because the company expected base-paper prices to decline and strategically reduced purchases. At the end of 2020, prepayments rose by RMB11.974 million from the end of 2019 because pulp prices rose in the fourth quarter of 2020 and were expected to keep rising, leading Nanwang to increase base-paper purchases.
Accounts payable in 2020 were RMB81.498 million, compared with receivables of RMB127 million, leaving a gap of about RMB46 million that the company effectively needed to fund. Once suppliers reach a certain scale and concentration, FoodBud noted, they may gain stronger bargaining power and extend settlement periods with their own upstream suppliers. Nanwang's top five payable suppliers accounted for 46.87% of payables in 2020.
For restaurant operators, the case shows both the value and the fragility of packaging suppliers tied to major chains. Large restaurant customers can make annual volume more predictable and stabilize factory utilization, but customer concentration, related-party exposure, receivables, and expansion timing matter.
FoodBud's conclusion was that supply-chain businesses often need to bind closely with industry leaders, but the model is vulnerable if customer-side stress creates large bad debts. Growth also requires more working capital: suppliers must keep funding production before receivables are collected.
The strategic question for packaging companies is whether they can lead on material and design innovation. If the business is only supplying and manufacturing to specification, it is difficult to build pricing power.
Note: IPO, fundraising, capacity-expansion, and forward-looking figures above are historical disclosures from 2021.