Photo source: Visual China

Blue Whale financial reporter Wang Jianwen

“Are you eating sweet rice dumplings or salty rice dumplings this year”, “Are rice dumplings steamed or cooked?”... As the Dragon Boat Festival approaches, rice dumplings are once again receiving attention from consumers, and topics related to zongzi are also trending frequently.

However, as the “first stock of rice dumplings,” Wu Fangzhai's stock price did not rise before the Dragon Boat Festival. Since June 1, the cumulative decline in the company's stock price reached 4.30%. By the close of June 7, the company's stock price closed at 26.72 yuan/share, with a total market value of about 3.8 billion yuan.

Performance fluctuated, and diversified development results were not evident. Wufangzhai, which started with rice dumplings, is stuck in rice dumplings.

Performance fluctuates

Since its establishment, Wufangzhai has a history of 100 years.

In 1921, Zhang Jinquan, a merchant from Lanxi, Zhejiang, sold rice dumplings in Jiaxing, Zhejiang, named Wu Fang Zhai. After 1998, Wufangzhai began to be restructured, and Wufangzhai Industrial was established. Beginning in 2001, Ocean Industrial (later renamed “Wufangzhai Group”) began to gradually acquire shares of Wufangzhai Industrial and gradually became the company's largest shareholder. In 2022, Wu Fangzhai was listed on the main board of the Shanghai Stock Exchange.

According to the annual report, as of the end of 2023, Li Jianping and Li Haojia's father and son held a total of 40% of Wufangzhai Group's shares, indirectly controlling 36.84% of Wufangzhai's shares, and are actual controllers of listed companies.

Despite the title of a century-old brand, Wu Fangzhai's performance in recent years has fluctuated.

From 2021 to 2023, the company's revenue was 2,892 billion yuan, 2,635 billion yuan, respectively; net profit to mother was 194 million yuan, 137 million yuan and 166 million yuan, respectively. In the first quarter of 2024, Wufangzhai's revenue was 207 million yuan, and net profit to mother was -70 million yuan, all down from the same period in 2023.

In 2023, although Wufangzhai's performance rebounded from 2022, it did not meet the company's performance targets. At the beginning of 2023, the company introduced equity incentives for some managers. According to the announcement, in 2023, the company's revenue and net profit will need to increase 21% and 18% compared to 2022 before the ban on restricted shares held by the above managers can be lifted, but this goal has not been achieved. In December 2023, Wu Fangzhai also lowered the 2024 and 2025 performance assessment indicators.

In order to boost performance, Wu Fangzhai promoted sales channel reform while reducing sales expense rates.

Currently, most of Wufangzhai's sales still come from offline channels. In 2023, the company received 364 million yuan in revenue through direct management (chain store) channels and 909 million yuan in revenue through dealer channels. Compared with the dealer channel, the gross margin of the chain store channel is higher. In 2023, the gross margin of the company's chain store channel was 55.93%, and the gross margin of the dealer channel was 37.91%.

Against this backdrop, the number of Wufangzhai chain stores did not increase but declined. In 2023, the number of direct stores operated by the company was 112, down 26 from the previous year; the number of cooperative stores was 25, a decrease of 6 over the previous year. Over the same period, the number of company dealers increased by 7.

At the 2023 shareholders' meeting, Wu Fangzhai admitted that in the past, the company chose to expand rapidly through direct management, but due to the external environment, the development of the chain restaurant sector declined. At the end of last year, the company thoroughly sorted out the stores through a “shrink, move, close” strategy. Yu Yingqian, director of the company, also said, “The company has made targeted closures for some stores with relatively high rents and high costs.” In the future, the company's strategy will focus on franchising to achieve rapid expansion of the company's business.

In addition to channel reforms, Wu Fangzhai continues to reduce sales expenses to guarantee profit levels.

Wufangzhai's expenses are mainly sales expenses. Sales expenses exceed the sum of management expenses, R&D expenses, and financial expenses. In 2023, Wufangzhai's sales expenses totaled 552 million yuan, accounting for 20.93% of the company's total revenue.

Compared to before listing, Wufangzhai's sales expense ratio has dropped drastically. From 2019 to 2021, the company's sales expenses ratio was above 27%. The annual report shows that compared with before listing, the decline in the company's sales expenses rate is mainly due to a decrease in store rent fees and transportation and storage costs. The former stems from the company's reduction in the number of direct-run stores, while the latter has benefited from the company's continued elimination of inventory products in recent years.

As of the end of 2023, Wufangzhai's inventory balance was 198 million yuan, accounting for 8.47% of total assets, down 9.73 percentage points from the end of 2021.

The path to diversification has not been completed

Since its establishment nearly 100 years ago, Wufangzhai's performance is still mainly supported by rice dumplings.

In 2018, Li Jianping, chairman of Wu Fangzhai, once said in an interview, “The rice dumpling circle is just this big, almost to the 'ceiling.' So we are very clear that if we want to break through the 'ceiling', we must step out; we can't just make rice dumplings.” According to Li Jianping, Wufangzhai's rice dumplings accounted for about 59% of sales in 2017. With the company's diversified operations, “it is estimated that it will drop below 50% within 3 years.” In the future, Wufangzhai will become a “famous brand of Chinese fast food chains”.

According to the annual report, in addition to rice dumplings, Wu Fangzhai also sells products such as mooncakes, meals (that is, catering business), egg products, and pastries.

However, in recent years, the share of the rice dumpling business in Wufangzhai's performance has not declined but increased. In 2023, the company's revenue for the zongzi series products was 1,940 billion yuan, accounting for 73.64% of total revenue, which is far higher than 59% in 2017. With the exception of rice dumplings, revenue growth in the company's mooncake and egg products businesses was weak, while revenue from the meal business declined sharply. In 2021, the company's food business revenue was 252 million yuan, which had dropped to 148 million yuan by 2023.

For Wu Fangzhai, the path of diversification has not been completed, which means that the company still has to rely on the rice dumpling business to support its performance. As a result, the company is also further increasing its rice dumpling production capacity.

In 2023, Wufangzhai sold a total of 54,400 tons of rice dumplings, of which 39,600 tons were produced by the company itself, and the rest were outsourced. In recent years, the company's demand for contract processing has expanded. From 2021 to 2023, the proportion of outsourced production increased from 24.41% to 25.61%.

In order to further increase its own rice dumpling production capacity, in August 2023, Wu Fangzhai announced that it would adjust the structure of the previous IPO's fund-raising project. The adjusted projects are the R&D center and information technology upgrade construction project, and the Chengdu production base upgrade project.

According to the announcement, the original R&D center and information technology upgrade construction project mainly renovated and upgraded the original R&D center and built a new product testing workshop, etc., which did not increase the production capacity of Wufangzhai. However, after this adjustment, Wu Fangzhai will build a new production line while optimizing the pilot plant, so that it has an annual production capacity of 45 million fresh dumplings, fresh rice dumplings, and cooked rice dumplings.

In addition, Wu Fangzhai also plans to adjust the Chengdu production base upgrade project. The company believes that the original plan will not guarantee the production capacity of rice dumplings required by the Chengdu production base in the future. Therefore, after this adjustment, the company plans to adjust the construction area of the project from 7,654 square meters to 16,227 square meters to reserve space for further expansion of production capacity in the future.

After revising the above investment and construction plan, Wu Fangzhai will need to spend an additional 398.42 million yuan in construction costs. These funds will be covered by the company's own funds.

Judging from Wu Fangzhai's balance and liability situation, the company's financial situation is relatively healthy and can cover the above capital expenses. As of the end of 2023, Wufangzhai's balance ratio was 24.37%, and the current ratio was 2.00. The company's balance of cash and cash equivalents was $610 million, and the balance of the company's short-term loans and long-term loans was zero.