"Investor Net" Han Yijia.

In December 2023, Swallow House officially landed on the Hong Kong Stock Exchange after many twists and turns, becoming the first domestic 'swiftlet stock'. With the company's listing, the billion-dollar swiftlet market also entered the vision of the capital markets.

Recently, Swallow House released its 2024 interim report. The interim report shows that in the first half of the year, Swallow House achieved revenue of 1.059 billion yuan, a year-on-year growth of 11.36%, and a net income of 60.045 million yuan, a year-on-year decrease of 44.07%.

The first financial report after the listing, the company experienced a decline in profitability. However, in the prospectus, the company has consistently maintained double-digit growth in revenue and profit, with a 2.8% year-on-year increase in net income in 2023.

Now, with the performance sharply declining, it inevitably raises concerns in the market about the development of Swallow House. Is it that high-end swiftlet products are not selling, or is the company's performance returning to its roots?

High marketing expenses

Regarding the decline in net income, Swallow House stated in the announcement that it is mainly due to the dual spokesperson brand strategy, the newly established green asia vets factory, and the conservative consumption of offline customers, leading to slower-than-expected growth in offline channel revenue.

From the data disclosed in the interim report, the high sales expenses indeed dragged down the overall net income level. In the first half of this year, Swallow House's sales and distribution expenses were 0.365 billion yuan, an increase of 0.101 billion yuan from the same period in 2023, a year-on-year growth of 38.45%. The sales expense ratio increased from 27.74% to 34.48%, an increase of 6.74%.

Yan Zhiwu stated that in January and May 2024, the company officially announced Gong Li and Wang Yibo as the new brand ambassadors. The advertising and promotion expenses mainly incurred in the first half of the year to support the new brand ambassadors impacted the mid-year performance report.

Yan Zhiwu also mentioned that the role of ambassadors in enhancing brand momentum and promoting sales will continue to be reflected in the future. However, looking at past performance, the boost effect of marketing expenses on revenue is limited. Data shows that from 2020 to 2023, Yan Zhiwu's sales and distribution expenses reached 0.318 billion yuan, 0.399 billion yuan, 0.504 billion yuan, and 0.563 billion yuan respectively, totaling 1.784 billion yuan over four years, while the total net income in four years was only 0.713 billion yuan.

From 2021 to 2023, Yan Zhiwu's sales expenses grew by 25%, 26%, and 11.7%, while revenue growth was 15.83%, 14.79%, and 13.52% respectively. Therefore, the overall growth rate of marketing expenses far exceeded the revenue growth rate.

Consumers' impression of Yanwo products is mainly "high-end." To maintain the product positioning, Yanwo companies have also invested heavily in brand ambassadors. Xiaoxian Stew invited Zhang Ziyi and Chen Shu as ambassadors, while also promoting a series of tasting officials such as Wang Junkai and Wu Zun. Yan Zhiwu officially announced brand ambassadors Gong Li and Wang Yibo, one targeting high-end groups, and the other targeting young female groups. Prior to this, Yan Zhiwu successively appointed stars like Carina Lau, Lin Chi-ling, and Zhao Liying as ambassadors, which was also a considerable expense.

In addition to hiring brand ambassadors, Yan Zhiwu also increased brand tonality through collaborations with Michelin-starred restaurants, five-star hotels, and hosting women's golf tournaments, which indirectly increased sales and marketing costs.

Furthermore, Yan Zhiwu's profitability has been continuously declining. In the first half of this year, Yan Zhiwu's gross margin decreased by 2.74 percentage points to 48.5%; net profit margin was 5.67%, a year-on-year decrease of 5.62 percentage points; return on equity (ROE) was 7.81%, a year-on-year decrease of 16.21 percentage points.

To maintain its share in the high-end market, Yan Zhiwu's high sales expenses have become quite a 'cost'.

Contraction of offline channels

As a popular health product, bird's nest has mainly relied on offline channels for sales in the past. A research report shows that in 2022, offline channels accounted for 69.53% of the sales in the Chinese bird's nest market. It can be seen that changes in offline channels directly affect the performance of Yan Zhi Wu.

In the first half of 2024, Yan Zhi Wu's offline channel revenue was 0.419 billion yuan, a 1.64% decline from the revenue of 0.426 billion yuan in the same period of 2023, with the proportion of total revenue dropping from 44.74% to 39.51%. In fact, the proportion of Yan Zhi Wu's offline channels has been declining year by year. From 2021 to 2023, its offline channel revenues were 0.739 billion yuan, 0.792 billion yuan, and 8.60 billion yuan, accounting for 49.0%, 45.8%, and 43.79% of the total revenue respectively.

At the same time, there has been a certain degree of decline in the gross margin of the offline direct and distribution business. In the first half of 2024, the gross margin of the offline channels was about 55.49%, slightly down from around 57.03% in the first half of 2023.

Regarding the changes in channels, Yan Zhi Wu stated that despite facing significant challenges in the first half of 2024, thanks to the outstanding performance of online revenue growth, the group's income continued to grow steadily. The online channel's market share steadily increased, contributing more young customer groups and continuous growth vitality to the group.

From the data perspective, Yan Zhi Wu's e-commerce channels indeed experienced significant growth in the first half of 2024. The revenue from the e-commerce channels during the reporting period was 0.641 billion yuan, accounting for 60.49% of the total company's revenue, an increase of 21.89% from the same period in 2023. However, in terms of gross margin, the gross margin of the online channels during the same period was 43.75%, while in the first half of 2023 it was 46.35%. Despite the gross margin being lower than that of offline channels, there was still a certain degree of decline.

The changes in channels also brought inventory pressure to Yan Zhi Wu. The interim report shows that the company's inventory balance in the first half of the year was 0.314 billion yuan, compared to 0.36 billion yuan in 2023. Calculated based on the 2023 revenue of 1.964 billion yuan, the inventory ratio of Yan Zhi Wu was 18.33% last year, while in the first half of this year, the inventory ratio has already reached 29.65%.

How to solve the contraction of offline channels and adapt to the changes in new channels are the primary issues facing Yan Zhi Wu.

In order to find new growth points, Yan Zhi Wu launched the Yan Zhi Nong brand's bird's nest congee series in 2023. Different from the previous high-end route, Xiao Yan Nong belongs to the hundred-yuan affordable product category. The company's 2023 financial report shows that the cumulative sales of Xiao Yan Nong bird's nest congee across all platforms exceeded 1 million units, contributing revenue of 22.9 million yuan.

In addition, Swallow House plans to implement a series of measures in the second half of 2024, including accelerating the production of swiftlet porridge, swiftlet water, and other products.

Under the trend of changing consumption environment, Swallow House, specializing in high-end swiftlet products, also has to seek a "commoner route" for performance growth. The effectiveness remains to be continuously observed. (Produced by Thinking Finance)■