Under the pressure of being the "number one tea stock in the US stock market", Min East Red Group (ORIS.US) has not only not "felt out of place", but has made a stunning appearance.

On the first day of listing on October 17th, Min East Red Group soared by 50%, with a trading volume of 1.6552 million shares. In the following two trading days, the stock's performance continued to rise steadily. As of the closing on October 21st, Min East Red Group's stock price was $8.74, with a total market value of $0.19 billion, a significant increase of 118.5% over the issue price of $4.

Can the fundamentals of Min East Red Group support the soaring stock price? Deconstructing its prospectus may help us understand.

The performance has shown a declining trend in the past two years.

The prospectus shows that Min East Red Group grows, processes, and refines white and red tea in Fujian Province, China, and sells tea to distributors and end consumers in China, with processed white tea as its main product. The tea gardens operated by Min East Red Group are located in Tuorong County, Ningde City, Fujian Province. Up to now, the company has signed contract management and planting rights agreements for about 7.212 million square meters of tea gardens in Fujian Province. The company is one of the top ten tea companies in terms of tea garden area in Ningde City, which is one of the cities with the highest tea production in Fujian Province.

The historical growth of the company is mainly driven by the growth of the domestic white tea market. According to a report from China Investment, the domestic sales amount of white tea in mainland China experienced strong growth from approximately 0.4 billion USD in 2017 to around 1.3 billion USD in 2021, with a compound annual growth rate of about 32.8%. It is estimated to reach around 2.4 billion USD by 2026, with a compound annual growth rate of about 11.9% from 2021 to 2026.

As a supplier of white tea products, Mindong Red Group has taken advantage of the industry's growth momentum. However, in the past two years, the company's performance has shown some signs of decline. From 2022 to 2023, the company's revenue was 24.3 million USD and 24.1 million USD respectively, a slight decrease of 0.8% year-on-year; during the same period, the net income was 11.501 million USD and 11.853 million USD respectively, a decrease of 2.97% year-on-year.

As mentioned earlier, primary processing of white tea is the core product of Mindong Red. The total revenue from 2022 to 2023 was 20.2 million USD and 19.9 million USD, accounting for 83.2% and 82.4% of the total revenue respectively during the same period; primary processing of red tea accounted for 16.7% and 15.7% of the total revenue. Therefore, the company's performance fluctuations are mostly related to the sales performance of primary processed white tea.

In the past two years, the company has experienced a decline in the selling price of processed white tea. In terms of volume, the sales volume of processed white tea from 2022 to 2023 was 0.4719 million kilograms and 0.4886 million kilograms respectively; the average selling price per kilogram during the same period was 43 USD and 41 USD respectively. Despite some growth in sales, it still cannot offset the revenue gap caused by the price decline.

However, it is gratifying that the company's gross profit recorded a moderate increase during the reporting period, with gross profits of approximately 12.65 million USD and 127.8 million CNY respectively. The gross profit margins during the same period were approximately 52% and 53% respectively. The growth of gross profit is mainly attributed to the profitability brought by refined tea products. It is worth noting that the average selling price of refined tea has almost doubled in the past two years, reaching 125 USD and 228 USD. To capture the growth in the refined tea segment, the company plans to expand the sales volume of refined tea.

In addition to the lackluster performance and even decline, the company's key financial indicators have also been unsatisfactory.

During the period, the company's sales and distribution expenses were approximately 0.07 million yuan and 0.073 million yuan respectively, a slight increase of 4.3% year-on-year; financial expenses increased significantly by 42.8% year-on-year, mainly due to a sharp rise in depreciation and amortization. In the past two years, the company's depreciation and amortization were 0.044 million yuan and 0.252 million yuan respectively, with a year-on-year growth of 472.7%.

Additionally, the company's net cash flow generated from operating activities in the past two years was approximately 13.578 million yuan and 12.636 million yuan respectively; it narrowed slightly year-on-year, consistent with the downward trend in the company's performance. During the same period, the company's accounts receivable were approximately 0.859 million yuan and 0.936 million yuan respectively, a slight increase of 9% year-on-year.

It is worth noting that the majority of the company's business is conducted on an order basis, and its financial performance depends on maintaining relationships with major customers and the ability to develop new opportunities with potential customers. As of the fiscal years ended in 2022 and 2023, revenue from the top five customers accounted for approximately 40.5% and 39.3% of the total revenue, respectively. According to China Investment Report, leading primary tea drink production enterprises with high revenue concentration from top customers are not uncommon. The revenue contribution from the top five customers typically ranges from 20% to 50%.

However, despite the decline in performance and narrowing cash flow, Mingdong Red Group's accounts receivable continue to show a growing trend, indicating that the company's industry influence is not high, which affects both its collection and fund operational capabilities.

National 'One White Leaf' pattern enhances capacity expansion

White tea is an important category of Chinese tea. In recent years, white tea has gradually become a new favorite in the tea industry due to its fresh, elegant, sweet, and lingering characteristics. White tea is mainly produced in Fujian Province. Compared to other white tea growing areas in Hubei and Guizhou, Fujian's white tea enjoys a higher price premium. In 2021, white tea produced in Fujian, Guizhou, and Hubei accounted for approximately 67.2%, 12.3%, and 5.9% of the total production of white tea in mainland China. Within Fujian, Fuding produces most of the white tea, accounting for about 48% of the total production in Fujian in 2021.

According to jd.com's Big Data Research Institute's '2021 Spring Tea Consumption Trend Report,' the post-95s' new consumer group also prefers white tea. As white tea becomes the 'new aristocrat' among young consumer groups, more and more provinces besides the main white tea producing region of Fujian Province are entering the white tea market. Provinces such as Yunnan, Sichuan, Guizhou, and Hubei are intensifying their white tea production categories, leading to a nationwide 'white tea craze.' In 2023, the national white tea production volume reached 0.1002 million tons, with a growth rate of 538.22% over the past 10 years, ranking first in the growth rate of the six major tea categories in China.

The prospectus shows that the domestic sales value of white tea in mainland China is estimated to increase to $2.4 billion (16 billion RMB) by 2026, with a compound annual growth rate of 11.9% from 2021 to 2026. However, in terms of the competitive landscape, China's tea production and sales market is a highly fragmented market. According to Mindong Hong Group, the number of competitors in the white tea market reached 1,000 in 2020.

In order to seize the growth opportunities in the white tea market, Mindong Hong is actively increasing its production capacity.

On one hand, the company plans to increase its production capacity by acquiring tea gardens. In the past two years, the company has received but not accepted purchase orders totaling approximately $13.26 million (91.76 million RMB) and $14.26 million (92.3 million RMB) respectively. The inability to accommodate all purchase orders from customers has limited the company's performance growth potential. Acquiring additional capital to purchase and upgrade tea gardens will be an effective and efficient strategy to increase production, sales, revenue, and profit. However, acquiring tea gardens will also significantly increase depreciation and amortization expenses.

On the other hand, the company plans to construct a new production plant and purchase four automated production lines for primary processing of white tea. The company intends to expand its production facilities by establishing a new production plant in the Zhe Rong Tea Industrial Zone in Zhejiang, with an initial estimated total construction area of approximately 9,783.0 square meters. The initial phase of the new production plant will be used for primary processing of white and refined tea as well as product storage. The company has signed a letter of intent with the Zhe Rong Tea Industry Zone Management Committee, with an estimated tender price of approximately $5 million (around 33.7 million RMB).

Despite the increase in production capacity, it is positive for expanding the market share in the white tea market. However, with more entrants, homogeneous competition intensifies. Moreover, in 2023, the total sales volume of white tea was 0.083 million tons, accounting for 3.4% of the six major tea categories. Although the growth rate is significant, the actual total volume still lags far behind the over 10% market share of black and green tea.

While the market volume has not yet expanded significantly, more and more regions that want a piece of the pie are entering, posing increasingly significant challenges for the white tea. In addition, with an increase in supply, whether the price of the white tea market has resilience remains a test. As mentioned earlier, once the price of white tea drops, the low growth in sales volume may not be able to compensate for the decline in price. It will take time to see if Mindong Hong Group can revitalize its growth through expanded production.