The much-anticipated IPO of the Yan Palace, endorsed by a popular female celebrity, has finally come to fruition. On December 12th, Yan Palace (HK:01497) made its debut on the main board of the Hong Kong Stock Exchange, becoming the “first stock of bird’s nest.” However, the performance of Yan Palace in the secondary market has been chaotic.
On the first day of trading, Yan Palace opened at HKD 10.50 per share, reaching a high of HKD 10.70 per share, with an increase of over 10%. However, intraday, the stock price fell below the issue price, closing at HKD 9.70 per share, equal to the IPO issue price, with a total market value of approximately HKD 4.515 billion.
On the second day of trading (December 13th), Yan Palace opened lower and experienced a “big sell-off,” hitting a low of HKD 8.83 per share, a decrease of nearly 9%. As of midday, Yan Palace’s stock price was temporarily reported at HKD 8.94 per share, a decrease of 7.84%, with a total market value of approximately HKD 4.162 billion, reducing by HKD 353 million.
In this IPO, Yan Palace issued shares at HKD 9.70 per share, issuing 32 million shares and raising a net amount of HKD 256 million. It’s worth noting that Yan Palace had previously attempted an A-share listing with plans to raise approximately HKD 1.019 billion. However, on the eve of the IPO hearing, Yan Palace withdrew its application materials.
Yan Palace explained that due to ongoing uncertainties in the overall A-share approval process and considerations for future business development plans, listing on the Hong Kong Stock Exchange would provide an international platform to access foreign capital. However, investigations reveal that the situation is more complex. In April 2022, the China Securities Regulatory Commission (CSRC) raised 57 questions regarding Yan Palace’s initial public offering (IPO) application, citing concerns about special rights agreements, untrue contributions, and multiple instances of equity holding.
The CSRC believed that Yan Palace implied longevity and health benefits in its advertisements on media platforms. In response, the CSRC requested Yan Palace to provide specific explanations regarding the company’s advertising and related promotional materials, the specific promotional approach, and the compliance risks of false advertising, potentially leading to administrative penalties.
In comparison, Xiaoxian Stew was previously fined for false advertising. The promotional materials for its product parameters, including instant bird’s nest raw materials, dried bird’s nest content, product origin, and even food additives, did not align with reality. Additionally, it falsely claimed that the raw material for instant bird’s nest was “Swallow’s Bowl,” while the actual ingredients were Swallow’s Bowl and Swallow’s Strip.
According to Yan Palace’s prospectus, its product portfolio mainly includes pure bird’s nest products, “bird’s nest+” products, and “+bird’s nest” products. In 2022, Yan Palace had a total of 250 SKUs, with 194 pure bird’s nest products in four major series, including bowl nests, fresh stewed bird’s nests, rock sugar official nests, and dried bird’s nests.
The prospectus reveals that Yan Palace’s revenue for 2020, 2021, and 2022 was CNY 1.301 billion, CNY 1.507 billion, and CNY 1.730 billion, respectively, with gross profits of CNY 556 million, CNY 727 million, and CNY 878 million, and net profits of CNY 123 million, CNY 172 million, and CNY 206 million.
For the first five months of 2023, Yan Palace’s revenue was approximately CNY 783 million, a 12.30% increase from the same period in 2022, with gross profits of CNY 406 million, a 12.92% increase, and net profits of CNY 100 million, a 19.99% increase from the same period in 2022.
Under non-international financial reporting standards, Yan Palace’s adjusted net profits for the years 2020, 2021, 2022, and the first five months of 2023 were CNY 1.24 billion, CNY 1.94 billion, CNY 2.11 billion, and CNY 1.14 billion, respectively. Overall, Yan Palace’s performance growth is not substantial.
Revenue for Yan Palace is mainly contributed by pure bird’s nest products. During the reporting period, the company’s revenue from pure bird’s nest products was CNY 12.54 billion, CNY 14.42 billion, CNY 16.38 billion, and CNY 7.39 billion, accounting for 96.4%, 95.8%, 94.7%, and 94.3% of total revenue, respectively.
Among these, bowl nests had the highest revenue share, totaling CNY 5.59 billion, CNY 6.61 billion, CNY 6.73 billion, and CNY 2.83 billion, representing 43.0%, 44.0%, 38.9%, and 36.2% of Yan Palace’s total revenue during the same periods. Meanwhile, fresh stewed bird’s nest had revenue shares of 24.7%, 28.1%, 28.1%, and 27.5%.
Yan Palace boasts a high gross profit margin. The earlier prospectus indicates that the company’s main business gross profit margins from 2018 to the first half of 2021 were 51.63%, 48.33%, 48.51%, and 51.04%, respectively. According to the latest prospectus, Yan Palace’s gross profit margins for 2020 to the first five months of 2023 were 42.7%, 48.2%, 50.8%, and 51.9%, respectively.
Behind these figures is the divergence between the cost and selling price of bird’s nest. According to earlier prospectus disclosures, Yan Palace’s purchase cost for raw bird’s nest material was between CNY 11-12 per gram. Taking the star product, bowl nests, as an example, the deluxe version of bowl nests is priced at CNY 458 per bowl, with a bird’s nest content of only 3.61%, calculated based on 6.5g of bird’s nest per bowl.
By this calculation, the cost price of bird’s nest for this bowl of bowl nests is CNY 78, with additional costs such as labor not exceeding CNY 100. However, the selling price is CNY 458. According to dietary recommendations, bird’s nest is supposed to be consumed daily for three consecutive months for effectiveness. For the deluxe version of bowl nests, maintaining this for three months would cost over CNY 40,000. For the same amount, one could buy 40,000 eggs and consume one egg per day for 109 years.
In fact, bird’s nest also faces scrutiny over its nutritional content. The National Health Commission and the official website of the China Food and Drug Administration show that Yan Palace’s instant bird’s nest does not have a batch number for drugs or health food, with its food category listed as canned food and beverages. This means that Yan Palace’s deluxe bowl nests, priced at CNY 2,748 for six bowls, each weighing 180g, are essentially the same as canned orange slices in terms of food nature.
Additionally, the Chinese Center for Disease Control and Prevention’s Institute of Nutrition and Health, in a paper titled “Biological Activity of Sialic Acid and Its Distribution in Dairy Products,” pointed out that the average sialic acid content in eggs is approximately 27.03 μg/mg, while the sialic acid content in bird’s nest is 127 μg/mg, about 4.7 times that of eggs.
However, the cost of bird’s nest per milligram is approximately 3,000 to 4,000 times that of eggs, indicating that eggs are more cost-effective for obtaining sialic acid than bird’s nest. In reality, Yan Palace’s ingredient list is not deceptive; aside from 6.5g of bird’s nest, 96.39% of the composition is rock sugar and purified water, essentially sugar water.
Previously, Simba compensated consumers due to the “sugar water bird’s nest” incident, and Liu Guoliang also apologized for selling the same bird’s nest. Simba and three other companies had the responsibility to compensate three times the refund, amounting to a total compensation of CNY 597.85617 million, and the total refund amount was CNY 797.14156 million.
The expansion of the bird’s nest market is directly related to the high marketing and advertising expenses of companies like Yan Palace and Xiaoxian Stew. During the reporting period, Yan Palace’s sales expenses (sales and distribution expenses) were CNY 317 million, CNY 399 million, CNY 504 million, and CNY 209 million, accounting for 24.4%, 26.5%, 29.1%, and 26.6% of its total revenue, respectively.
The earlier prospectus shows that Yan Palace’s sales expenses from 2019 to 2021 were CNY 308 million, CNY 317 million, and CNY 391 million, accounting for 32.40%, 24.38%, and 26.10% of its revenue, respectively. Among these, advertising expenses were CNY 187 million, CNY 237 million, and CNY 267 million, accounting for 60.84%, 74.93%, and 68.37% of its sales expenses, respectively.
Apart from advertising, what else do companies like Yan Palace and Xiaoxian Stew have?