Since its listing on January 13, 2023, Zhengwei Group (02147) seems to have become a new stock that cannot be ignored in the Hong Kong stock market.

The reason for this is that its gains are so remarkable.

Recently, Zhengwei Group has once again begun to enter a period of rising stock prices, with a cumulative increase of nearly 20% since September 20. Looking at the longer term, its stock price has surged by more than 205% since it went public. By the close of trading on September 26, the stock price had surged 7.11% to HK$2.26 billion, with a total market value of HK$1,888 billion.

In comparison, as the stock price of the Positive Food Group continues to rise, its price-earnings ratio TTM has also risen to 30 times, far higher than the price-earnings ratio of Hong Kong packaged food, which is less than 10 times that of packaged food.

So, looking at it from another perspective, can the growth potential of a net group whose stock prices continue to rise match this rising power?

Lack of core competitiveness, fluctuating performance growth

Established in 2002, Zhengwei Group is an agri-food producer. The base camp is located in Jiangxi Province, then gradually expanded to 26 provinces, autonomous regions, and 3 municipalities directly under the Central Government, including Sichuan Province and Hubei Province.

The company mainly started by producing dried goods, then gradually expanded its business line to ready-to-eat vegetable snacks, ready-to-eat meat snacks, etc. Up to now, its product portfolio includes snacks, dried mountain delicacies, dried aquatic products, grains, and seasonings and other products, and has its own brands, “Shengyao” and “Ganweifang.” It cannot be said that its product line is not rich. As of December 20, 2022, Zhengwei Group owns 583 kinds of snacks and 630 kinds of dried goods.

Judging from performance, benefiting from a rich product line, Zenwei Group's performance in the first half of this year showed steady growth characteristics.

According to financial data, in the first half of 2023, the company achieved revenue of 192 million yuan, an increase of 14.8% over the previous year; profit attributable to company owners was 29.662 million yuan, an increase of 42.1% over the previous year; basic profit per share was 0.04 yuan. The increase in revenue during this period was mainly due to increased sales of snacks and dried aquatic products.

At the same time, net profit and gross margin also increased. In the first half of the year, it recorded gross profit of 64.6 million yuan, an increase of 19.6% over the previous year, while gross margin increased by 1.4 percentage points to 33.7%. The reason for the increase was due to the company's “sharp rise in volume and price”, sales growth to 24.8 million yuan, and an overall increase in product sales prices.

As profit levels increased, the company's cash flow also increased significantly: on June 30, 2023, the company's cash and cash equivalents were approximately $297 million, an increase of about 89.3% over $157 million on December 31, 2022.

However, looking at the long-term perspective, the fundamentals of the Zenith Group cannot be called “impressive”; on the contrary, they show signs of strong growth.

In 2022, the company achieved revenue of 357 million yuan, an increase of 4.34% over the previous year, and net profit attributable to the parent company of 466.97 million yuan, a year-on-year decrease of 3.30%, showing the phenomenon of no increase in revenue and profit. However, with time moving forward, the weak performance growth of Zenith Group has already been reflected. Net Group's revenue in 2019, 2020, and 2021 was 297 million yuan, 283 million yuan, and 342 million yuan respectively; profit for the period was 40.95 million yuan, 40.94 million yuan, and 48.29 million yuan respectively. Overall performance fluctuated, and the characteristics of weakness were already evident.

In-depth investigation revealed that the weak performance of the Zhengwei Group was mainly due to its lack of core competitiveness products. Specifically, although the company had 583 kinds of snacks and 630 kinds of dried food at the end of 2022, covering casual snacks loved by today's young people, such as spicy crispy bamboo shoots, pickled enoki mushrooms, spicy kelp, steamed wings, and grilled neck, etc., in reality, the company can produce very few representative products.

In the casual snack market, having strong products is a company's core competitiveness, and the performance of Jingwei Group that has not yet incubated fist products that can occupy the market and has a large revenue scale clearly shows in disguise the current situation where the company lacks core competitiveness. Over time, it also left a legacy for the development of this company.

Development is limited, and stock prices are “inflated”

In recent years, with the rise of new retail models, opening up online and offline channels to accelerate omni-channel integration has become the development consensus of the casual snack industry.

On this point, Nielsen IQ also pointed out in its research report that in line with the times, it is important to lay out an omni-channel layout. On the one hand, the offline market is still the focus and needs to continue to be consolidated as a stable volume. On the other hand, brands need to grasp new channel trends and increase layouts such as O2O, Douyin live e-commerce, consolidation, and group buying.

However, if you take a closer look at how the Positive Management Group operates, insufficient online channel construction may be a key factor dragging down the company's subsequent growth potential.

According to relevant financial data, supermarket chains have always been the main sales channel for Zhengwei Group. In 2022, the company's revenue from supermarkets was about 222 million yuan, accounting for 62.1% of total revenue, while its online channel revenue was almost negligible. In 2022, its e-commerce channel revenue accounted for less than 1%.

At the same time, the Zhengwei Group is also very dependent on customers such as large retailers. From 2019 to 2022, the top five customers of Zhengwei Group accounted for 78.6%, 85.8%, 81.8%, and 82% of sales revenue, respectively. In 2022, the largest customer revenue share even reached 42%.

As we all know, the casual snack track is a “very busy” track. Leading players such as the Three Squirrels, Liangpin Shop, and Baicaowei are actively using the power of new retail “outlets” to grow rapidly, yet Zhengwei Group still relies heavily on traditional channels. This is clearly not a good phenomenon for the company's subsequent development.

However, in addition to relying heavily on traditional channels to hamper the company's development, from the point of view of the region covered by the business, Zenwei Group also has major limitations.

According to data, in recent years, the company's revenue share from Jiangxi Province has always exceeded 50%. It can be seen that the Jiangxi market is still half of the Zhengwei Group. In addition to Jiangxi Province, currently only provinces and cities such as Hubei, Zhejiang, Sichuan (including Chongqing), Hunan, and Fujian account for more than 1% of revenue. Among them, Sichuan and Chongqing accounted for 23.6% of revenue. From this, it is easy to see that Zhengwei Group's influence in other provinces and cities is relatively weak.

As mentioned earlier, the casual snack track is a very busy track. Although it has strong development potential, new and old players are also constantly emerging to grab market share. This also means that the Zhengwei Group, which has insufficient core competitiveness, may be at a disadvantage in market competition.

According to Frost & Sullivan statistics, domestic snack food retail sales in 2020 were 774.9 billion yuan, and the compound annual growth rate of retail sales from 2015 to 2020 was 6.6%. Retail sales are expected to reach 1101.4 billion yuan in 2025, and the industry's compound annual growth rate is expected to reach 7.3% in the next 5 years. Although the industry is a trillion-level market, the internal volume of the racetrack is also increasing, and it is obviously not easy for Zenwei Group, which lacks core competitiveness, to “go to the next level”.

Overall, whether from the lackluster fundamentals or from the internal industry track, it seems that the Zhengwei Group does not have the corresponding growth potential to match such high stock prices, and this also means that investors need to be wary about maintaining the trend of the Zenwei Group.