On January 29, Damo expects Weilong (09985)'s net profit to grow by 6% this year, maintaining its “in sync with the market” rating. The target price was lowered from HK$9.1 to HK$6.8.
The Zhitong Finance App learned that when the stock price of “the first spicy strip” Weilong Meimiao (09985) was successfully listed on the Hong Kong Stock Exchange at the end of 2022, after a short “highlight moment”, the company's stock price hit a high of HK$12.4 on March 14, 2023. Since then, the stock price has fallen all the way down. So far, HK$5.72 has fallen by more than 50%. Recently, Damo published a report saying that Weilong will benefit from a good trend in raw material prices in 2024 and may gradually have better profit expectations, but due to adverse changes in sales channels, revenue is still uncertain.
As the leading leader in the spicy strip industry, Weilong's spicy strips are affordable and tasty, and have always been loved by consumers, but as the price of Weilong products has increased, this inherent impression has changed. Weilong's spicy strips are facing an embarrassing situation where consumers are unable to buy them and are unwilling to buy them.
Weilong's products are mainly divided into three categories. The first is flavored noodle products, including large and small gluten, spicy strips, followed by vegetable products that mainly use konjac and fresh seaweed; and finally, soy products and other products, which mainly include soft bean skin and braised eggs. Judging from the data, according to the company's financial report, Weilong's main three sectors have all experienced a process of drastic upward price adjustments over the past few years. Looking at the first half of 2023 alone, the seasoned noodle products sector saw the biggest increase, with a year-on-year increase of 27%, even outperforming the 10% to 20% annual increase of popular LV packages.
Deeply investigate the reason for Weilong's price increase, which may be related to the decline in product sales. Financial reports show that in 2022, Weilong's revenue from seasoned noodle products decreased by 6.8% from 2,918 million yuan in 2021 to 2,719 million yuan, and sales volume also decreased by 43,000 tons to 156,600 tons from 193,600 tons in 2021. In order to offset the impact of the decline in sales caused by relatively high prices, Weilong had to continue to raise prices.
Weilong's effect of exchanging price for volume is already evident in its performance. In the first half of 2023, Weilong's net profit returned to mother was 447 million yuan, turning a loss into a profit. Despite this, a method of increasing total revenue by increasing the unit price, such as quenching thirst, can easily drag the company into a death spiral of price increase and volume reduction. Some people in the industry warned, “The practice of increasing prices to boost performance may have an impact on sales growth in the long run. Therefore, companies need to grasp the extent of price increases to avoid a sharp decline in sales due to excessive price increases, which in turn harms performance growth.”
Earlier, Guojin Securities stated in a performance review for the first half of 2023 that there is still pressure on Weilong to raise prices. According to the bank, the recovery of Weilong noodle products in the first half of 2023 fell short of expectations. The main reason was that distribution channels were still under pressure. At the same time, considering that price increases had a significant impact on sales, it lowered Weilong's performance expectations.
In addition to this, Weilong's increasingly sweet taste has also been criticized by many people, and is even called a sweet bar that is not spicy. Other brands that sniffed out the opportunity quickly followed suit, with Prince Spicy being the most typical. Unlike Weilong's sweet and spicy flavor, Prince Spicy sticks to the original spicy flavor, and at the same time, the price is very affordable, attracting a large number of consumers who were dissuaded by Weilong due to cost performance and taste. In the spicy strip industry, there is even talk of “Yufeng” (Prince of Spicy) in the South and “Weilong” in the North.
After Prince Spicy became popular, Wei Long chose to follow up quickly. In September 2023, he launched a new product — Overbearing Panda Spicy Hot Bars. The price reached a new level. The price of 36 packets is nearly 32 yuan, which is equivalent to 27.7 yuan per 500 grams. Such “high-end” spicy bars may be difficult to win back consumers lost due to the high price.
In addition, Weilong also has the problem of excessive reliance on offline channels, and the expansion of online channels is clearly insufficient, while the consumer preferences of young users are online. According to data, in 2019-2021, Weilong's offline channel revenue accounted for 92.6%, 90.7%, and 88.5% of the company's revenue, while online channel revenue accounted for only 4.2%, 5.6%, and 6.3%.
On January 29, Damo released a research report saying that the snack industry is mainly expanding through snack discounts and e-commerce. However, the biggest beneficiaries are usually smaller companies or their own brands, or brands that are rapidly transforming channels. The bank believes that this is not beneficial to Weilong because about 40% of the Group's offline sales come from traditional KA (large chains). As snack discount stores and e-commerce pay more attention to lower-tier cities, the group may face uncertainty about revenue and pricing structures. The bank expects Weilong's net profit to grow by 6% this year, maintaining its “in sync with the market” rating, and the target price was lowered from HK$9.1 to HK$6.8.