Lockdown Food Supplier Pang Pang Xiang puts IPO Back on the Menu

Key Takeaways:

• Bucking the Covid downturn, Pang Pang Xiang’s profits jumped in the first five months of the year after it provided Shanghai with lockdown food supplies
• The IPO-bound company is a family business, wholly owned by Chairman Huang Jianyi and his relatives

By Stone Shek

One man’s meat is another man’s poison, so an old saying goes. And even the Covid pandemic has brought opportunity as well as adversity for companies, particularly firms that were called upon to deliver crucial services during lockdown.

In the food sector, one of China’s few pandemic beneficiaries is Pang Pang Xiang (China) Co. Ltd., Shanghai’slargest provider of foodstuffs for canteen catering. Fresh from its success, the company filed to list its shares in Hong Kong for a second time on Oct. 24, soon after its first application lapsed, with Ping An Capital as the sole sponsor.

Updated figures in the prospectus reveal that the company’s net profit and gross margin jumped in the five months to the end of May, when Shanghai residents were battling through another lockdown to contain Covid-19 outbreaks. So how did the company end up benefiting from measures that have otherwise hampered the economy?  

As a supplier of ingredients and food services, Pang Pang Xiang sources, processes and repackages foodstuffs that are sent on to customers for turning into canteen or boxed meals.

Its mainstay clients are Shanghai-based businesses or educational institutions. Kindergartens and other schools accounted for between around 59% and 83% of annual revenue in the past three years. But the market for procuring and processing food for group consumption is extremely fragmented, with its low technological barriers to entry. Even though Pang Pang Xiang ranks as Shanghai’s biggest integrated supplier of canteen foodstuffs, it only held a meager 1.5% share of the market based on 2021 sales revenue, according to research cited in the preliminary prospectus.

As Covid has kept flaring up in China, Pang Pang Xiang’s operating performance has proved volatile in the past three years. At the start of the pandemic in 2020, its revenues fell 13% year on year to 123 million yuan ($16.8 million), as social distancing rules forced schools to switch to online teaching. But revenues surged 81% the following year to 223 million yuan after learners returned to the classroom and social mixing resumed.

However, the company’s revenue dipped again in the first five months of this year, down 15% to just 74.5 million yuan from the year-earlier period, after local authorities imposed a two-month lockdown from March to quash Covid outbreaks in several parts of Shanghai.

Silver lining for lockdown food suppliers

Despite revenue fluctuations, profits at Pang Pang Xiang have grown steadily. In 2020, net profit jumped around 20% to 27.29 million yuan as the company benefited from falling input costs but stable retail prices for its products. Its gross margin rose 9.3 percentage points to 38.2% that year. The financial performance remained positive through last year, when net profit surged 34% to 36.61 million yuan even though gross margin slipped to 33.8%.

In the first five months of this year, the pandemic forced Shanghai schools to close again, cutting off the company’s core income stream. The revenue contribution from educational institutions plummeted from around 83% in 2019 to just under 26% in the period. But instead of falling, the company’s profits leapt 40% to 17.79 million yuan. It turns out that in this case food was a crisis-proof commodity.

Pang Pang Xiang had a stroke of luck when it was awarded a municipal contract to provide stable food supplies to Shanghai residents during the lockdown. The lockdown services generated windfall revenues of 34.27 million yuan, with a higher gross margin of nearly 70%. This pushed the company’s overall gross margin to just over 53% for the period, far above the level of the past three years.

However, in June the lockdown was lifted and schools reopened their doors. Pang Pang Xiang’s performance is now likely to revert to the previous pattern.

Unusually, the company only provided financial data up to May this year in its latest IPO filing, instead of half-year figures from January to June. Therefore, investors lack information on Pang Pang Xiang’s performance after Shanghai returned to business as usual, and they may wonder about the reason for the missing data.

Pre-IPO dividend payout

The company’s main subsidiary, Shanghai Pongpongsound Agricultural and Distribution, was founded in 2012 and went on to list on Beijing’s National Equities Exchange and Quotations (NEEQ) board in 2016, before exiting the market in 2019.

Chairman Huang Jianyi gradually bought shares from his two fellow founders and now Pang Pang Xiang is fully owned by him and his wife Zhang Weiping. The family-dominated structure is unusual for a pre-IPO company. Indeed, aside from CFO Chen Zhengqin, two of the three executive directors on the board are the chairman and his daughter Huang Xianzhi.

The prospectus states that some of the IPO proceeds will be used to cut the firm’s reliance on external financing such as bank loans. In the past three years, the company’s bank loans have surged from 10 million yuan in 2019 to 71.46 million yuan in 2021. But the company’s cash pile dropped sharply from 33.31 million yuan at the end of December last year to just 4.71 million yuan. The company burned through 86% of its cash in just five months, after giving out 23.4 million yuan in dividends to shareholders.

For valuation purposes, investors can look to two peers in the wholesale food and catering sector. Sysco Corporation SYY and Zhengzhou Qianweiyangchu Food (001215.SZ) have price-to-earnings (P/E) ratios of about 32 times and 45 times. Applying the P/E average of 38.5 times and extrapolating five-month profit figures to the full year, Pang Pang Xiang would be valued at up to HK$1.76 billion ($226 million). But such calculations can never quite predict how investors will feel about tucking into a family business in the relatively low-tech supply chain for catered food.