Weilong Defies Downbeat Consumer Market With Its Cheap Spicy Snacks

Key Takeaways:

• Weilong Delicious said its revenue rose 26% in the first half of 2024, as sales of its vegetable products jumped 57% to become its biggest breadwinner
• The company looks like a good defensive play in the current environment of consumer caution due to the affordability of its snacks that typically cost less than $1

By Doug Young

There’s nothing like a spicy snack to make you forget about your worries in economically uncertain times.

That’s the major message coming from leading spicy snack maker Weilong Delicious Global Holdings Ltd., whose latest upbeat results bucked a much gloomier sound coming from most of China’s various consumer sectors. While most of its peers were reporting contracting revenue and profits, Weilong reported a 26% rise in its first-half revenue, while its profit rose by an even bigger 39%.

The company divides its spicy products into three major groups: seasoned flour products, vegetable products and bean products. Of those, vegetable products were the star performer of the latest period, logging 57% growth to overtake flour products as the company’s biggest breadwinner.

But the bigger theme here is China’s so-called “consumption downgrade,” which is seeing consumers rein in their spending in the current climate of economic uncertainty. As that happens, many people are eschewing more expensive big-ticket luxuries like smartphones and cars, and even dining out in fancy restaurants. In place of those, cheaper items like fast food and Weilong’s packaged snacks are increasingly seen as a more affordable little luxury.

Weilong’s snacks are quite cheap, typically costing less than 20 yuan, or about $3. The company’s vegetable products that performed so well during the first half of the year are some of the cheapest, with a package containing 60 packets of its popular Konjac Shuang costing just 65.80 yuan on e-commerce site JD.com.

At prices like that, it’s not surprising that cost-conscious Chinese consumers might not feel too guilty enjoying a pack or two while staying at home and watching TV instead of the usual night out at the karaoke bar.

Weilong also took exception to all the indicators showing Chinese consumer sentiment remains weak. It pointed to a recent consumer sentiment survey by global consultancy McKinsey that showed 76% of Chinese people were optimistic about the country’s macro economy this year, up from 73% a year earlier.

“Although consumers remain cautious about their consumption expectations, only several demographics are not so optimistic,” Weilong pointed out. “Most notably, younger consumers, particularly Generation Z, demonstrated a higher willingness of consumption. This positive sentiment laid a solid foundation for the growth potential of the snack food industry.”

Weilong added that sales of social consumer goods in China “showed an upward trend” in the first half of 2024, though it didn’t specify by how much. China’s retail sales continue to grow and haven’t slipped into contraction mode just yet. But their latest growth rates are far from the strong figures of earlier times, including just 2% growth in June – the slowest rate in more than a year.

As consumers opt for smaller luxuries, it’s not surprising that companies like Weilong would be one of the big beneficiaries. The company first alerted investors on July 25 that its first-half profit would rise between 35% and 39% year-on-year. Since then its shares have rallied 19%, which includes a 2.9% gain in early Monday trade following the release of the detailed interim report last Thursday.

Undervalued?

In the current climate of consumer caution, Weilong’s stock looks relatively undervalued. The shares have lost about a third of their value since the company’s Hong Kong listing at the end of 2022. It’s also down about 1% so far this year, trailing an 8.5% gain for the broader Hang Seng China Enterprises Index.

Even after the post-earnings rally, the stock still trades at a price-to-earnings (P/E) ratio of just 14. That’s below the 15 for Uni-President China (0220.HK) and 16 for Tingyi (0322.HK), two of China’s leading instant noodle makers, and is well behind the 32 for Zhou Hei Ya (1458.HK), a maker of spicy duck-based snacks.

The big question, of course, will be whether Weilong’s sudden growth spurt will continue into the second half of the year.

The company’s revenue jumped by 26% to 2.94 billion yuan ($410 million) in the first six months of the year from 2.33 billion yuan a year earlier. That growth rate was notably faster than the 5.2% revenue increase for all of last year, when the figure rose to 4.87 billion yuan.

We’ve already noted that the star performer for the period was vegetable products, whose sales jumped 57% to 1.46 billion yuan, accounting for half of all revenue. Seasoned flour products grew just 5% year-on-year to 1.35 billion yuan, accounting for 46% of the total, while bean product sales rose 18% to account for the remaining 4.2%.

Weilong attributed the strong performance for vegetable products to the introduction of new products, and also the addition of more sales channels.

While sales soared, the company also got a boost from lower raw material costs and inventory reductions due to strong demand for its products. Its cost of revenue rose 21%, slower than its revenue growth, while its average inventory days fell to 51 from 73 days in the first half of last year. Those factors helped the company to boost its gross margin to 49.8% in the first half of the year, up 2.3 percentage points year-on-year.

The potent combination of strong revenue growth and lower costs propelled Weilong’s profit by 39% to 621 million yuan, at the top end of its previous profit alert.

At the end of the day, Weilong looks like a nice defensive play in the current climate of economic uncertainty due to the affordability of its popular snacks. Its relatively low valuation also implies there could be some upside to the stock. The main question hanging over the company will be whether it can sustain its big first-half revenue gains for the rest of the year on the strength of continuing strong sales for its vegetable-based snacks.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.