Oriental Rise Serves Up Steamy IPO For Tea Lovers

Key Takeaways:

• Oriental Rise’s shares posted strong gains in their Nasdaq trading debut, as the company raised a relatively modest $7 million
• The company will use IPO proceeds to help fund a major expansion that will boost its land area under cultivation by 50%

By Doug Young

Move over, bubble tea chains.

Oriental Rise Holding Ltd. ORIS has just served up a new kind of tea offering on the Nasdaq, this one far more traditional than the trendy new generation of bubble teas offered by the likes of ChaBaiDao (2555.HK) and Nayuki (2150.HK) in Hong Kong. Investors certainly seemed to like the flavor of Oriental Rise’s business cultivating and selling white tea leaves, boosting the stock by 50% on Thursday, its first trading day.

The company raised a relatively modest $7 million from the listing, which saw it issue 1.75 million shares priced at $4 each. Tiger Securities was the sole underwriter.

Unlike the ultracompetitive bubble tea space, China’s traditional tea sector is relatively underrepresented on public markets, despite the nation’s thousands of years of history cultivating the leaves. China is more focused on promoting high-tech companies in sectors like microchips and autonomous driving these days, leaving little room for this kind of traditional tea producer to raise funds on the country’s policy-driven domestic financial markets.

But such companies still offer some big potential due to the industry’s fragmented nature, populated by lots of small producers operating in relatively remote areas due to the requirement for high elevations, often in mountainous regions, needed to grow tea. Oriental Rise is also noteworthy for its niche in white tea, which is relatively unknown outside China compared to more common green and black teas.

Known for its anti-oxidant properties and more subtle taste due to relative lack of processing compared with those other types, China’s white tea market is growing far faster than the overall tea market, according to Oriental Rise’s prospectus. Third-party data in the document shows China’s white tea sales more than tripled from 2.9 billion yuan ($407 million) in 2017 to 9.1 billion yuan in 2021, representing 32.8% annual growth. The figure is expected to further grow to 16 billion yuan in annual sales by 2026.  

By volume, the sale of white tea leaves also grew by a similar 34.1% annually from 21,800 tons in 2017 to 70,500 tons in 2021. By comparison, overall domestic tea sales in China grew by a far slower 6.1% annually from 1.8 million tons to 2.3 million tons over that period, with the figure expected to reach 2.8 million tons in 2026, according to the prospectus.

Oriental Rise’s own growth is far less impressive, largely constrained by the company’s limited land supply. The company operates farms under contract with local villages in Zherong county of South China’s Fujian province, known for its year-round mild weather, abundant rainfall and mountainous area that is conducive to tea planting. It works closely in contractual arrangements with local committees in the villages of Zhaizhong and Huangbai.

Such arrangements are common in China, where land is typically controlled by local village committees, and thus good relations with those committees are critical to doing successful business. Such arrangements also present one of the greatest risks for companies like Oriental Rise and other agri-businesses, since land use policies are constantly changing in China, and what’s allowable one day may become improper the next.

“Based on the advice of our PRC legal advisers, we believe that the village committees of Zhaizhong and Huangbai Village had been properly authorized to act on behalf of all of the farmer-households in the relevant villages,” it said in the prospectus, addressing such risk.

Big Expansion

As we’ve previously noted, Oriental Rise’s revenue and profits have been relatively steady in the last two years due to constraints caused by the size of its tea farms. Its revenue totaled $24.1 million last year, roughly flat from $24.3 million in 2022. Its net profit was also quite steady at $11.5 million last year from $11.9 million in 2022.

Some simple math will show Oriental Rise’s gross margin was quite enviable for this kind of traditional company, rising slightly to 53% last year from 52% in 2022. Those margins should continue to improve if the company can expand its operation and gain greater economies of scale, which brings us back to the issue of land constraints.

The company notes that it actually received more orders than it could fill in the last two years, forcing it to turn away around 92 million yuan worth of business in both 2022 and 2023. It’s planning to address that issue with a major expansion, which will be an important use for its IPO proceeds. We should also note Oriental Rise is quite cash-rich for a company of its size, with $36.7 million in its coffers at the end of last year, up sharply from $25.7 million a year earlier.

The company currently produces its teas on 7.2 square kilometers of land in Zherong county. But it has entered into letters of intent with the two villages where it operates for rights to cultivate another 3.5 square kilometers, which would increase its land area by roughly 50%. It said the land acquisition would cost about 87.6 million yuan, which it would finance from its cash flow and IPO proceeds.

The company is also in the process of building a new tea processing plant, which would require about $5 million for land acquisition and another $730,000 to build and equip the new facility. That means that altogether the acquisition of new farmland and construction of the new processing plant would cost the company about $18 million, which looks quite affordable given its current cash reserves and positive cash flow.

Oriental Rise’s big jump on its first trading day contrasts sharply with a 3.2% decline for the MSCI China Small-Cap Index on Thursday, and gives Oriental Rise a market value of about $132 million. Even after the big first-day jump, the company still trades at a relatively modest price to earnings (P/E) ratio of just 13. Most similar tea producers, many from India, trade far higher, such as CCL Products (CCL.NS) with a P/E of 34 and Goodricke Group (GOODRICKE.BO) at 22. That could indicate some strong upside potential for Oriental Rise’s stock, as it offers up a new type of tea flavor for western investors.

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