Fast-Growing Rice Merchant Looks For Big Harvest With Hong Kong IPO

Key Takeaways:

• Internet rice merchant Shiyue Daotian is seeking to attract investors to its Hong Kong IPO with annual growth averaging 40% over the past three years
• The company’s latest funding earlier this year, with participation from the Abu Dhabi government, valued it at nearly $2 billion

By Fai Pui

“Love Stories from the Countryside” is a staple on Chinese TV, telling bittersweet yet humorous tales from rural areas in Northeastern China’s rustbelt. Two years ago, a local entrepreneurial rice company scored its own hit with a series of products co-branded with the series and sold them on the e-commerce platforms of JD.com JD and Alibaba BABA. It promoted its take on the Chinese dietary staple using a series of creative videos, funny posters and cartoons drawing on the series name.

Now, the rice merchant behind the campaign, Shiyue Daotian Group Co. Ltd., is hoping to score another hit, this one in financial markets, with its plan to list in Hong Kong. It served up its prospectus on the last day of March, and reportedly plans to raise up to $300 million, according to media reports citing market sources. Morgan Stanley, CICC and CITIC Securities International are joint sponsors of the deal.

The Chinese dietary staple was traditionally sold through wholesale agricultural markets, large supermarkets and smaller retail stores offering big brands like Beidahuang, Fortune and CR Ng Fung. In 2005, Wang Bing and Zhao Wenjun, a couple from Northeastern China, jumped on the industry train by becoming grain traders.

Six years later the couple founded their own Shiyue Daotian and Firewood Courtyard brands of rice, and threw a major disruptor into the traditional offline market by conducting business over the internet. JD.com was their first online partner, and two years later the brands found their way onto Alibaba’s Tmall, China’s leading B2C online marketplace. In 2018, the couple expanded with their establishment of Sunshine Family, a high-end rice brand.

Revenue Goes Snap, Crackle And Pop

Third-party data cited in the company’s prospectus shows Shiyue Daotian has been the largest seller of rice, whole grains, beans and seeds over comprehensive e-commerce platforms in China from 2019 to 2022. Last year, its market share reached 14.2%, nearly triple the second-place company.

Over the past three years, Shiyue Daotian’s revenue has grown rapidly, doubling from 2.3 billion yuan ($334 million) in 2020 to more than 4.5 billion yuan last year, representing a compound annual growth rate of about 40%. Rice products accounted for about 80% of its revenue. Whole grains and beans accounted for 11.5%, while dried foods and other products accounted for the remaining 8.6%.

Third-party e-commerce platforms are Shiyue Daotian’s largest single revenue source. The company was working with 29 such e-commerce companies as of last year, with revenue from those partners growing from 1.59 billion yuan to 2.66 billion yuan over the last three years, accounting for nearly 60% of its total income.

The company also operates its own online store, and began selling offline in 2016 as well. Revenue from its self-operated online store totaled 490 million yuan last year, down 7.4% year-over-year. But revenue from modern supermarkets jumped 72.3% last year to account for 15.4% of the total. That made Shiyue Daotian the fourth largest company in China in terms of revenue from modern retail channels in China’s rice, whole grain, bean and seed market.

Despite its steady growth, Shiyue Daotian has been far less stable in terms of profits. After posting a profit of about 14 million yuan in 2020, it lost 173 million yuan the following year. The losses ballooned to 564 million yuan last year. The company blamed the growing sea of red ink mainly on rising sales and distribution expenses, as well as a big rise in administrative expenses related to stock incentives.

To boost sales among its online shoppers, the company partnered with over 3,500 key opinion leaders (KOLs) last year, causing sales and distribution expenses to jump 40% to 315 million yuan. Its administrative expenses grew even more, tripling to 858 million yuan due to costs related to an employee incentive plan that was the main driver for its soaring annual loss. Excluding such costs and changes in book value to financial instruments issued to investors, the company’s non-GAAP adjusted profits have actually grown steadily from 220 million yuan in 2020 to 360 million yuan last year.

Middle Eastern investor

Compared with companies from hot areas like the internet, artificial intelligence and biotech, traditional enterprises like rice dealers often get less-than-steamy receptions from investors due to their slow growth. But Shiyue Daotian appears to be an exception, perhaps due to its tech-savvy online approach that has attracted some big-name investors.

After receiving 300 million yuan from GenBridge Capital in its seedling Series A financing in September 2020, the company raised 1.45 billion yuan from big names including Sequoia Capital, Yunfeng Capital and CMC Capital less than a year later. Earlier this year, it even attracted attention from abroad by securing Series C financing from the Abu Dhabi government’s MIC Capital, valuing the company at 12.6 billion yuan.

Heilongjiang Agriculture (600598.SH), a similar Northeastern Chinese agricultural products dealer listed in Shanghai, has a current price-to-sales (P/S) ratio of about 5.6 times. If Shiyue Daotian receives a similar multiple, its 4.53 billion yuan in revenue last year would value the company at 25.4 billion yuan after IPO – roughly double the level at the time of the Abu Dhabi investment and similar to Heilongjiang Agriculture’s 23.7 billion yuan market cap.

To attract retail investors, Shiyue Daotian says it plans to pay 20% of its distributable profits as dividends every year. The company has a record of paying such dividends in the past, including a 50 million yuan in dividend payments in 2020 and another 200 million yuan last year.

By repackaging a traditional product with an internet story, a small rice trader has grown into an industry giant, and wants to tell the world its story on the Hong Kong Stock Exchange. That tale from Shiyue Daotian shows success can sometimes be cooked up even in conventional industries, given the right recipe of innovation and savvy packaging.