Exclusive Interview with Weng Yinuo, Founding Partner of Shanghai Hongzhang Capital: Focusing on Consumer Manufacturing
The Chinese consumer market in 2023 can be described as a year full of "black swan" events. The slowdown of A-share IPOs and changes in China-US relations have halved the listing plans of many companies. It has become increasingly difficult for enterprises to raise funds, and broken capital chains have become the norm. From the collapse of some once leading new consumer brands to Pinduoduo's market value surpassing Alibaba for the first time, consumer trends and the pattern of brand competition are being rewritten. In the new year, are there still investment opportunities in the primary market for the consumer industry? To address this question, Nanjing Innovation Investment Group has invited Mr. Weng Yinuo, Founding Partner of Shanghai Hongzhang Investment Management Co., Ltd., to discuss and share topics such as investment strategies and valuation logic in the large consumer industry, especially in the consumer manufacturing sector, focusing on the theme of "consumer manufacturing".
Weng Yinuo founded Hongzhang Capital in 2012. With over 20 years of experience in equity investment, he has long focused on the consumer industry and possesses forward-looking insights into it, making him a recognized industry expert in the consumer sector. Mr. Weng once served as Executive General Manager of the Direct Investment Department at China International Capital Corporation (CICC). Many companies he invested in have successfully listed on capital markets including the US stock market, Hong Kong SAR stock market, and domestic A-share market, such as JiajiaYue (603708), Blue Moon (06993.HK), and Ziyan Baiweiji (603057). He holds a master's degree in Investment Management from City, University of London. Currently, he serves as Deputy Secretary-General of the Shanghai International Private Equity Fund Association, Vice President of the China Condiment Association, and also holds positions as a Director of listed company JiajiaYue and an Independent Director of Shanghai Bailian Commercial Investment. His works include The Future of New Retail and The Future of New Brands.
Hongzhang Investment is an expert in China's large consumer investment field. Could you introduce Hongzhang Investment?
Founded in 2012, Hongzhang Investment has long adhered to value research-driven investment, identifying high-growth new business formats and high-quality unlisted consumer companies in the stock market, and providing in-depth post-investment management support. Hongzhang has a unique positioning in the investment stages of growth, Pre-IPO, and a few selected mergers and acquisitions, making it one of the few managers in China with experience in managing and operating holding projects. We think independently, do not chase "trends", and deeply explore "hidden champions" in the industry that have not been over-pursued by capital.
Currently, Hongzhang's understanding and focus areas in the consumer sector include: retail chain platforms, consumer manufacturing supply chains, consumer healthcare, consumer technology, and consumer product exports. We have invested in many outstanding enterprises, including Blue Moon, JiajiaYue, and Ziyan Food. We are committed to collaborating with the industry from the perspective of industrial capital to promote industrial development.
Consumption is an extremely broad and diverse concept. How does Hongzhang Investment define consumption? And how do you further classify the large consumer industry?
There are various ways to classify consumption, such as discretionary consumption, essential consumption, and service-based consumption. Currently, Hongzhang classifies and defines consumption mainly into the following four directions:
First, platform-based consumption, including retail chains and e-commerce platforms.
Second, consumer products, covering consumer brands and consumer supply chain manufacturing. Consumer manufacturing is B2B-oriented, while consumer brands are C2C-oriented. From consumers' perspective, most people perceive the consumer industry as a C-end business; in fact, the B-end business in the consumer industry has a large scale, accounting for 60-70% of the market, while the brand-side (C-end) business accounts for 30%.
Third, the intersection of consumption with other industries, including consumption & technology and consumption & healthcare. This is also a direction we are currently focusing on expanding and researching.
Fourth, opportunities for the consumer industry in China's "Belt and Road" Initiative. More and more consumer enterprises are shifting their focus to emerging countries, especially those along the "Belt and Road", and we are paying close attention to opportunities in this area.
From an investment perspective, how should we interpret and identify the value and competitiveness of consumer supply chain manufacturing enterprises?
The game relationship between elements in the consumer industry chain has changed over the years. Twenty years ago, channels (such as hypermarkets) and media (such as television) were centralized, while the supply chain manufacturing sector was fragmented with many small factories. Therefore, it was easy for large-scale platforms to emerge in that era.
However, the current environment is characterized by fragmented channels and media, making it more difficult to build large brands. In contrast, the supply chain manufacturing sector is shifting from fragmentation to centralization. As more and more enterprises engage in brand-building, they all need to find OEMs (original equipment manufacturers), which has led to the emergence of large-scale supply chain manufacturing enterprises. These consumer supply chain manufacturing enterprises have also created good economic benefits in their local regions.
Hongzhang has explored and invested in many "super supply chain manufacturing enterprises". We have deeply cultivated this direction in the past, achieving good results and creating favorable economic benefits for the locations where these enterprises are based.
How does Hongzhang identify these "hidden champion" enterprises?
Many super manufacturers are not located in first- or second-tier cities, but mostly in third- and fourth-tier cities where local costs are lower. For example, Shuaike Pet, an enterprise we invested in, is headquartered in Yinan County, Shandong Province. It is a leading domestic supply chain manufacturing enterprise for pet food and a high-quality super supply chain company in the pet food sector. Located in the main production area of pet food raw materials, the enterprise sources all raw materials directly from within Shandong's production area, giving it inherent advantages in raw materials and logistics. Hongzhang supported Shuaike in the early stages of its development.
Hongzhang's investment team conducts in-depth industry research and investment scanning to identify potential investment targets. We connect with the best entrepreneurs and corporate executives through various forms, keep up with industry development trends, establish brand influence in the industry, and create a large number of high-quality investment opportunities.
How do you define a "super manufacturing supply chain", and are there any quantitative indicators?
There are several perspectives to define it. For example:
The enterprise is a leading player in its niche industry, with revenue scale ranking among the top three in the niche market.
Currently, an annual revenue of over RMB 1 billion is a basic threshold; most such enterprises have annual revenue exceeding RMB 1 billion, with some surpassing RMB 2-3 billion, while still maintaining an annual growth rate of 20-30%.
These "hidden champion" enterprises have sound financial conditions. Generally, they do not proactively seek financing in the market and are not in the sight of ordinary consumers. Our approach to identifying these enterprises often involves in-depth industry research to analyze and explore the links with the best profit margins in the entire industrial value chain.
Hongzhang Investment has successfully identified many outstanding "super hidden champion" enterprises. These enterprises have strong cash flow and generally do not proactively raise funds in the market. How does Hongzhang secure such investment opportunities, and how do you maintain long-term good cooperative relationships with these enterprises?
First, Hongzhang emphasizes investment research capabilities. Through continuous research, we have established an investment research system that enables in-depth understanding of industries and businesses. Every year, we determine investment themes and predict future investment opportunities based on our research. For example, we began top-down research on the consumer health industry 5 years ago; our investment team spent time communicating with industry insiders, and this year we invested in an outstanding probiotic R&D enterprise.
In addition, Hongzhang Investment has established a strong reputation and influence in China's consumer investment field, and maintains long-term investment and strategic cooperative relationships with many outstanding entrepreneurs and business owners. Hongzhang has deeply cultivated the consumer industry for a long time, and our accumulated experience and resources can provide support to entrepreneurs. For instance, we have accumulated abundant resources in offline channels; in the current environment where it is not easy to make profits in the highly competitive e-commerce sector, we can help brand owners enter offline channels.
In short, enterprises need leading insights into the industry and possess unique resources within the industry, rather than merely providing financial support to portfolio companies. Here in Nanjing, we have identified and invested in an excellent enterprise engaged in IP-derived FMCG (fast-moving consumer goods).
The consumer industry is closely related to people's livelihood, with large production scales and sound operating cash flow. However, there may be some misunderstandings in the capital market—for example, it is believed that compared with technology enterprises, consumer enterprises have lower competitive barriers. What is your view on this issue?
First, the barriers of consumer enterprises are not only reflected in products but also include barriers in sales channel networks and marketing.
Second, consumer enterprises also have technological attributes, mainly reflected in applied technology, and form barriers in this aspect. For example, they bring efficiency improvements to customers. Take Hanshow Technology, an enterprise we invested in—it is a leading domestic enterprise engaged in the R&D, production, and sales of electronic shelf labels (ESLs), which provides value by improving efficiency in retail scenarios and has entered many offline retail networks.
Another example is agricultural technology, including seed industry and gene editing; some of these areas are also "chokepoint" sectors for China. The implementation of science and technology ultimately manifests in consumer products in many cases.
Compared with industries such as energy and technology, the consumer industry has a unique valuation system. From the perspective of valuing consumer enterprises, are there any differences between financial investors and industrial investors? What is the general valuation range?
The valuation system for consumer enterprises basically conforms to the classic valuation system, namely discounted cash flow (DCF).
The difference between financial investors and industrial investors is that financial investors tend to simplify the valuation process, focusing on growth and cash flow; industrial investors sometimes value the links with higher barriers in the industrial value chain more highly from the perspective of the industrial value chain.
The valuation range is affected by market sentiment. For example, around 2020, market sentiment was positive, leading to high valuation multiples—ranging from 3x to 10x PS (Price-to-Sales ratio) at that time. In the current environment with more rational market sentiment, the PS ratio is approximately 3x, and the PE (Price-to-Earnings ratio) ranges from 15x to 25x. Compared with the secondary market, the primary market usually has a valuation discount. Currently, market sentiment is rational, and the overall valuation of consumer enterprises is relatively reasonable.
What is your view on the development of Nanjing's intelligent manufacturing industry?
Many manufacturing industries originally based in Shanghai have relocated to Nanjing, including a large number of excellent intelligent manufacturing enterprises. In addition, many outstanding consumer manufacturing headquarters originally located in northern China that we have contacted are also relocating to the East China region; their industrial supporting facilities will also move here accordingly. This will also drive consumer enterprises from other domestic regions to settle here, and many will consider placing their headquarters economy in East China, particularly in Nanjing.
Nanjing Innovation Investment Group, linking municipal and district-level resources, manages tens of billions of yuan in mother funds, including investment layouts in the consumer sector. We hope to collaborate with professional partners and align on business and product initiatives.
Thank you very much. I believe Hongzhang Investment will actively communicate with consumer supply chain manufacturing enterprises to promote their settlement in Nanjing and drive the development of the headquarters economy. At the same time, we will continue to strengthen cooperation with outstanding local enterprises in Nanjing. Together with Nanjing Innovation Investment Group, we aim to achieve fruitful results in industrial implementation, forum exchanges, fund cooperation, and other aspects, and jointly create a favorable development environment for the consumer industry in Nanjing. Thank you!
Thank you for Mr. Weng Yinuo's sharing. We believe that in the new year, there will definitely be huge investment opportunities in the primary market for the consumer industry.
Source: Gong Yuxiang (Fund Department)
Reviewer: Xue Yao
Publisher: You Yi
