Today (February 2nd), CHAILEEDO learned from the official website of the Beijing Stock Exchange that the Listing Committee of the Beijing Stock Exchange has approved Anhui Chinaherb Flavors&Fragrance Co., Ltd.’s (hereinafter referred to as “Anhui Chinaherb”) application for the public issuance of stocks during its 6th review meeting in 2024. This also means that Anhui Chinaherb may become the first listed company in the flavors and fragrances industry in 2024.
Revenue growth is less than 30%, change in listing standards
Public information shows that Anhui Chinaherb was established in 2009 and mainly focuses on the research, production, and sales of spices and flavors. In 2017, Anhui Chinaherb was listed on the National Equities Exchange and Quotations (NEEQ) system for small and medium-sized enterprises, and in June 2021, it entered the innovation tier. In April 2022, Anhui Chinaherb initiated listing counseling with the Beijing Stock Exchange and in October of the same year, it issued a “Notice on the Board of Directors’ Review of Public Issuance of Shares and Listing on the Beijing Stock Exchange,” officially commencing the listing process on the Beijing Stock Exchange.
CHAILEEDO has analyzed Anhui Chinaherb’s main financial data in recent years. From 2020 to the first half of 2023, Anhui Chinaherb’s revenue was 105 million yuan ($14.6 million), 150 million yuan ($20.86 million), 189 million yuan ($26.28 million), and 87 million yuan ($12.1 million), respectively. The net profits were 14.63 million yuan ($2 million), 23.07 million yuan ($3.2 million), 37.71 million yuan ($5.2 million), and 18.87 million yuan ($2.62 million), respectively. The attributable non-recurring net profits were 12.42 million yuan ($1.73 million), 24.02 million yuan ($3.34 million), 33.78 million yuan ($4.67 million), and 15.64 million yuan ($2.17 million), respectively. The gross profit margins were 27.42%, 32.35%, 33.88%, and 34.16%, respectively.
It can be seen that Anhui Chinaherb’s net profit has increased by over 50% in recent years, with a significant growth of 455.54% in 2020. However, the company’s overall revenue growth has shown a declining trend, with growth in 2022 falling below 30%. Based on the previous filing, Anhui Chinaherb selected the listing standards as “expected market value not less than 400 million yuan ($55.61 million), average annual operating income of not less than 100 million yuan ($13.9 million) over the past two years, and a year-on-year growth rate of operating income of not less than 30% in the most recent year, with positive net cash flow generated from operating activities in the most recent year.”
Based on the 2022 performance, Anhui Chinaherb clearly no longer meets these listing standards. Therefore, Anhui Chinaherb has chosen to change the listing standards. The revised listing standards require an “expected market value not less than 200 million yuan ($27.8 million), net profit not less than 15 million yuan ($2.09 million) in the past two years, with an average weighted return on net assets not less than 8%, or a net profit of not less than 25 million yuan ($3.48 million) in the most recent year, with an average weighted return on net assets not less than 8%.”
According to the prospectus, Anhui Chinaherb’s main business focuses on cooling agents, synthetic flavors, and natural flavors. Cooling agents are its main source of revenue, including N,2,3-Trimethyl-2-isopropylbutanamide (WS-23), N-Ethyl-2-isopropyl-5-methylcyclohexanecarboxamide (WS-3), cooling agent WS-10, and menthyl acetate, among other cooling agent products. The related raw materials have been included in the “List of Used Cosmetic Raw Materials (2021 Edition)” and are widely used in the fields of personal care, oral care, and topical applications.
In addition to cooling agents, Anhui Chinaherb’s business also includes synthetic flavors such as dibutyl ester and ethyl butyrate, as well as natural flavors such as lavender oil, garlic oil, ginger oil, and red orange oil. Ethyl butyrate can be used as a flavoring, solvent, and extraction agent, while ginger oil and red orange oil can be used in personal care products. Lavender oil is mainly used in toothpaste, mouthwash, and other oral care products.
However, the revenue contribution from these two product categories is not high. Based on the data from the first half of 2023, 79.38% of Anhui Chinaherb’s revenue comes from cooling agent products, and this proportion has been increasing year by year since 2021. Synthetic flavor products account for 10.14% of total revenue and show a declining trend year by year, while natural flavor products account for only 4.63%, but this is a significant improvement compared to 0.62% in 2020.
In terms of product sales, Anhui Chinaherb’s customers are not highly concentrated, and there is no significant reliance on a single or a few customers. The proportion of sales from the top five customers has been decreasing year by year. From 2020 to the first half of 2023, the top fivecustomers’ contribution to revenue decreased from 33.47% to 22.47%. This indicates that Anhui Chinaherb has been able to diversify its customer base and reduce dependency on specific clients.
Specifically, apart from food companies, most of Anhui Chinaherb’s customers are spice and flavor traders, including international spice and flavor giants such as Symrise and Givaudan. Among them, Givaudan is also Anhui Chinaherb’s largest overseas customer in terms of sales.
Market share of 30%, continuous expansion of production capacity
It is worth mentioning that the spice and flavor industry, as a highly complementary and interconnected industry with other sectors, has experienced rapid development in the past few decades. According to Anhui Chinaherb’s prospectus, there are currently over 7,000 varieties of spices in the world, including over 6,000 synthetic spices and around 500 natural spices. The number of flavorings created by blending various types of spices exceeds tens of thousands.
Correspondingly, China’s spice and flavor industry is undergoing structural transformation and upgrading, shifting from pursuing rapid growth to high-quality growth. During the 13th Five-Year Plan period, China’s spice and flavor industry accounted for about one-fifth of the global market, with international trade exceeding 4 billion US dollars. China has become one of the major spice suppliers globally and also one of the most important markets in the spice and flavor industry.
According to data released by the China Flavor and Fragrance Industry Association, the market size of China’s spice and flavor industry increased from 25.2 billion yuan ($3.5 billion) in 2016 to 42.4 billion yuan ($5.9 billion) in 2022. Furthermore, the “14th Five-Year Plan” for the spice and flavor industry sets a target for China to achieve a fragrance production capacity of 400,000 tons and a spice production capacity of 250,000 tons by 2025, with the industry’s main business revenue reaching 50 billion yuan ($6.95 billion). It can be said that the spice and flavor industry still has considerable room for development.
However, as an upstream supply chain industry, the spice and flavor industry faces high costs of raw materials. The raw materials for spice production mainly come from spice plants or basic chemical products. Spice plants are susceptible to natural climate conditions, resulting in uneven annual output and unstable raw material supply and prices. Basic chemical products are also influenced by factors such as fluctuations in crude oil prices, which affect costs.
Anhui Chinaherb also mentioned in the prospectus that the proportion of direct materials to the main business costs is quite high, accounting for 88.70%, 88.21%, 86.82%, and 86.04% respectively from 2020 to the first half of 2023. This means that Anhui Chinaherb’s product costs are significantly impacted by direct materials.
For instance, the price of synthetic spices increased from 80,000 yuan ($11,122.72)/ton in 2022 to 120,000 yuan ($16,684.1)/ton and then decreased to 79,300 yuan ($11,025.4)/ton in the first half of 2023. The prices of natural spices also fluctuate significantly. However, the prices of cooling agents have been relatively stable in recent years, with prices ranging from 311,400 to 335,900 yuan ($46,701.5)/ton.
Specifically for cooling agents, the WS series cooling agent is the main product of Anhui Chinaherb. This raw material is an upgraded substitute for traditional cooling agent menthol, with a refreshing taste similar to menthol but with less irritation. It is less volatile, heat-resistant, and has no bitter taste. It provides long-lasting cooling sensation and strong impact in skin and oral care, with better physicochemical properties than menthol. These characteristics make it suitable for use in various products, such as oral care.
According to publicly available information, the domestic demand for cooling agents, including WS-23, increased by approximately 40% between 2019 and 2022, and the domestic demand for WS-23 in 2022 was about 1,346 tons. Data from the Shanghai Food Additives and Ingredients Industry Association shows that the WS series cooling agent products are expected to partially replace the market for menthol in the near future.
The prospectus shows that Anhui Chinaherb holds a market share of approximately 30% for WS-23 and other products in the domestic market in 2021 and 2022, making it one of the major producers in this product category. Consequently, the production expansion of “cooling agent” products becomes a significant focus for the company.
According to the prospectus, Anhui Chinaherb plans to issue up to 14.95 million shares of RMB common stock, accounting for 20.00% of the total post-issue share capital. After deducting issuance expenses, all the funds raised will be used for projects related to the company’s main business, specifically the production of 2,600 tons of cooling agents and fragrance raw materials per year (Phase I). The planned amount to be raised is 149.5 million yuan ($20.79 million), and the total investment in the project will reach 257 million yuan ($35.73 million). Currently, the project has obtained environmental impact assessment approval.
In detail, the project will produce various products, including nitriles and cooling agents, with 1,170 tons being nitrile products, which are the main raw materials for cooling agents. Therefore, 630 tons will be used for self-consumption, which will help AnhuiChinaherb expand its production capacity and meet the growing demand for cooling agents. The company aims to increase its market share and strengthen its position as a major producer in the domestic market for cooling agents.
Overall, the spice and flavor industry in China is experiencing growth and transformation, with the market size expanding and the industry focusing on high-quality growth. While the industry faces challenges such as raw material costs and price fluctuations, there is still significant room for development. Anhui Chinaherb’s planned production expansion and fundraising efforts reflect the company’s commitment to capitalizing on the market opportunities and meeting the demand for cooling agents in the industry.
2024: Cosmetics raw materials still in the spotlight
It is worth mentioning that besides Anhui Chinaherb, two other fragrance and flavor companies have recently accelerated their steps towards the capital market. Public information shows that synthetic fragrance company HAC updated its prospectus in November last year and responded to the second round of inquiries from the Shenzhen Stock Exchange. Wanxiang Technology, which failed to pass the review for the Second-board Market of the Shenzhen Stock Exchange, has also resumed listing guidance at the end of last year.
In addition to these companies, three raw material companies are actively seeking listing, including Trauer, Trautec, and Nanjing Shineking Biotech. Trautec initiated the listing guidance just in January this year. Trauer, which previously halted its review in 2021, re-submitted its listing application to the Beijing Stock Exchange last year. Nanjing Shineking Biotech, which specializes in biostimulant products and biologics, is currently in the inquiry stage.
In fact, as consumers pay more attention to the efficacy and formulation of cosmetics, raw materials have gradually become the darlings of the capital market. However, the main businesses of the companies attracting capital attention also show a clear bias. According to CHAILEEDO analyzed 28 financing cases in the raw materials sector in 2023, basic raw material companies favored by capital are still in the minority, with no fragrance and flavor companies among them. Most of the funded companies are engaged in the development of high-difficulty functional ingredients. Half of these companies are involved in synthetic biology or recombinant collagen fields.
Taking the five companies with financing amounts exceeding 100 million yuan ($13.9 million) as an example, apart from Chongqing Yuteng, which focuses on recombinant type A botulinum toxin, the rest are all synthetic biology companies. For instance, Paml Biotechnologies, which raised over 100 million yuan ($13.9 million) in a pre-Series A round in January last year, focuses on innovative bio-material research using synthetic biology technology. Ueny, on the other hand, diversifies its business in the field of synthetic biology and focuses on applications such as pharmaceutical ingredient formulation, medical aesthetic product ingredients, functional feed and crop protection ingredients, and new biotechnologies.
Of course, other categories of raw material companies also have opportunities. The Japanese nuclear wastewater discharge incident last year led to the abandonment of Japanese raw materials, prompting many companies to seek high-quality domestically produced alternatives to mitigate risks. An industry insider once told CHAILEEDO, “Some Japanese raw materials have very high demand, and once abandoned, there will be a significant market gap.” This is seen as a major opportunity for domestic raw materials to overtake.
Overall, there are still opportunities in the raw materials sector this year, especially for companies with new technologies and materials. However, this does not mean that there is no development space in other areas of raw material applications. As long as companies can maintain product innovation and continuously produce high-quality and high-yield raw materials, they can build a solid core competitiveness.
