Fragrance and flavoring companies continue to surge in the IPO, continuing to sweep the Chinese domestic market. Recently, HAC Bio has made new progress in its IPO, while on the other hand, Wanxiang Technology Group Co., Ltd. (referred to as “Wanxiang Technology”) has restarted its IPO.
However, on July 14, 2022, one day before the hearing, Wanxiang Technology’s IPO review was terminated by the ChiNext Listing Committee of the Shenzhen Stock Exchange due to issues such as multiple bribery cases, tax evasion, and excessive emissions. In the context of tightened IPO regulations, the future of Wanxiang Technology, which is attempting to go public despite these issues, is uncertain.
Restarting IPO After Termination Due to Bribery
Recently, the official website of the China Securities Regulatory Commission (CSRC) released the “Report on the Initial Public Offering and Listing Guidance Filing of Wanxiang Technology Group Co., Ltd.”
According to the report, on November 9, 2023, Wanxiang Technology signed a guidance agreement with CITIC Securities. According to the guidance work arrangement, the guidance period will last from November 2023 to May 2024. The report also shows that its original shareholder, Wanxiang International, was listed on the main board of the Shenzhen Stock Exchange from July 19, 2007, to March 30, 2012.
Public information shows that Wanxiang Technology was established in 2001, with Li Chunnan as its actual controller. According to Wanxiang Technology’s official website, the company focuses on the research, production, and sales of flavors and fragrances. Its products are widely used in the industries of flavors and fragrances, daily chemicals, food and beverages, etc. Currently, it has established stable business relationships with the top ten international flavor and fragrance companies such as Firmenich, Givaudan, IFF, Mane, and Symrise, as well as internationally renowned companies such as Colgate-Palmolive and Procter & Gamble. Its products are sold in more than 30 countries and regions across six continents.
Looking back at the past six months, in June of this year, the company changed its name from “Wanxiang Technology Co., Ltd.” to “Wanxiang Technology Group Co., Ltd.” CHAILEEDO noticed that the company has changed its name several times, previously known as “Huaian Wanbang Flavors Co., Ltd.” and “Huaian Wanbang Flavors Industry Co., Ltd.”
Going further back, CHAILEEDO learned that this is Wanxiang Technology’s second attempt at an IPO. In July 2022, the Listing Committee of the Shenzhen Stock Exchange terminated the IPO review of Wanxiang Technology. According to the information disclosed by the Shenzhen Stock Exchange, the last time Wanxiang Technology’s IPO was accepted was on December 25, 2020, and it has been nearly a year and a half since the termination of the review, with Minsheng Securities as the sponsor institution.
Regarding the reasons for the termination, the Listing Committee of the Shenzhen Stock Exchange pointed out that from 2005 to 2019, Wanxiang Technology’s actual controllers, former executives, and core technical personnel were involved in nine bribery cases, and such incidents continued to occur during the reporting period, which did not comply with the relevant issuance and registration rules of it. It is reported that among the IPO rejections in 2022, Wanxiang Technology was the only company rejected due to bribery.
The IPO failure due to a long history of bribery is not common among previously rejected companies. It is understood that in the nine bribery cases of Wanxiang Technology, the recipients of bribes have all been sentenced, and in six cases, the bribery was personally orchestrated by Li Chunnan, the actual controller, chairman, and general manager of the company. The bribes were mostly given to officials from local departments involved in environmental protection, planning, and construction.
In addition, in terms of taxation, Li Chunnan and 15 other individuals failed to pay personal income tax related to Wanxiang International’s privatization process.
Due to the bribery and tax evasion incidents, Wanxiang Technology tasted the “bitter fruit” during its previous IPO attempt. After more than a year of setbacks, Wanxiang Technology has now changed its securities firm and restarted its IPO, but the path to listing still remains unclear.
“Although the bribery incidents were not committed by the corporate entity itself, they may indirectly reflect the difficulty of revenue growth,” said an executive director of a capital company to CHAILEEDO. Even if Wanxiang Technology has resolved the previous issues through rectification, whether they can overcome the bottleneck of performance growth will still be a key consideration for the IPO.
Chinese and International Flavoring Giants Face Performance Pressure
According to the official website of Wanxiang Technology, the company’s main business includes natural flavors and synthetic flavors. The natural flavors include peppermint oil and linaloe oil, while the synthetic flavors include l-carvone, methyl jasmonate, coumarin, apiole, ethyl maltol, and methyl maltol.
According to its previous prospectus, Wanxiang Technology’s revenue for the years 2019-2021 was 1.178 billion yuan, 1.218 billion yuan, and 1.415 billion yuan, with year-on-year growth rates of 3.33%, 3.40%, and 16.17%, respectively. The net profits were 117 million yuan, 77.5 million yuan, and 75.89 million yuan, with year-on-year growth rates of 22.62%, -33.76%, and -2.08%, respectively. Furthermore, the gross profit margins for the main business of Wanxiang Technology were 26.94%, 24.08%, and 20.90% for the years 2019-2021, showing a downward trend and significantly lower than the industry average gross profit margin of 37.35%.
It is worth mentioning that Wanxiang Technology has a relatively high proportion of overseas income. From 2019 to 2021, its export revenue was 785 million yuan, 706 million yuan, and 793 million yuan, accounting for 68.04%, 58.47%, and 56.75% respectively, despite a declining trend, it still exceeded half of the total revenue.
Due to the relatively high concentration of downstream famous brands in the flavor and fragrance industry, Wanxiang Technology has a high level of customer dependency. From 2019 to 2021, the sales to the top five end customers accounted for approximately 40% of the company’s total sales. Among them, Firmenich is Wanxiang Technology’s largest customer and also its largest supplier, exerting a significant influence on the company’s performance.
In fact, both domestic and foreign listed flavor and fragrance companies are facing performance challenges due to rising costs and high inventory levels caused by the pandemic.
Looking at the third-quarter reports disclosed by domestic flavor and fragrance listed companies, the overall situation is not optimistic. For example, Huaye Flavor’s revenue in the third quarter of this year was 63 million yuan, a year-on-year decrease of 0.07%, and a net loss of 2.5 million yuan, a year-on-year decrease of 142.25%. Another well-known company, Asian Star, saw a net profit of 23 million yuan, a year-on-year decrease of 27.04%.
Not only domestic companies, but international flavoring giants are also facing performance pressure. Among the four global flavor and fragrance companies, IFF’s net sales in the third quarter were 2.82 billion US dollars (approximately 20.1 billion yuan), a decrease of 7.93% year-on-year, and net profit was 27 million US dollars (approximately 192 million yuan), an increase of 101.23% year-on-year. Givaudan-Firmenich also experienced a decrease in both revenue and profit.
Regarding the performance and expectations, IFF stated that due to continuous destocking by customers, it is expected that this year’s sales volume will decline in the high single-digit range compared to the previous year. Givaudan-Firmenich mentioned that the current market is weak, and there is no substantial improvement expected in the business conditions in the second half of the year.
Under the pressure of the overall environment, top companies both domestically and internationally are seeking transformation. Therefore, it is not difficult to understand why Wanxiang Technology is pushing for an IPO again after its previous attempt failed.
Asia to Become the Largest Region for Flavor and Fragrance Demand
Currently, the global international flavor and fragrance market is thriving and still in the blue ocean stage.
According to the “Global Flavor and Fragrance (F&F) Products” report, the global flavor and fragrance market is estimated to reach $42.6 billion in 2021 and is expected to continue growing at a rate of 3.6% annually from 2021 to 2026. According to forecasts, the Asian market will become the largest region for flavor and fragrance consumption demand globally.
In fact, China has already become one of the most important spice suppliers in the world and is a significant market with a large share in the global flavor and fragrance industry. Public data shows that in 2022, the global flavor and fragrance market reached 196.4 billion yuan, and the market size in China reached 56 billion yuan, accounting for 28.5% of the global market.
However, due to a late start, China’s flavor and fragrance industry faces challenges such as outdated extraction methods, a lack of core competitiveness and innovation capabilities in products, and relatively small production scales. With the internationalization of the domestic market, international flavor and fragrance giants have expanded their presence in China, investing in factories and quickly occupying the high-end market for flavor and fragrance within the country.
Faced with international giants, local private enterprises in the flavor and fragrance industry face enormous pressure and challenges. Additionally, the flavor and fragrance industry belongs to the fine chemical industry, with fast product updates, high requirements for application technology, and significant capital needs. However, the concentration of the domestic flavor and fragrance industry is relatively low, and the market landscape is scattered. Public information shows that there are approximately 1,000 flavor and fragrance companies in China, with only around 40 companies achieving annual revenues exceeding 100 million yuan.
In the face of fierce competition and to survive the elimination game, in recent years, some flavor and fragrance companies with certain strength and scale have sought to go public and seek capital support.
It is understood that since 2020, there have been seven Chinese flavor companies that have gone public or queued for IPO, including Kerry Aromatics, Huaye Flavor, and Green Biologics. According to the previous prospectus of Wanxiang Technology, it plans to raise 648 million yuan to further improve product quality and expand product categories. At that time, industry insiders pointed out that after the completion of the investment projects, it may help Wanxiang Technology further enhance its core competitiveness and better participate in global competition.
The flavor and fragrance market has unlimited potential, and in this “IPO wave,” the beneficiaries are not only the companies themselves but also the promotion of technological innovation, thus driving the development of the entire industry. However, local flavor and fragrance companies still face significant challenges in reaching new heights.
