At the time of the launch of the Hong Kong Stock Connect: WL DELICIOUS faces a "double pain" of price and distribution channels.

Institutional investors of WL DELICIOUS (9985.HK) may need to "take a break and have some spicy snacks" now.

Recently, the Shanghai and Shenzhen Stock Exchanges issued notices to adjust the constituent stocks of the Hang Seng Composite Index, Mid Cap Index, and Small Cap Index. According to the regulations of the Shenzhen Stock Exchange's Shenzhen-Hong Kong Stock Connect, WL DELICIOUS will be removed from the list of Hong Kong stocks under the Shenzhen-Hong Kong Stock Connect, effective from March 4, 2024.

On March 4th, the stock price of WL DELICIOUS fell by 13.8% to HKD 4.81 per share, with a market value evaporating by HKD 1.8 billion in a single day. The total market value is now only HKD 11.3 billion, a drastic drop from its initial listing on the Hong Kong stock market.

Wang Zehua, an analyst from Founder Securities, pointed out that the low liquidity is the core reason for WL DELICIOUS being removed from the Hong Kong stock connect. This low liquidity is attributed to the low percentage of shares publicly offered during WL DELICIOUS's IPO, as major shareholders have not reduced their holdings.

As of the first half of 2023, the controlling shareholders Liu Weiping and Liu Fuping hold 80.99% of WL DELICIOUS through a trust structure, without any reduction in holdings.

Prior to its listing, institutional investors who invested in WL DELICIOUS included CPE Yuanfeng, Hillhouse Capital, Sequoia China, Tencent, and Yunfeng Fund. If external institutional shareholders have not reduced their holdings, based on the cost estimate of $2.16 per share disclosed in the prospectus (approximately HKD 16.7 based on historical exchange rates), the unrealized losses of investors like Hillhouse and Sequoia may exceed 70%.

According to information from sources related to WL DELICIOUS obtained by TradeWind01, institutional investors of WL DELICIOUS have not taken any actions to reduce their holdings.

On the other hand, the adjustment in prices and channels is causing pain for WL DELICIOUS's business.

In the first half of 2023, WL DELICIOUS achieved a revenue of 2.327 billion yuan, a slight increase of 3% year-on-year; and a net profit of 447 million yuan, turning around from a loss.

However, looking at individual products, the revenue contribution from its core product, seasoned noodle products (including spicy snacks), decreased by 3.9% year-on-year to 1.289 billion yuan, with the revenue share dropping from 59.3% to 55.4%.

WL DELICIOUS attributed this to the product structure adjustment in May 2022, which eliminated some low-priced products; and the decline in foot traffic in traditional retail and supermarket channels.

The short-term challenges of its core product, spicy snacks, can be seen from the changes in volume and price.

In the first half of 2023, the ton price of WL DELICIOUS's seasoned noodle products increased significantly by 26.83% year-on-year to 20.8 yuan/kg, but the sales volume also decreased by 24% year-on-year.

WL DELICIOUS's second-largest product, vegetable products, clearly failed to drive growth. In the first half of 2023, the revenue only increased by 14.14% year-on-year to 933 million yuan. It's worth noting that in 2021, this segment still had a growth rate of 45.54%, which dropped to 1.76% in 2022.

In terms of channels, WL DELICIOUS, like other snack brands, needs to face the changes brought by the bulk snack channel to the industry.

According to information from sources close to WL DELICIOUS, since the second quarter of last year, WL DELICIOUS has tailored packaging and product specifications to provide a special pricing system for the bulk snack channel. In September and October last year, the bulk channel accounted for more than 10% of WL DELICIOUS sales, and it is expected to continue to increase next year.

The source mentioned that the bulk snack channel has extreme requirements for the mid-to-back-end and supply chain.

For example, the product shelf life requirement is to receive goods within 12-15 days, the manufacturer's profit requirement is less than 20% or even lower, and the supply chain inventory turnover is on average 5 days. Therefore, cooperation with the bulk snack channel imposes higher efficiency requirements on the brand.

To meet these requirements, WL DELICIOUS adopts flexible production, actively responds to "customer demand for any product combination at any time," and uses a direct distribution model to meet the real-time changing sales demand at the end.

However, this may also mean that WL DELICIOUS, which has defined the spicy strip category, is facing a challenge to its authority in the bulk channel.