Anjoy Food, stock price at a low level, senior executives significantly reduce holdings

Anjoy Food is the leader in the frozen food industry. Over the past few years, it has maintained good growth, with both revenue and profit growth rates mostly above 15%. It can be said to have a quite perfect growth trend and is the only enterprise in the frozen food industry with a scale exceeding one hundred billion.

However, despite such growth, Anjoy Food's stock price has been falling for over three years. It was only this year that the stock price rebounded slightly. Recently, senior executives plan to reduce their shareholdings, pushing down the momentum that Anjoy had just gained, and now the P/E ratio is only around 15 times.

Where did Anjoy go wrong?

1. Financial Health, Suddenly Rich

In terms of thinking, we need to confirm whether Anjoy Food's growth is artificially inflated through financial statements adjustments.

However, from the financial reports, Anjoy's situation still looks quite outstanding.

With Anjoy's rapid growth, its gross profit margin has remained relatively stable. The sudden drop in gross profit margin in 2020 was due to accounting standards shifting freight costs from selling expenses to operating costs, but the gross profit margin gradually increased afterwards, likely due to product price increases.

At the same time, the trends of Anjoy Food's various expenses are mostly decreasing, leading to a continuous increase in net profit margin.

Looking at the balance sheet, Anjoy currently has 5.315 billion yuan in cash and 1.232 billion yuan in trading financial assets, totaling 6.5 billion yuan in cash assets. Short-term liabilities are only 226 million yuan, long-term liabilities 1 million yuan, which can be considered quite comfortable. This large sum of money mainly came from a 5.6 billion yuan substantial private placement in 2022, making the company suddenly wealthy. However, based on the financial data of the past two years, this money has hardly been utilized, just earning some interest.

It is precisely because Anjoy did not make good use of this money, leading to a significant decline in ROE. In 2022, the ROE was 10.72%, a drop of nearly 4 percentage points compared to 14.66% in 2021, and it rebounded to 12.1% in 2023.

The easiest item to inflate revenue, accounts receivable, has actually decreased in the past two years. Compared to the overall revenue scale, it is not a big issue at all.

A prominent issue in the balance sheet is the continuous increase in inventory. However, in terms of the overall asset scale, the proportion of inventory is actually shrinking, and the absolute proportion is not large.

On the cash flow side, Anjoy has been spending a lot on capital expenditures, with two or three relatively large investments. Overall, the free cash flow is relatively average, which may also be one of the reasons why the market is pessimistic.

Overall, Anjoy's financial performance is good. However, based on its industry and business model, it needs to continuously expand to establish an advantage, making it difficult for its asset returns to settle down. At the same time, there is insufficient market confidence in whether Anjoy can use its money effectively.

II. Industry Trend Slowing Down?

Anjoy Food's operating income is mainly contributed by three major categories: hotpot seasoning products, rice and noodle products, and dishes products, accounting for 50.1%, 18.12%, and 27.96% of revenue in 2023, respectively.

Following the operating strategy of "advancing on three fronts," the company is considered one of the more diligent enterprises in the industry.

Hotpot ingredients account for half of Anjoy's main business segments. Benefiting from the hotpot industry as an important sub-industry in the catering sector, with high standardization and relatively strong replicability, hotpot ingredients have also experienced a period of rapid growth.

Hotpot ingredients mainly include frozen fish paste products (such as imitation crab sticks, fish tofu, etc.) and frozen meat products (Xiaomi dumplings, Sani meatballs, etc.), belonging to the frozen food industry.

Currently, various segments of China's frozen food industry are at different stages of development. Frozen fish paste products and frozen meat products are gradually entering a mature stage, with growth rates slowing down. According to Frost & Sullivan, the size of China's frozen food market in 2021 was 175.5 billion yuan, with hotpot ingredients being the second largest segment of frozen food. In 2021, the market size of hotpot ingredients was 52 billion yuan, a year-on-year increase of +13%. Looking specifically at the development of fish paste products, according to data from China's Fisheries Statistical Yearbook, after 2017, fish paste products entered a period of stock competition, with a decline in production on the supply side. The hotpot ingredients industry has also basically entered a mature stage, with the high-speed growth phase in the past, and the industry's growth is now relatively stable.

However, the increase in the chain rate of B-end catering and the penetration rate of C-end consumption have brought about an increase in the demand for customization and high-end products, providing good opportunities for structured development for such products.

Anjoy balances both B-end and C-end channels. On one hand, it maintains competitiveness in the open small B-end channels with advantages, adapts to the market trend of increasing chain rate in catering and the growing demand for product customization on new retail platforms, further widening the gap with major competitors and continuously increasing market share. On the other hand, it follows the trend of C-end becoming more high-end in the industry, improving profitability through product structure upgrades.

Channels and scale are rare competitive advantages in this industry.

The barriers to entry in the hotpot ingredients industry are not high, with mature production lines, mature technology processes, high homogeneity of frozen hotpot ingredient products, high degree of automation in processing, and the main factor affecting the taste of hotpot ingredients being the amount of fish paste/meat. Expanding scale reduces costs and reaching as many consumers as possible is key in this industry.

In terms of frozen noodles and rice products, the industry is already in a mature stage, showing a trend towards staple food development, requiring differentiation and innovation to become a new growth point.

Among them, traditional staple foods (such as dumplings, tangyuan, zongzi) are currently in the late stage of maturity; while pastry products are in the early stage of maturity, with new types of noodles and rice products such as shaomai, hand-grabbed pancakes, steamed pan-fried dumplings, pies, xiaolongbao, etc., still being popular among consumers. Anjoy will adhere to the product strategy of "strengthening staple foods and launching main dishes," targeting the staple food sector, using explosive product thinking to create flagship products, optimizing product structure based on existing pastry products, and continuing to strengthen and expand staple food products Anjoy Food's main focus in the future lies in its pre-made meal business. In 2023, the revenue from frozen ready-to-eat products reached 3.927 billion RMB, a year-on-year increase of 29.84%, accounting for 27.96% of total revenue. It quickly surpassed the scale of the frozen rice and noodle business.

Pre-made meals are a high certainty sunrise track, with a clear logic for increasing penetration rate and obvious trends. In the medium to long term, the B-end hotel pre-made meal market is in the early stages of rapid development. The improvement in per capita consumption and chain ratio in China's catering industry will effectively support the demand for pre-made meals in the B-end. Pre-made meals for C-end customers are still in the budding stage, and with the acceleration of life pace, the C-end market also has good prospects and vast potential.

However, the disadvantages of pre-made meals are also obvious. Like Anjoy's other two businesses, the industry's barriers to entry are not high, and only by achieving a large enough scale can there be some competitiveness. The industry landscape is generally quite fragmented, and anyone can come in and get involved. Anjoy's development of pre-made meals complements its existing businesses. After many years of development, Anjoy has established a marketing network centered in East China and radiating nationwide, which can also be utilized together.

But pre-made meals are not an easy industry. This industry has a wide variety of products, requiring constant attention to any innovations in the market, and once it grows, it needs comprehensive integration of the industrial chain upstream and downstream. Anjoy insists on focusing on cultivating 3-5 "strategic flagship products" each year, with nearly 400 varieties currently available. Having a wide range of products can lead to inventory and wastage issues, increasing costs and reducing returns. However, in order to expand scale and grab market share, this approach is necessary.

One of Anjoy's competitive strategies is to localize sales and R&D. After sales in a certain area reach a certain scale, factories are established locally to save on transportation costs, improve market response speed, and quickly generate profits. Anjoy's national base layout is basically completed now, and localized R&D work is carried out in the production base areas, with each production base responsible for the R&D of new products in a specific category. Once a product is suitable, it is quickly scaled up to rapidly erode the market share of regional competitors.

It can be said that Anjoy is engaged in a troublesome business, with many tasks and fatigue. While others may also be able to do it, they may not see the value and may be reluctant to expand into the market. If operations are not well managed, despite not earning much to begin with, they may end up losing money instead. For example, companies like Sanquan Food, Haixin Food, and Huifa Food face similar situations, earning hard-earned money.

3. Lack of shareholder return awareness

Compared to other similar companies in the industry, Anjoy is relatively proactive, which is why it can sustain impressive growth.

Anjoy's executive team consists of professional managers who have been brought in, and they all hold shares in the company, deeply aligning their interests with the company's.

From the company's past development, it is evident that the management is quite professional in operations. However, in terms of shareholder returns, the company's performance is average.

In March 2022, Anjoy Food conducted a non-public offering of shares, raising 5.6 billion RMB, with the majority lying in banks earning interest, reducing the company's returns and suppressing its valuation level Subsequently, the controlling shareholder Fujian Guoli Minsheng Technology Development Co., Ltd. has been reducing its holdings all the way until September 2023, when there was a change in the company's controlling shareholder structure and the actual controller changed. Guoli Minsheng promised not to transfer its holdings of Anjoy Food within 18 months. At the beginning of this year, they further committed to not reducing their holdings for 60 months, and only then did the stock price gradually stabilize.

However, after the major shareholder finished reducing their holdings, it was the turn of the executives to start reducing theirs. While the management team initiated share buybacks, at the same time, several executives chose to reduce their holdings, making the company's buyback seem like a cover for their own retreat. Even though Anjoy's stock price has returned to a low level, the company's two deputy general managers still chose to significantly reduce their holdings, seemingly without the intention of sharing the long-term development dividends with the company.

In terms of equity returns and quick realization, executives chose to cash out even when the stock price is low, which truly surprised the market. They are the ones who understand the company the most, yet they did not think from a shareholder's perspective. Investors with low risk appetite are likely to stay away.

IV. Conclusion

Anjoy Food was previously favored by the market due to its sustained rapid growth and the large development space in its industry. However, in terms of its business model, its moat is not deep enough, and it requires continuous expansion, treating offense as defense.

In the current macro environment, market consumer demand is unstable, and the certainty and returns of expansion are decreasing. Compared to other enterprises, especially state-owned enterprises, Anjoy appears to have much weaker certainty. While the decline in Anjoy's stock price can be attributed to factors such as previous significant increases, the company's management seems to be more responsible for themselves rather than for the shareholders, which further distances investors