IPOs brewing in Anxi

Saint-Germain-des-Prés, an upscale area in Paris, is known for its luxury shops and swanky bistros. And now its ranks have been joined by a small tea boutique, the result of an investment by five tea producers from Anxi.

The premier location is to project Anxi Tieguanyin’s reputation as a luxury product, says Lin Rongxi, deputy general manager of Eight Horses Tea, one of the five tea producers. “Right now everyone is talking about the rise of China. In my opinion, Chinese tea should be the symbol of that rise,” Lin told the China Daily.

Despite being the oldest tea producer, China has only recently begun to create a modern tea industry. Both at home and overseas, Chinese tea brands have struggled to compete against foreign competitors.

Anxi Tiekuanyin Group, the leading domestic oolong tea manufacturer and retailer, hopes to be one of the first to capitalise on the country’s tea-making heritage.

Recently it announced plans to raise Rmb157 million ($24.7 million) through an IPO on the Shenzhen Stock Exchange and, if successful, Anxi Tiekuanyin will become the first tea company to be listed on the domestic A-share market. More than 10 other tea companies including Huangshan Xieyuda Tea Industry and Anxi Bama Tea plan to join the IPO pipeline. This follows the success of Tenfu Tea, China’s largest tea retailer, which listed in Hong Kong last year, raising $161 million.

“Public listings will help domestic tea companies increase brand awareness and develop their businesses quickly,” Cai Jun, a tea industry expert at the China Chamber of Commerce of Import and Export of Foodstuffs, told the Global Times.

Tieguanyin, one of China’s ‘Ten Famous Teas’, is considered by many as the quintessential Oolong tea. Anxi county, which lies adjacent to Xiamen in China’s southeastern Fujian province, has the ideal geographical and climatic conditions to cultivate the best Tieguanyin leaves. As such Anxi Tieguanyin has been highly prized among tea aficionados for centuries.

Last year Anxi Tiekuanyin (confusingly the company spells its name with a ‘k’ while the tea is spelled with a ‘g’) posted a net profit of Rmb48.9 million, an 86% year-on-year growth. The company says the money raised in its IPO will be invested in new plantations, a wider sales effort, and research and development.

A look at the company’s prospectus also reveals risks in Anxi Tiekuanyin’s business model. For a start, the company sources most of its tea leaves from third parties, rather than growing them itself. Purchase of leaves from other producers accounted for 60% of cost-of-sales last year.

That poses a supply chain risk, says Innovative Finance Observation, a newspaper. Monitoring quality across millions of scattered tea gardens is also an impossible task. “Most tea companies, even big ones like Anxi Tiekuanyin, face food safety risks, as they mainly purchase tea from local farmers,” says Xie Fuliang, a consultant at Hangzhou-based Achieve Consulting. “After the listing, the tea companies will have to pay more attention to food safety issues and increase their inspections of tea bought from farmers.”

Other observers doubt that Anxi Tiekuanyin will be able to generate a price premium from its brand. Although Anxi Tieguanyin is famous domestically, the company doesn’t have the rights to the necessary trademarks. In fact, the only marque the company actually owns is “Fengshan”, the name for one of its blends. There are over 300 companies registered in Anxi alone that produce Tieguanyin. Vietnam, Sri Lanka and Burma also grow and sell their own Tieguanyin tea.

Tea producers in Yunnan also face a similar problem in differentiating their products. Chinese teas are traditionally sold by type and place of origin, rather than by brand. So even though Yunnan Pu’er tea is very well-known, there are more than 3,000 Pu’er tea makers and merchants around the country, says the Beijing Times.

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