On course for the bourse

It is one of the best known Chinese brands of the modern era and it is contemplating a stock market listing. So why is no one apparently welcoming the news that beverage manufacturer Wahaha is thinking about going public?

Well firstly, Wahaha would be breaking the rule of threes. In Western terminology this stems from the Latin motto omne trium perfectum.

This holds that three of anything is the magic number that conveys perfection either in the form of an idea, or a turn of phrase: veni vidi vici anyone?

In Chinese capital markets lore there are two famous groupings of ‘three’ companies. On the one side, there is the BAT troika of Baidu, Alibaba and Tencent, which have made good use of the financial markets to fund their rapid expansion (Alibaba is reportedly planning a Hong Kong listing that will raise $20 billion).

Then on the other there is Huawei, Wahaha and Laoganma (one of China’s most famous chilli paste brands; see WiC435). Domestically, the trio are equally famous for shunning the financial markets altogether.

But perhaps Wahaha’s founder, Zong Qinghou, or more pertinently, his successor and daughter, Kelly Zong Fuli, are thinking about another rule of three. Confucius gave this advice in his Analects when he noted that, “King Wen of Zhou thought thrice and then acted. When I heard this, I thought twice would have been better.”

The meaning is clear. Hesitate for too long and your moment may pass. And this is unfortunately what many Chinese newspaper columnists and social media bloggers seem to think about Wahaha. For Zong senior is no longer China’s richest man.

He has slipped from first in the Forbes China rankings in 2012 to 18th in 2019, although his present net worth – $8.2 billion – is still nothing to be sniffed at. The problem: his fortune has not risen over the past decade because his company has lost market share to newer entrants.

Falling sales are generally not conducive to successful stock market listings. Back in 2010 when Wahaha’s revenue for the first time topped Rmb50 billion ($7.2 billion), Zong said he was planning to grow “another Wahaha” by doubling his unlisted firm’s sales to Rmb100 billion.

Instead of scaling that new height, Wahaha’s top line slipped by nearly Rmb30 billion in five years to just Rmb45.6 billion in 2017.

At its peak back in 2009, Wahaha had a roughly 18% market share in the ready-to-drink tea market (including milk tea). That share stood at just 3.6% by the end of 2018, according to one investment bank’s research. The two Taiwanese market leaders Tingyi and Uni-President have also both lost market share particularly over the last four years; slipping about 10 percentage points each to 35.5% and 29.6% respectively. By contrast, newer domestic entrants like Nongfu Spring have crept up from nothing in 2014 to 9.6% at the end of 2018.

Nongfu was established in Hangzhou in 1996 and has enjoyed a fairly spectacular growth profile. And it has been even more successful in the bottled water category, with a market leading 28.3% share at the end of 2018. Wahaha ranks fifth on 6.7% behind Ganten, which has a 10.4% market share. Ganten has also proved itself to be a savvy marketer, buying a Scottish castle in 2012 so it could begin settling bottled spring water using its name: Blairquhan.

Brand counts for everything where consumer goods are concerned. Both Nongfu and Ganten have succeeded by tapping into a growing desire for premium products that emphasise health and wellbeing.

However, Wahaha remains closely associated with its founder who is well known for his not-so healthy chain-smoking habit, and his extreme frugality. Indeed in 2013, his no-frills approach came back to hurt him (quite literally) when he had no security to protect him from a disgruntled would-be employee, who severed the tendons in Zong’s left hand during a knife attack (see WiC210).

Zong is a classic rough-and-ready, first-generation entrepreneur. He spotted a market opportunity in the early days as consumerism began to take off in China and grabbed it with both hands.

As we first wrote in WiC29, Zong started off by selling popsicles to children at schools in Hangzhou. He went on to create a line of health drinks after noticing how malnourished a number of them were.

Wahaha was founded in 1987. Its brand name was designed to sound like a child laughing.

In recent years, Zong has tried to diversify away from beverages but with limited success. In 2003, there was a children’s wear line, followed by milk powder in 2010, commercial property in 2012 and then liquor in 2013. As we wrote in WiC448, Wahaha has also just set up a robotics unit in a bid to upgrade to smart manufacturing.

However, in recent newspaper interviews, Kelly Zong has suggested that her father has not been adept at moving with the times.

“I pay more attention to process, whereas my father relies on intuition,” she said. “He needs to gain a deeper understanding about the new generation of consumers.”

Zong senior has long been resistant to the idea of an IPO. Zong junior holds the opposite view and said in the same interview it would be “normal” for the company to list.

In 2016, she canvassed investment banks about a potential bid for New York Stock Exchange-listed Dean Foods by a Wahaha unit she was then heading. Then in 2017, she tried to secure a backdoor listing for her own business interests.

She failed but not before sending the penny stock in question, Hong Kong-listed China Candy, on a rollercoaster ride.

The 37 year-old officially took over as Wahaha’s head of branding last year and seems determined to make her mark. Not for nothing is she known as “the most diligent princess” for her devotion to the company and work ethic (while still advocating for a better work-life balance than her famously workaholic father).

But she still faces a tough challenge convincing Chinese consumers and potential stock market investors that she is more than just a fuerdai, a term for the second-generation rich which can carry a derogatory subtext (for the billionaire heirs question marks are levelled at whether their entrepreneurial talents match their parents’).

Many companies falter when the first generation relies on its offspring to take over the reins rather than bringing in a professional manager cadre. Yet Kelly Zong may prove to be the exception to the rule.

Over the years, she has frequently expressed her reservations about Wahaha’s diversification into new areas.

Instead, she’s advocated a more focused approach on the core beverages group embracing a new range of differentiated products, as well as e-commerce channels to sell them and a greater focus on sustainability and greener thinking.

She also wants to bring in more professional managers to transform Wahaha’s corporate culture.

“My father has always liked to do everything single-handedly and for a long time everyone just relied on him,” she told the Daily Economic News. “I want to introduce structured management, teamwork and cooperation.”

One thing Kelly Zong has definitely understood is how an IPO could benefit Wahaha.

“We don’t need money or a strategic partner,” she added in the interview. “But even though we’re a big brand, potential suppliers and business partners prefer negotiating with listed companies because they think they have standardised processes.”

She added that Wahaha would use any IPO proceeds for upstream and downstream integration. “In today’s industry environment, capital markets are the means that companies use to further their development,” she concluded.

Whether she would prefer a Hong Kong IPO or a local A-share listing seems to be the only major issue that she’s left unanswered…

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