Blue Moon shadowed by aggressive promotional spending in slowing economy

Heavy spending on its livestreaming channels pushed the leading laundry detergent maker to its first-ever annual loss since its IPO in 2020
Key Takeaways:
- Blue Moon’s revenue growth slowed to just 5.3% in the second half of last year, as it recorded a loss for the six-month period
- China’s leading laundry detergent maker is taking a blow from a slowing economy and the yuan’s depreciation, even as it spends aggressively on livestreaming e-commerce
By Doug Young
Livestreaming e-commerce has powered sales for leading laundry detergent maker Blue Moon Group Holdings Ltd. (6993.HK) to new highs lately, as the company spends heavily to promote its new more environmentally friendly Zhizun brand targeting the younger generation. But such heavy spending can only go so far before returns start diminishing sharply – a lesson that’s on clean display in a new profit warning from the company issued Friday.
At the same time, the warning shows the company is also being undermined by China’s slowing economy, with Blue Moon saying it will report its first-ever annual loss since going public in 2020. Last but not least, the company is also probably questioning its decision to report its results in Hong Kong dollars, even though nearly all of its business is in China’s currency, the yuan. That decision is hurting the company now, as China’s currency loses steady ground against the Hong Kong dollar, which is pegged to the U.S. dollar.
Blue Moon’s profit warning is filled with red flags, including its revelation of a sharp revenue slowdown that’s attributable to all of the above factors. The first-ever annual loss also won’t reassure analysts who were already turning bearish on the company.
In a relative rarity, a majority four out of six analysts polled by Yahoo Finance are negative on Blue Moon, rating it either an “underperform” or “sell.” And in an even greater rarity, those analysts’ average price target of HK$2.15 for Blue Moon’s stock is actually well below the stock’s latest close of HK$2.96 last Friday. That relatively high level comes after a 50% run-up in Blue Moon’s stock over the last six months.
Even at that high level, the company’s stock still trades at a relatively modest price-to-sales (P/S) ratio of just 2, well behind the 7.8 for leading bottled water maker Nongfu (9633.HK) and also trailing the 2.24 for global consumer products giant Unilever (UL.US). But it’s ahead of the 0.74 for cosmetics seller Yatsen (YSG.US). That seems to show that investors believe sellers of more basic products like water and laundry detergent are likely to do better in China’s current economic slowdown than makers of more discretionary products like makeup.
Investors also weren’t too pleased with the company’s latest profit warning, bidding down Blue Moon’s shares by more than 3% in Monday morning trade.
The company said it expects to report revenue of HK$8.5 billion ($1.09 billion) for all of 2024, which represents 16% growth from the previous year. But some number crunching using the company’s previously released report for the first half of last year shows its revenue grew just 5.3% in the second half of the year to HK$5.37 billion, slowing sharply from the 41% growth in the first half.
Blue Moon typically reports weak profits – and often losses – in the first half of the year, and then more than offsets those with strong second-half results to report full-year profits. But in a somewhat alarming development, the company said it expects to report a 2024 full-year loss of HK$700 million to $750 million, which, as we’ve previously noted, will be its first-ever annual loss since going public. At the midpoint of that range, the company would report a loss of HK$61 million in the second half of the year, reversing a HK$492 million profit a year earlier.
Heavy promotional spending
Blue Moon is a household name in most of China, known for its signature Blue Moon brand of detergent sold from big blue plastic bottles that often get premium display space in traditional grocery stores. But the company realizes that many buyers of that brand are older folks, and is trying to appeal to a younger generation with its new brand of Zhizun Biotech Liquid Laundry Detergent, a concentrated detergent designed to appeal to younger, more environmentally conscious shoppers.
As Blue Moon heavily promoted the newer brand, sales from its new e-commerce channel rose by 4.5 times year-on-year in the first half of last year. The company even boasted that it sold 10 million bottles in a single livestreaming session during last year’s June 18 online shopping festival.
But in its latest profit warning, the company says sales from its new e-commerce channel increased just 2.1 times for all 2024 year-on-year, slowing sharply from the first half’s growth rate. Blue Moon mentions the “Double 11” shopping festival in November in its profit warning, which is the big online shopping event in the second half of the year.
But unlike its earlier discussion of the June 18 festival, the “Double 11” discussion is more vague and doesn’t include any figures, simply saying “the group kept its leading position and ranked first in terms of cumulative sales on multiple major e-commerce platforms.” The lack of specific figures suggests that the company’s livestreaming sales during the festival didn’t post the same kind of explosive growth last year as the company saw in the June 18 festival.
Despite that, Blue Moon said it remains convinced that e-commerce and livestreaming are the future of its business, and it continues to spend heavily to promote those channels. It didn’t give any promotional spending figures for the full year. But in its midyear report, it said its selling and distribution expenses doubled year-on-year to HK$2.2 billion in the first half of 2024, accounting for 70% of revenue for the period. By comparison, such spending made up a sizable but lower 48% of revenue in the first half of 2023.
All this shows that Blue Moon continues to spend heavily on promoting its new brands and livestreaming e-commerce, even though growth for this part of its business appears to have peaked and is rapidly slowing. That heavy spending is not only taking a toll on its profits, but also its cash, which fell to HK$5.3 billion by the end of December from HK$7.3 billion a year earlier. Blue Moon’s slowing returns on e-commerce promotion, drop into the red and diminishing cash might lead some to question whether the company might be better off shifting to more conservative strategy, especially with all the uncertainties around it.
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