6979.HK
Noble Family planning to seek a listing in Hong Kong

Inspired by fellow liquor brand ZJLD, the Chinese wine distributor plans to pull out of the mainland NEEQ market and list its shares in Hong Kong 

Key Takeaways:

  • Noble Family Wine has been profitable for three years in a row, meeting the criteria for a Hong Kong listing
  • The company’s revenue from red wine sales almost tripled in the first half of the year, but gross margin on the business plunged 3.3 percentage points to 6.3%

     

By Bai Xin rui

In gloomy times, a stiff drink may help chase off the blues. This appears to be the case for investors in corporate China, who have bought into Hong Kong’s first distillery listing while the broader equity market has been tumbling.

The resilience of liquor brand ZJLD Group Inc. (6979.HK), which makes a range of popular spirits, has not gone unnoticed by China’s alcohol industry. Chinese wine distributor Noble Family Wine And Liquor Co. Ltd. (835961.NQ) is pulling out of the mainland’s over-the-counter market in hopes of emulating ZJLD’s success as a Hong Kong stock.

ZJLD launched earlier this year on the Hong Kong Stock Exchange where its shares peaked at HK$13.18 ($1.68), 22% above the listing price of HK$10.82. The stock has outperformed the Chinese and Hong Kong benchmarks this year, offering a tempting blueprint for others in the sector. On Friday (Oct. 20), ZJLD closed at HK$11.46, still 6% higher than the listing price.

On Oct. 10, the Noble Family Wine group announced plans to delist from China’s National Equities Exchange and Quotations (NEEQ) in the interests of strategic development, a move that enables a switch to the more prominent Hong Kong market. When trading resumed the next day, the company’s share price soared nearly 38%. 

The company was established in May 2008 and listed six years later on the NEEQ, an over-the-counter market aimed at small- and medium-sized enterprises. The group sells wines, spirits and beers through offline stores and online platforms, in partnership with well-known brands such as Kweichow Moutai (600519.SH), Wuliangye (000858.SZ) and Luzhou Laojiao (000568.SZ). The company’s website says it has more than 3,000 franchise stores and small shops, with operation centers in more than 30 provinces, municipalities and autonomous regions, amounting to a brand value of 21.1 billion yuan in 2021.

In China’s wine industry, upstream producers tend to be the sector’s biggest earners. Further down the supply chain, a multitude of distributors and sales outlets, restaurants and supermarkets battle for their cut, together accounting for 20% to 30% of the profits earned by the industry as a whole. 

Profits on the rise

Noble Family Wine performed resiliently this year in the face of China’s stiff economic headwinds. In its latest first-half results, the company’s net profit rose 3.4% to 56.5 million yuan from the same period a year earlier, while revenue rose 4.4% to 634 million yuan. Liquor revenue made up 76% of the total, rising 9.8% to 485 million yuan. The key growth driver was the company’s red wine business, with revenue nearly tripling to 58.8 million yuan.

The company has been upbeat about the prospects for China’s wine industry, noting the market grew from 1.03 trillion yuan in 2018 to 1.23 trillion yuan in 2021 during a period of significant transformation. A projected annual growth rate of 5% to 6% would create a 1.5 trillion yuan market by 2025.

The wine distribution sector may be expanding but it is highly decentralized and fragmented. Noble Family Wine held only 0.12% of the mainland market in 2022 and even Vats Liquor Chain Store Management (300755.SZ), the sector leader listed on the Shenzhen Stock Exchange, could only command a 1.03% share. By contrast, the dominant U.S. distributor of alcoholic drinks, Southern Glazer’s Wine and Spirits, controlsmore than 30% of the domestic market. However, the Chinese market could be ripe for consolidation in the future as wine sellers join forces and work on boosting their brands.

Lessons from ZJLD 

The company is setting its sights on the Hong Kong market as a bigger springboard to success. A report in the 21st Century Business Herald, quoting people close to the company, said the NEEQ exit would be followed by restructuring and fund-raising to pave the way for a Hong Kong listing. The company has, in effect, already met the entry criteria for the Hong Kong main board with annual net profits of 85.3 million yuan, 122 million yuan and 79.4 million yuan in the last three financial years, and no change in its shareholder structure for nearly a year.

ZJLD’s experience, as the first liquor producer to be listed in Hong Kong, is instructive. The stock was offered near the lower end of the estimated price range, but the initial response was still lukewarm, with a subscription rate of only 0.94 times for Chinese investors and 2.9 times for foreign investors. On its debut day, the share price tumbled nearly 18%. But the stock stabilized and started to rise, coming off its peak recently but still outperforming the Hang Seng and the CSI 300 Index.

Margins could leave sour taste

Noble Family Wine would not be the first mainland alcohol distributor to list in Hong Kong. It would follow in the footsteps of Silver Base Group Holdings Ltd. (0886.HK), whose shares have been suspended as the company goes through a liquidation process. Fierce competition in the mainland market is a motivating factor. With a challenge from new live streaming e-commerce platforms such as TikTok, Little Red Book (Xiaohongshu) and Pinduoduo, Noble Family Wine could raise its profile and tap Hong Kong investors for M&A funds to boost its market share.

But replicating the fortunes of ZJLD in a Hong Kong market downturn could be a tall order when relative profitability is put under the microscope. As an alcohol producer, ZJLD is in the upstream business with agross margin for the half year of 57.9%, a year-on-year rise of 2.3 percentage points. The equivalent figure for Noble Family Wine was only 12.5%, an increase of just 0.16 percentage points. The gross margin on red wine, the company’s fastest growing business, actually plunged 3.3 percentage points to 6.3% in the first half of the year. 

The company may need to come up with star backers and a conservative offer price to tempt investors to develop a lasting taste for its beverage brand.

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