Yan Palace flies back to profit growth as revenue sags

The birds-nest products maker’s profit rose about 3.8% in the second half of last year, reversing a decline in the first half, even as its second-half revenue fell 2%

Key Takeaways:

• Yan Palace’s revenue fell in the second half of last year, but its profit returned to a growth track during the six-month period after falling in the first half
• The company is aggressively courting a generation of younger Chinese consumers by using movie stars as brand ambassadors and collaborating with a Michelin-star chef

By Doug Young

A new profit alert from Xiamen Yan Palace Bird’s Nest Industry Co. Ltd. (1497.HK) has something for all investors, both the bulls and the bears.

For the bulls, China’s leading maker of edible products derived from birds nests revealed it returned to profit growth in the second half of 2024, rebounding from a steep drop in the first half of the year. For the bears, the announcement reveals the exact opposite trend for the company’s revenue, which began contracting in the second half of the year, in contrast to annual revenue growth every year since at least 2021.

The revenue contraction looks the most worrisome, since it shows that Yan Palace is getting sucked into the same vortex of weak consumer sentiment that’s having a similar effect on many consumer-facing companies around China.

At the same time, Yan Palace is showing it’s not just sitting around and waiting for sentiment to improve. The company is taking steps to make its operations more efficient and has also launched a major campaign targeting more upscale and younger consumers. That’s a key step companies like Yan Palace need to take to stay relevant since its products fall into the category of traditional Chinese medicine and health supplements that are popular among the older generation but are increasingly shunned by younger consumers.

The bears, worried about the falling revenue, were kings of the nest after Yan Palace released its report. The stock was down on Monday morning, though by a relatively mild 1.4% in early trading. At current levels, Yan Palace’s shares are now down around 30% from an IPO price of HK$9.70 when the shares first took flight in December 2023.

Yan Palace said it expects to report revenue of between 2 billion yuan ($276 million) and 2.1 billion yuan for all of 2024, representing a 2% to 7% rise year-on-year, according to its announcement. A final result at the midpoint of that range would translate to a 2% revenue decline in the second half of the year, based on calculations using company data from the first half of the year, reversing 11% growth in the first half.

Meanwhile, the company also said it expects to report a profit of between 158.7 million yuan and 179.8 million yuan for the full year, which would represent a decrease of 15% to 25% from 2023. Calculations using first-half data and the midpoint of its forecast profit range show the company’s profit actually rose 3.8% in the second half of the year, rebounding from a 44% decline in the first half of the year.

Yan Palace credited the improved profit picture to its ongoing campaign to move its brand image upmarket, which we’ll describe in more detail shortly. But it also acknowledged the toll of China’s weak consumer sentiment caused by economic uncertainty. “Affected by the structural adjustment to the macro-consumption environment, revenue from offline channels declined slightly due to the trend of conservative spending by offline customers, and the revenue from online channels achieved a steady growth,” it said.

Brand ambassadors

Yan Palace sells edible products made from birds nests, a practice that dates back centuries in China. Legend says the idea was first introduced to China by famous explorer Zheng He after his historic voyages during the Ming Dynasty in the early 15th century. Such products later earned a reputation as a delicacy for the affluent, known for their nourishing qualities. Today they have become quite affordable and are seen as a sort of health supplement.

Realizing it needs to keep its products relevant for young Chinese, Yan Palace has regularly hired young movie stars to speak as its brand ambassadors. Such a strategy put the company on the map among young consumers as early as 2008 when Hong Kong actress and brand ambassador Carina Liu Jialing famously said “Yan Palace is my brand of choice for birds-nest products.”

Continuing that tradition, the company hired veteran actress Gong Li in January 2024, followed by the younger Wang Yibo last May, as its latest brand ambassadors. At the same time, it also teamed up with Michelin two-star chef Huang Jinghui last year for promotional campaigns in Xiamen, Beijing and Kunming, showcasing various birds-nest-based products in more modern settings like afternoon tea.

The outreach to younger buyers seems to be working, based on big growth in Yan Palace’s online sales, a preferred venue for such consumers to buy their products. Online sales rose 22% in the first half of last year to 641 million yuan, accounting for 60% of the company’s total for the period. By comparison, sales through the company’s network of 740 traditional offline stores across China fell 1.6% in the first half of the year to 419 million yuan, accounting for the remaining 40% of its revenue total.

“Based on the prospective investment in brand strategy, the brand effect was gradually released, and net profit in the second half of the year increased year-on-year, as a result that decline in net profit for the whole year was significantly reduced,” the company said in its latest statement, commenting on how its branding strategy was improving its profitability.

Yan Palace also noted that its profitability took a slight hit last year from its ongoing investment in building new facilities, including the launch of a new “green intelligent factory” last May. But it pointed out such updated facilities will ultimately help to improve its margins in the years ahead, as it seeks to maintain its place as the leader in a health supplement category that is popular but also quite competitive.

Investors seem supportive of Yan Palace’s efforts, awarding the company with a price-to-earnings (P/E) ratio of 14, which look relatively respectable in the current climate of consumer caution. Tong Ren Tang (3613.HK), a famous traditional medicine maker that also sells birds nest products, also trades at 14, while the lesser-known China Traditional Chinese Medicine (0570.HK), which issued its own profit warning last month, trades lower at 11.

To subscribe to Bamboo Works free weekly newsletter, click here