October rice fields (09676) plummeted by 33.91% in a single day: after all, “weak” fundamentals cannot withstand the wave of lifting the ban?

It plummeted by nearly 34% in a single day, and in October (09676), the already “weak” stock price once again “collapsed” under the tide of the ban being lifted.

On October 14, rice paddies fell rapidly in October. In early trading, the stock quickly fell from red to a drop of more than 20%. After that, the stock continued to decline sharply. At one point, it fell more than 35% during the intraday period. By the close of trading, the stock price had plummeted by 33.91% to HK$8.05. The latest total market value was HK$8.599 billion.

Judging from the news, the current sharp drop in rice paddies stock prices in October may be unrelated to the one-year stock ban period before the IPO.

According to the previous announcement, October 11 will usher in a one-year share ban for pre-IPO investors. This includes pre-listing investors including YF Mega Media (HK) under Yunfeng Fund, Sequoia Capital China Growth (Sequoia China), and Ceran Investment. The share lockdown period will begin on October 11, 2023 and end on October 12, 2024 for a period of 367 days.

Coincidentally, in April, the stock price also experienced a sharp rise and fall in October due to the lifting of the ban on the cornerstone investor Xinmin Tianshi — on April 10, the company's stock price suddenly surged 15.03%, fell by more than 9% during the session on the 11th, and finally closed down 5.41%.

Stock prices are under severe pressure every time the ban is lifted. What actually happened to rice fields in October?

High marketing costs, an unconcealed “growth bubble”

The history of rice paddies in October can be traced back to 2005, when the company's founder and his wife entered the kitchen staple food industry and started the raw food trade business. In 2011, October Rice Field founded two core brands, “October Rice Field” and “Firewood Compound”, and developed in the direction of branding. Then, in 2018, the company launched the “Fu Xiang Renjia” rice brand again. Up to now, rice fields in October have formed a diversified business layout, mainly rice and grains, with dried groceries such as dates, black fungus, and lotus seeds.

The reason why the company was able to break out in the staple food industry, which is full of big names, is probably mainly due to the company's online channel global marketing matrix. Specifically, unlike traditional staple food companies such as Arowana and Fulinmen, which have established a deep offline sales network, October Rice Field was one of the first kitchen staple food companies to develop online channels. The company turned the brand into an “influencer” online through marketing methods such as live streaming, celebrity endorsements, and brand days. As of March 31, 2023, October Rice Field has cooperated with more than 4,000 KOLs and KOCs.

Although this style of play can quickly increase the company's online popularity, the “high marketing expenses” it brings will undoubtedly also put some pressure on the company's profitability.

In the first half of 2024, rice fields achieved revenue of 2.62 billion yuan for the first time in October, an increase of 17.7% over the previous year; net profit to mother was 125.8 million yuan, turning a loss into a profit. However, in reality, in the previous three years, from 2021 to 2023, rice fields had already lost 172.9 million yuan, 564.2 million yuan, and 64.86 million yuan respectively, with a cumulative loss of nearly 800 million yuan.

Combined with the company's previous financial data, it can be seen that the high level of marketing investment is also putting pressure on its profitability: from 2021 to 2023, the company's sales and distribution expenses were 223 million yuan, 315 million yuan, and 324.1 million yuan respectively, accounting for 6.2%, 7.0%, and 6.7% of the company's total revenue for the same period, respectively.

In the first half of this year, sales and distribution expenses for rice fields in October also increased further. During the period, the company's sales and distribution expenses increased by 47.9% from RMB 162 million in the first half of the previous year to RMB 239.6 million during the reporting period, mainly due to changes in the sales channel structure, commission fees related to social e-commerce platforms increased dramatically.

Although the rice field turned a loss into a profit in October in the first half of this year, in reality, the company's overall profit level still needs to be further stabilized and improved. This unstable profit situation may affect investors' confidence in the company and their judgment on the long-term value of the investment.

At the same time, judging from the revenue structure, the October rice field's performance growth in the first half of 2024 did not depend on its main rice business, but on grains, beans, and other products. This also indirectly indicates that the company's core business growth is weak, and there is an uncertain trend of future performance growth.

Specifically, income from rice products from rice fields in October decreased by 1.9% from 1,739 million yuan in the same period last year to 1.707 billion yuan in the first half of 2024. Revenue from grains, beans and other products increased 151.9% from 288 million yuan in the same period last year to 726 million yuan during the reporting period, while the poor performance of dried goods and other products decreased 6.2% from 200 million yuan in the same period last year to RMB 187 million, accounting for 7.1% of total operating income.

In addition, Paddy's cash flow tightened further in October — the company's cash and cash equivalents decreased by 58.7% from $1,427 million as of December 31, 2023 to $589 million as of June 30, 2024, mainly due to the Group's repayment of loans and the use of idle funds to purchase wealth management products during the reporting period.

Performance has increased but cash flow has declined, marketing expenses are high but growth in the main business is weak. This contrary growth trend has undoubtedly worried investors.

High marketing costs, an unconcealed “growth bubble”

Looking at the shareholder structure chart before the listing of rice paddies in October, it is easy to see that rice paddies may face the risk of relatively concentrated equity development in October.

According to reports, prior to the listing of Rice Field in October, shares were concentrated. The founder's family held more than 70% of the shares, of which Wang Bing and Zhao Wenjun held nearly 32% of the shares. In addition to the founder's husband and wife, there are also two executive directors from the founder's family on the company's board of directors. Meanwhile, the general managers of October Rice Field's two main subsidiaries, Shenyang Xinchang and Wuchang Caiqiao, are Zhao Wenjun's nephew and sister, respectively. The shareholders are also members of the founder's family.

Prior to listing, Qicheng Capital held 12.49% of the shares and was the largest external shareholder of the company; Sequoia China held 5.66% of the shares, MIC held 4.9% of the shares, Yunfeng Fund held 3.4% of the shares, CMC Capital held 1.81% of the shares, and Ceran Investment held 0.45% of the shares.

Also, it is worth noting that in October, the cornerstone investment ratio for rice fields was low, accounting for about 13.51% of global sales. According to related reports, there was only one cornerstone investor in the rice field in October, Xinmin Tianshi Agricultural Industry Development Co., Ltd., and based on the median price, Cornerstone subscribed for a total of HK$105 million, accounting for 13.51% of the total circulation. This ratio is much lower than the cornerstone ratio of other recent IPOs 12.

Due to the concentration of shares, this also means that there are relatively few tradable shares in rice paddies in October. Once there is a sell-off, the stock price is clearly depressed. The details are as follows:

For example, in October, the majority shareholders of rice fields may choose to sell stocks after the ban is lifted due to their own capital needs, changes in judgment on the company's prospects, etc. This kind of centralized sell-off will put tremendous pressure on stock prices. Alternatively, some shareholders may have doubts about the company's long-term development prospects. For example, the company faces challenges in business development, market competition, cost control, etc., making shareholders think that the current stock price is at a high level and is an appropriate time to sell.

Furthermore, even if the majority shareholders do not sell immediately, the market will be concerned about the potential selling pressure after the ban is lifted, thus reacting to the stock price in advance, causing the stock price to fall before the ban is lifted.

In summary, at a time when the ban is being lifted, the main business with unstable profitability and tight cash flow growth in October may not bring much confidence to investors. This or indicates that the company's stock price trend is difficult to be optimistic in this wave of lifting the ban.