Venture Capital Experts Speak | Exclusive Interview with Weng Yinuo, Founding Partner of Shanghai Hongzhang Capital: Focusing on Consumer Manufacturing

Preface:

The Chinese consumer market in 2023 can be described as a year full of black swans. The slowdown of A-share IPOs and changes in Sino-U.S. relations have led to many companies' listing plans being cut in half. Corporate financing is becoming increasingly difficult, and the break in the capital chain has become the norm. From the downfall of some once-leading new consumer brands to Pinduoduo's market value surpassing Alibaba for the first time, the landscape of consumption trends and brand competition is being rewritten. In the new year, are there still investment opportunities in the primary market for the consumer industry? To discuss this, the Nanjing Innovation Investment Group has invited Mr. Weng Yinuo, founding partner of Shanghai Hongzhang Investment Management Co., Ltd., to explore and share investment strategies, valuation logic, and other topics in the large consumer industry, especially in the field of consumer manufacturing.

Mr. Weng Yinuo founded Hongzhang Capital in 2012, with over 20 years of equity investment experience, and has long focused on the consumer industry, possessing forward-looking insights and being recognized as an industry expert. Mr. Weng previously served as the executive general manager of the direct investment department at China International Capital Corporation, and many of the companies he invested in have successfully listed in the U.S., Hong Kong, and the domestic A-share capital markets, including Jiajiayue (603708), Blue Moon (06993.HK), and Ziyan Baiwei Chicken (603057). Mr. Weng holds a master's degree in investment management from City University of London and currently serves as the deputy secretary-general of the Shanghai International Private Equity Fund Association, vice president of the China Condiment Association, and as a director of Jiajiayue and an independent director of Shanghai Bailian Commercial Investment.

Venture Capital Group: Hongzhang Investment is an expert in the field of consumer investment in China. Please introduce Hongzhang Investment.

　　Mr. Weng Yinuo:Hongzhang Investment was established in 2012, adhering to value research-driven principles, discovering high-growth new business formats and high-quality unlisted consumer companies, and providing deep post-investment management empowerment. Hongzhang uniquely positions itself in the growth stage, Pre-IPO, and a select few mergers and acquisitions, making it one of the few managers in China with experience in managing and operating holding projects. We think independently, do not chase "hot trends," and deeply explore the "invisible champions" in industries that have not been excessively pursued by capital. Currently, Hongzhang's understanding and focus on consumption include: retail chain platforms, consumer manufacturing supply chains, consumer healthcare, consumer technology, and consumer overseas expansion. We have invested in many excellent companies, including Blue Moon, Jiajiayue, and Ziyan Food. We are committed to promoting industry development from the perspective of industrial capital and through industry collaboration.

Venture Capital Group:​Consumption is a very large and diverse concept. What is Hongzhang Investment's definition of consumption? How do you further classify the large consumer industry?

　　Mr. Weng Yinuo:There are various classification methods for consumption, such as discretionary consumption, essential consumption, and service consumption. Hongzhang currently classifies and defines consumption mainly in the following four directions. First, platform consumption, including retail chains and e-commerce platforms; second, consumer products, including consumer brands and consumer supply chain manufacturing. Consumer manufacturing is B2B, while consumer brands are B2C. From the consumer's perspective, it is more about understanding the C-end business, but in fact, the B-end business in the consumer industry is very large, accounting for 60-70%, while the brand-end business accounts for 30%; third, the intersection of consumption and other industries, including consumption and technology, consumption and healthcare, which is also a key area we are currently expanding and researching; fourth, the opportunities for the consumer industry in China's Belt and Road strategy, as more and more consumer companies are looking towards emerging countries, especially Belt and Road countries, and we are paying attention to opportunities in this area.

Venture Capital Group:​From an investment perspective, how should we interpret and discover the value and competitiveness of consumer supply chain manufacturing enterprises?

　　Mr. Weng Yinuo:The competitive relationship of elements in the consumer industry chain has changed over the years. Twenty years ago, channels such as hypermarkets and media, like television, were centralized, while the supply chain manufacturing industry was fragmented, with many small factories. Therefore, it was easier to create large platforms in that era. Currently, the environment is that channels and media are fragmented, making it more difficult to create large brands, while the supply chain manufacturing industry is moving from decentralization to centralization, with more and more companies needing to find OEMs, leading to the emergence of large-scale supply chain manufacturing enterprises. These consumer supply chain manufacturing companies have also created good economic benefits locally. Hongzhang has invested in many super supply chain manufacturing enterprises, and we have deeply cultivated this direction in the past, achieving good results and creating good economic benefits for the locations of these enterprises.

Venture Capital Group:​​​How does Hongzhang discover these invisible champion enterprises?

　　Mr. Weng Yinuo:Many super manufacturers are not located in first- and second-tier cities, but mostly in third- and fourth-tier cities where local costs are low. For example, the company we invested in, Shuaike Pet, is headquartered in Yinan County, Shandong, and is a leading pet food supply chain manufacturing enterprise in China, being a high-quality super supply chain company for pet food. The company is located in a major production area for pet food raw materials, with all raw materials supplied directly from Shandong, possessing advantages in natural raw materials and logistics. Hongzhang supported Shuaike in its early development. The Hongzhang investment team conducts in-depth industry research and investment scanning to identify potential investment targets and connects with the best entrepreneurs and corporate executives in various ways, keeping up with industry development trends, establishing brand influence in the industry, and creating a large number of high-quality investment opportunities.

Venture Capital Group:How do you define super manufacturing supply chains? Are there quantitative indicators?

　　Mr. Weng Yinuo:There are several angles. For example, the company is a leading enterprise in a segmented industry, and its revenue scale ranks among the top three in that segmented market. Currently, a revenue of over 1 billion yuan is the basic threshold, with most companies exceeding 1 billion in revenue, some even exceeding 2 to 3 billion, while still maintaining an annual growth rate of 20% to 30%. These invisible champion enterprises have good financial conditions and generally do not actively seek financing in the market, nor are they in the consumer's view. Our approach to discovering these enterprises often involves in-depth research into the industry to analyze and uncover the most profitable segments of the entire industry value chain.

Venture Capital Group:​​​Hongzhang Investment has successfully discovered many excellent super invisible champion enterprises. These enterprises have very good cash flow and generally do not actively seek financing in the market. How does Hongzhang obtain such investment opportunities and maintain a continuous good cooperative relationship with these enterprises?

　　Mr. Weng Yinuo:First of all, Hongzhang emphasizes investment research capabilities. Through continuous research, we establish a deep understanding of the industry and business, creating an investment research system. Every year, we determine investment themes and predict future investment opportunities based on our research. For example, we began top-down research on the consumer health industry five years ago, and the investment team spent time communicating with people in the industry. This year, we invested in an excellent probiotic research and development company. In addition, Hongzhang Investment has established an excellent reputation and influence in the field of consumer investment in China, maintaining long-term investment and strategic partnerships with many excellent entrepreneurs and business leaders. Hongzhang has long been deeply involved in the consumer industry, and our accumulation and resources can help entrepreneurs. For example, we have many accumulations and resources in offline channels, and in an environment where it is difficult to make money in e-commerce, we can help brand owners enter offline channels. In short, enterprises need to form a leading understanding of the industry and possess special resources within the industry, rather than just providing financial support. We have discovered and invested in a very excellent IP derivative fast-moving consumer goods company locally in Nanjing.

Venture Capital Group:The consumer industry is close to people's livelihoods, has a large production scale, and good operating cash flow. However, the capital market may have some misunderstandings, such as believing that compared to technology companies, consumer companies have lower competitive barriers, etc. How do you view this issue?

　　Mr. Weng Yinuo:First of all, the barriers for consumer enterprises are not only reflected in products but also include barriers in sales channel networks, marketing barriers, etc. Secondly, consumer enterprises also possess technological attributes, mainly reflected in applied technology, forming barriers in applied technology. For example, upgrading efficiency for customers, such as our investment in Hanshuo Technology, which is a leading domestic electronic price tag R&D, production, and sales company, providing value to improve efficiency in retail scenarios and entering many offline retail networks. Additionally, agricultural technology, including seed industry, gene editing, etc., some of which are also China's bottleneck projects. The implementation of science and technology ultimately expresses itself in consumer goods.

Venture Capital Group:Compared to industries like energy and technology, the consumer industry has its own unique valuation system. Is there a difference in the valuation perspective of financial investors and industrial investors for consumer enterprises? Generally speaking, what is the valuation range?

　　Mr. Weng Yinuo:The valuation system for consumer enterprises basically still conforms to the classic valuation system, which is cash flow discounting. The difference between financial investors and industrial investors is that financial investors simplify things relatively, focusing on growth and cash flow, while industrial investors may sometimes give higher valuations to segments with higher barriers in the industry value chain. The valuation range will be influenced by market sentiment. For example, around 2020, when market sentiment was good, the valuation multiples were high, ranging from 3 times to 10 times PS. In the current environment, the market is calm, and it is about 3 times PS, with 15 times to 25 times PE. The primary market tends to have a discount compared to the secondary market in terms of valuation. Currently, the overall valuation of consumer enterprises in the market is relatively reasonable.

Venture Capital Group:What is your view on the development of the intelligent manufacturing industry in Nanjing?Many manufacturing industries from Shanghai have relocated to Nanjing, including many excellent intelligent manufacturing enterprises. Additionally, many good consumer manufacturing headquarters from the north that we are in contact with are also moving to the East China region, which will bring along their industrial support, driving other domestic consumer enterprises to settle here, all considering placing their headquarters economy in East China, specifically in Nanjing.

　　Mr. Weng Yinuo:Nanjing Innovation Investment Group, in conjunction with the municipal and district levels, manages hundreds of billions in mother funds, including investments in the consumer sector, hoping to collaborate and resonate with professional partners in business and product aspects.

Venture Capital Group:Thank you very much. I believe Hongzhang Investment will actively communicate with consumer supply chain manufacturing enterprises to promote their settlement in Nanjing and drive the development of the headquarters economy. At the same time, we will continue to strengthen cooperation with excellent local enterprises in Nanjing. Together with Nanchuang Investment, we will take root and flourish in various aspects such as industry landing, forum exchanges, and fund cooperation, jointly creating a good development atmosphere for the consumer industry in Nanjing. Thank you!

　　Mr. Weng Yinuo:Thank you very much, Mr. Weng Yinuo, for your sharing. I believe that in the new year, there will be huge investment opportunities in the consumer industry in the primary market.

Source: Fund Department, Gong Yuxiang

Reviewed by: Xue Yao

Published by: You Yi

　　审核：薛瑶

　　发布：尤异