Weilong defies the weak consumer market with its cheap spicy snacks

Key findings:

• Weilong Delicious announced that its revenue increased 26% in the first half of 2024 as sales of its vegetable products increased 57%, becoming its largest revenue generator.
• The company appears to be a good defensive investment in the current environment of consumer caution given the affordability of its snacks, which typically cost less than $1.

By Doug Young

In economically uncertain times, nothing helps you forget your worries better than a spicy snack.

This is the most important message from the leading manufacturer of spicy snacks Weilong Delicious Global Holdings Ltd.whose recent positive results defied the much gloomier tones from most Chinese consumer sectors. While most of its competitors reported declining sales and profits, Weilong reported a 26% increase in sales in the first half of the year, while profits rose by as much as 39%.

The company divides its seasoned products into three main groups: seasoned flour products, vegetable products and bean products. Of these, vegetable products have been the star of the industry in the recent period, recording a growth of 57%, overtaking flour products as the company’s biggest revenue generator.

The bigger issue here, however, is China’s so-called “consumption slowdown,” which means that consumers are cutting back on spending in the face of current economic uncertainty. In this context, many people are foregoing more expensive luxury items like smartphones and cars, and even stopping eating out at expensive restaurants. Instead, cheaper items like fast food and Weilong’s packaged snacks are increasingly seen as more affordable little luxuries.

Weilong’s snacks are quite affordable, usually costing less than 20 yuan, or about $3. The company’s vegetable products, which sold so well in the first half of the year, are among the cheapest. A pack of 60 packets of the popular Konjac Shuang costs just 65.80 yuan on the e-commerce site JD.com.

With prices like these, it’s not surprising that cost-conscious Chinese consumers don’t feel too guilty about treating themselves to a pack or two at home in front of the TV, rather than spending their usual evening at the karaoke bar.

Weilong also criticized all indicators that point to continued weak sentiment among Chinese consumers. The bank referred to a recent consumer sentiment survey by the global consulting firm McKinsey, according to which 76 percent of Chinese are optimistic about the country’s macroeconomic development this year. Last year, the figure was only 73 percent.

“Although consumers remain cautious about their consumption expectations, only some demographics are not so optimistic,” Weilong emphasized. “In particular, younger consumers, especially Generation Z, showed a higher willingness to consume. This positive sentiment laid a solid foundation for the growth potential of the snack food industry.”

Weilong added that sales of social consumer goods in China showed “an upward trend” in the first half of 2024, but did not specify by how much. China’s retail sales continue to grow and have not yet slipped into contraction mode. But their recent growth rates are far from the strong numbers of earlier times, including just 2% growth in June – the lowest rate in more than a year.

As consumers opt for smaller luxury goods, it’s not surprising that companies like Weilong are among the big beneficiaries. The company first told investors on July 25 that its half-year profit would rise 35 to 39 percent year-on-year. Since then, its shares have rebounded 19 percent, including a 2.9 percent gain in early Monday trading after the release of its detailed interim report last Thursday.

Undervalued?

Given the current consumer reticence, Weilong’s shares appear relatively undervalued. They have lost about a third of their value since the company listed on Hong Kong’s stock exchange in late 2022. They are down about 1% so far this year, compared to an 8.5% rise in the broader Hang Seng China Enterprises Index.

Even after the rally following the results release, the stock is still trading at a price-to-earnings ratio (P/E) of just 14. This is below the price-to-earnings ratio of 15 for University President China (0220.HK) and 16 for Tingyi (0322.HK), two of China’s leading instant noodle manufacturers, and is well behind the 32 for Zhou Hei Ya (1458.HK), a manufacturer of spicy duck-based snacks.

The big question, of course, will be whether Weilong’s sudden growth spurt will continue into the second half of the year.

The company’s revenue rose 26% to 2.94 billion yuan ($410 million) in the first six months of the year, up from 2.33 billion yuan a year earlier. This growth rate was significantly higher than the 5.2% increase in revenue over the whole of last year, when it rose to 4.87 billion yuan.

We have already noted that the star of the period was vegetable products, whose sales rose 57% to 1.46 billion yuan, accounting for half of the total. Seasoned flour products grew only 5% year-on-year to 1.35 billion yuan, accounting for 46% of the total, while bean products sales rose 18%, accounting for the remaining 4.2%.

Weilong attributed the strong performance in vegetable products to the launch of new products and the addition of additional sales channels.

While sales soared, the company also benefited from lower raw material costs and inventory reductions due to strong demand for its products. Manufacturing costs rose 21%, slower than sales growth, while average inventory days fell to 51 days from 73 days in the first half of last year. These factors helped the company increase its gross margin to 49.8% in the first half, up 2.3 percentage points year-on-year.

The effective combination of strong sales growth and lower costs pushed Weilong’s profit up 39% to 621 million yuan, at the upper end of the previous profit forecast.

Ultimately, Weilong appears to be a good defensive play in the current climate of economic uncertainty due to the affordability of its popular snacks. The relatively low valuation also suggests that the stock still has upside potential. The key question facing the company will be whether it can sustain its high sales gains from the first half of the year due to continued strong sales of its vegetable snacks for the rest of the year.

This article was written by an unpaid outside contributor. It does not represent Benzinga’s reporting and has not been edited for content or content.