350_patrickliangChina's phasing in of Quality Service standards in 2008 opens up OEM opportunities for China Angel, says executive chairman Patrick Liang. Photo by Sim KihA REGULATORY CHANGE in standards required of China’s moon cake makers is opening up fresh opportunities for China Angel Food, says the company's executive chairman, Patrick Liang, 43.

This is the year China phases in its Quality Service (QS) standard for moon cake producers, which may lead restaurants and hotels to outsourcing their moon cake production, says Mr Liang.

New rules include requiring moon cake makers to automate production at a fixed location on at least 100 square meters of dedicated space, and labeling moon cake boxes with the manufacturer’s name.

China Angel's flagship product is Shenzhen’s top selling moon-cake, “Angel”, which has 5% of the Guangdong market, according to China’s Association of Bakery and Confectionery.

Mr Liang is confident that hotels and restaurants would want to leverage on
the Angel brandname, which has won accolades in Shenzhen for taste, branding and consumers’ vote, to sell more mooncakes.

Mooncake sales raked in some Rmb 102.3 million in FY07 for China Angel, accounting for 51% of group revenue. 
The company ended FY07 with revenue growing 88% to Rmb 199.4 million.

Gross margins for moon-cakes were 51%.

Group gross margins for FY07 were maintained at 47% while net margins slid to 24%.

How does Angel wow the 8.6 million permanent residents in Shenzhen, which generates the highest income among mainland Chinese cities?  (Per capita GDP in the sub-provincial Guangdong city reached Rmb 79,221 in 2007, up 14.7% y-o-y.)

For one thing, the bakery chain does not stint on raw materials, which include carbonated sugar and peanut butter oil imported from South Africa.

Over 90% of Shenzhen city dwellers buy moon-cakes, mainly as gifts for friends and relatives, a custom entrenched in Chinese culture.  Per capita disposal income in the special economic zone grew 10.2% last year to Rmb 24,870.

90% of China Angel’s confectionery was sold to Guangdong’s population of 93 million in FY06, 4% to the rest of China and 6% exported.

Every year, up to 10 million moon-cakes are produced by China Angel in the two months leading up to the Mid-Autumn festival.  For this reason, sales peak in the third quarter, which accounts for
over 60% of group sales.

Growing through product diversification and market penetration

Sales grew 88% to Rmb 199.4 million in FY07.
Leveraging on its Angel brand name, the bakery chain has diversified into Lunar New Year goodies and pastries.

”We want greater sales contribution from other festive celebrations and are widening our range of lunar new year goodies,” says financial controller, Soh Yeow Hwa.

Sales of snacks, which are mainly cookies, seeds and candy for Chinese New Year celebrations, more than doubled to Rmb 67.4 million (FY06: Rmb 24.4 million, up 175.8%).

This segment, which also includes dried delicacies such as abalone and mushrooms, contributed 34% of sales, compared with 23% in FY06.

Pastry sales contributed 15% last year.  Pastry is sold in Angel cake shops, located within Shenzhen, where its baking lines are so that its shelves can always be lined with piping-hot pastries.

Moon-cakes and snacks are also sold outside Shenzhen through food distributors.

For example, Auric Pacific was appointed sole distributor of China Angel’s snacks and other food products in Singapore with effect from August 2007.

China Angel takes into account tastes peculiar to each city.  For instance, northern and western city dwellers prefer elaborate packaging, says management.

New packaging for new markets is also a means of introducing higher selling prices, necessitated by the rising cost of flour, sugar, oil, lotus seeds and eggs.  Shenzhen’s inflation in food prices was as high as 8.6% in 2007.

Food materials make up over 80% of cost of sales.  The company recently made bulk purchases of raw materials to stock up at lower prices during off-peak season.  Inventories increased to Rmb 23.2 million as at end 2007, up from Rmb 1.7 million at end 2006 as a result.

Threefold increase in retail outlets and capacity increase

Angel cake shops have more than tripled in the past 2 quarters to 34 currently.
Angel positions itself at the “import” quality level.  Prices are set at about 15% above brands perceived to have “domestic” quality and 15% below Hong Kong brands such as Meixin and Ronghua.

China Angel’s best-selling category – double-yolk lotus seed paste in a box of four – retail for about a hundred yuan:  the very same category espoused by a moon-cake gourmet in an interview with Xinhua News Agency during the last Mid-Autumn festival.

350_pdtnMooncake capacity will be ramped up 3-fold by May 2008.Rejection rate was kept at about 1% (industry average 5%) 
through a strong system for managing information.

Historical sales patterns are documented and used to project inventory requirements for each location.  The bakery chain also developed a system for the cake shops to communicate inventory glut or shortage on a day-to-day basis.  Moon-cakes that sit unsold are quickly moved to locations where they can sell well.

Its efforts are paying off: group sales rocketed 78% a year between FY04 and FY07.

The number of Angel cake shops has more than tripled in the past 2 quarters – from 11 when the stock was listed (July 07 IPO: 35 cents) to 27 currently.

To increase brand awareness, China Angel stepped up its advertising campaign in 2007.

Selling and distribution expenses increased 226% y-o-y to Rmb 27.7 million as a result.  This includes A&P expenses of Rmb 10.9 million.

Production capacity of moon-cakes will be ramped up threefold to 7,200 metric tons a year.

Capacity for 3,000 tons of cookies (snacks segment) a year will also be added.

Current capacity is 2,050 tons of moon-cakes and 3,786 tons of pastries a year.  Snacks are currently purchased from sub-contract producers.

Come May 2008, moon-cakes and cookies will be produced at Guanlan High Tech Industrial Park (Shenzhen) on premises leased for 5 years from 1 December 2007. 
The second factory, at 32,000-sq meters, is three times the size of its existing plant.

  Last Close Price (S$) Mkt Cap(S$ m) Sales(S$ m) Historic PE
CHINA ANGEL FOOD $0.27 $86.4 $39.2 9.4
CHINA LIFESTYLE $0.39 $196.2 $130.7 11.5
HSU FU CHI INTER $0.97 $771.2 $532.8 15.4
PETRA FOODS LTD $1.24 $660.0 $1,168.1 18.0
Source: Bloomberg/ NextInsight (3 Mar 2008)

Other confectioners on SGX are jelly-maker China Lifestyle, China's top-selling candy-maker Hsu Fu Chi, and cocoa and chocolate maker Petra Foods.

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