Packaging That Really Pays: Packaging Expenses Up 50%, Packaging Costs Account for 9% of Revenue

Nayuki Tea (02150.HK, hereinafter "Nayuki"), known as having the "highest average order value," listed on the Hong Kong Stock Exchange at the end of last month at an issue price of HK$19.8 per share, but suffered a break below its issue price on the very first day.

Now, several days after Nayuki's listing, its share price performance is still below expectations. As of the close on July 9, 2021, Nayuki's share price was HK$16.72 per share, with a total market value of HK$28.677 billion.

On the day of listing, Red Star Capital Bureau made a cost calculation for Nayuki. Data disclosed in the company's prospectus show that from 2018 to 2020, Nayuki's material costs as a proportion of total revenue rose from 35.3% to 37.9%. Calculated at today's average order value of RMB 43, the material spent on one cup of Nayuki is as high as RMB 16.3.

In common understanding, milk tea is a high-gross-margin industry. But Nayuki seems not at all hesitant in its input into raw materials.

However, Red Star Capital Bureau found that

from 2018 to 2020, Nayuki's input into raw materials did not rise; what rose was packaging materials.

Interestingly,

according to Nayuki's prospectus, its largest packaging supplier is Dongguan Zundao Eco-Friendly Packaging Industrial Co., Ltd. (hereinafter "Zundao Eco-Friendly").

And according to the Tianyancha APP,

Nayuki founders Peng Xin and Zhao Lin, a married couple, indirectly hold 50% of the equity of Zundao Eco-Friendly.

How much money does the packaging of one cup of milk tea actually require?

Raw material cost input did not rise

What rose is packaging materials

Nayuki's material costs mainly include two parts: raw material costs, such as tea leaves, fruit, dairy products and other raw materials; and the cost of packaging materials and consumables, such as tea cups and paper bags.

The prospectus shows that in 2020 Nayuki's raw material costs accounted for 28.7% of total revenue, which, compared with 29.2% in 2018, not only did not rise but actually fell.

As for Nayuki's packaging costs, this expense's proportion of total revenue rose from 6.1% in 2018 to 9.2% in 2020.

In other words, the increase in Nayuki's material costs is mainly due to the increase in packaging material costs, and not because more or more expensive raw materials were used.

What level is Nayuki's packaging cost at?

For example, calculated at an average order value of RMB 27 for tea drinks, the packaging cost of one cup of milk tea was about RMB 1.65 in 2018; by 2020, the packaging cost of one cup of milk tea had risen to RMB 2.48.

In just two years,

the packaging cost alone of one cup of milk tea rose by 50.3%, which is somewhat hard to believe.

Regarding the issue of Nayuki's relatively high packaging costs, after the prospectus was published, some media asked the relevant Nayuki executive about the matter. The executive responded: "In this industry this is very normal; for example, in Starbucks' gross margin cost, the biggest item is not its coffee, but its cup."

According to Starbucks' financial reports, Starbucks' gross margin is currently around 67%, far higher than Nayuki's. But given that coffee making is more standardized, supply chain costs are lower, and Starbucks' financial report does not disclose more details on packaging costs, it is hard to draw an analogy between the two in terms of the impact of packaging costs on gross margin based on Starbucks' financial data.

But through Nayuki's prospectus, Red Star Capital Bureau discovered more details and questions about packaging costs.

Nayuki's largest packaging supplier is not simple

Nayuki's prospectus shows that

from 2018 to 2020, Nayuki's largest supplier was Zundao Eco-Friendly, which mainly provides packaging material services to Nayuki.

The prospectus shows that from 2018 to 2020, Nayuki's fees for purchasing packaging materials from Zundao Eco-Friendly were RMB 37.612 million, 94.611 million and 94.447 million respectively, with purchase amounts accounting for about 8% of total procurement.

According to the Tianyancha APP, Zundao Eco-Friendly was established in October 2017, with a staff size of 50 to 99 people. It is worth noting that in 2018 Zundao Eco-Friendly became Nayuki's largest packaging supplier; at the end of that same year, the company underwent a major equity change, with Shenzhen Xinlin Culture Communication Co., Ltd. holding 50% of Zundao Eco-Friendly's equity; and

Peng Xin and Zhao Lin, a married couple, each hold 50% of the equity of Shenzhen Xinlin Culture Communication Co., Ltd.

However, regarding Zundao Eco-Friendly's production capacity, there are puzzling aspects.

A document of approval from the Dongguan Environmental Protection Bureau shows that Zundao Eco-Friendly was about to relocate, renovate and expand, with the document dated July 19, 2019.

This information shows that after the expansion Zundao Eco-Friendly's production capacity is: an annual output of 1.2 million paper bags, 2.5 million cup sleeves, 1 million milk tea cups, 2.5 million bread boxes, 1.5 million double-cup holders and 100,000 six-cup boxes.

According to the company's capacity disclosed in this document,

assuming Zundao Eco-Friendly achieved full production immediately after expansion, it could produce a total of about 8.8 million units of various products each year.

On July 8, Red Star Capital Bureau visited the Chengdu International Hotel Supplies and Catering Expo where Zundao Eco-Friendly exhibited. According to the per-unit packaging pricing given by Zundao Eco-Friendly, even estimating at the higher price range,

the actual value of 8.8 million products would not exceed RMB 6 million.

But in 2019 and 2020, Nayuki paid Zundao packaging fees of more than RMB 90 million for two consecutive years. If calculated at this amount, the number of products Nayuki ordered would be far more than 8.8 million.

If we compare the amount Nayuki paid with Zundao Eco-Friendly's actual capacity, the per-unit price of the packaging products provided by Zundao Eco-Friendly would be as high as RMB 10 each, which would make the total packaging cost of a complete cup of milk tea as high as tens of yuan — which is simply impossible.

An order as large as Nayuki's could simply not be absorbed by Zundao Eco-Friendly's capacity.

Red Star Capital Bureau checked Tianyancha and found that Luo Liangshan, a shareholder of Zundao Eco-Friendly, also has a company under his name, Shenzhen Jinggongxin Technology Co., Ltd. (hereinafter "Shenzhen Jinggongxin"), established in November 2014, mainly engaged in the R&D, design and sales of textiles and packaging products.

The mystery of the capacity may be hidden behind Shenzhen Jinggongxin.

It is quite possible that Shenzhen Jinggongxin also provides packaging materials to Nayuki, but Nayuki has not disclosed more information. At the same time, there may be a problem of "third parties" entering Nayuki's packaging supply; whether this will cause changes in Nayuki's packaging costs later is worth further consideration.

Regarding the fact that from 2018 to 2020 Nayuki's largest packaging supplier was Zundao Eco-Friendly,

whether Zundao Eco-Friendly's capacity can take on Nayuki's demand, whether Shenzhen Jinggongxin is doing the work of absorbing Nayuki's orders, and what considerations lay behind Nayuki founders Peng Xin and Zhao Lin indirectly holding 50% of Zundao Eco-Friendly's equity — Red Star Capital Bureau contacted Nayuki on these related issues, but as of press time had received no response.

How much is milk tea outer packaging actually worth?

From July 8 to 10, Chengdu hosted the Chengdu International Hotel Supplies and Catering Expo.

Red Star Capital Bureau reporters visited several catering-industry suppliers on site, including Zundao Eco-Friendly and another company, "Fengyi Industrial," which claimed to also provide packaging materials to Nayuki.

The reporter told the sales staff of both companies that they wanted to buy milk tea outer packaging materials. The sales staff of both companies said that prices would vary according to the material. When Red Star Capital Bureau asked about the price level of Nayuki's outer packaging, both sales staff said that Nayuki's outer packaging materials are relatively high-quality materials.

Generally speaking, the complete packaging of a cup of milk tea includes the milk tea cup, cup lid, straw, cup sleeve, cup holder, paper bag and other parts.

The sales staff introduced to the Red Star Capital Bureau reporter in turn the per-unit prices of several higher-quality packaging items: PP frosted cups about RMB 0.7 each, PLA straws about RMB 0.15 each, PP cup lids about RMB 0.15 each, cup sleeves about RMB 0.1 each, cup holders about RMB 0.5 each, and high-quality eco-friendly paper bags about RMB 1 each,

so if a cup of milk tea used all higher-quality packaging products, the total price would be about RMB 2.6.

The sales staff also said that this price is for a minimum order of 50,000 units; the larger the purchase volume, the lower the per-unit price.

It is worth mentioning that this price is the comprehensive per-unit price of a fully equipped single cup of milk tea. Ordinarily milk tea shops also have a large number of dine-in customers, who generally do not need products such as paper bags and cup holders; at the same time, the specific packaging used for a single product also varies — for example, the "Baqi Yu Youpa" launched by Nayuki does not need packaging materials such as a straw, cup lid, cup sleeve or cup holder, which also reduces the packaging cost of a single product to a certain extent.

As a representative of high-end tea drinks, Nayuki pursues "high-end" in both raw materials and outer packaging. From the consumer experience, users indeed get the dual satisfaction of drinking and using.

But whether it is the continuously rising packaging costs, or the complex relationship between supplier and enterprise, or the general packaging prices learned by Red Star Capital Bureau from visiting suppliers on site, all may have cast a layer of fog over Nayuki's packaging costs.

——This article is reproduced from China Packaging Network (pack.cn), original link: http://news.pack.cn/show-377772.html