JD Capital: Consumption Upgrade Promotes Industrial Integration, Bright Prospects Ensured for Indus
2016-09-23
The 2015 report The Rise of New Class of Chinese Consumers indicates that the number of Chinese urban middle-class consumers has approached 150 million with their average annual income reaching USD 11,733.
Today, the middle-class consumers, nearly 150 million, together with about 240 million mass consumers, are no longer satisfied with spending money on basic necessities. This giant group of people will become the driving force of future market consumption. China has realized with ease the convert of the consumption habit within dozens of years, while developed countries have taken several decades to do so.
“Behind the consumption upgrade is the accumulated effect of the change of lifestyle, consumption environment, way of purchase, goods for supply, consumption concept, purchasing power, etc. The consumption industry experiences the most evident and relevant upgrade since the increase of personal income”, commented by an investment director from JD Capital,” the consumption market is one of the few to witness a unilateral rise, which is exactly what we call the consumption upgrade.”
It is said that over the past nine years, JD Capital has focused on the investment logistics of “consumption upgrade” and practiced equity investment in this field. Its portfolio companies include ADEL, Monarch Sanitary Appliance, Hongqi Chain and LANCY, all of which have implemented their IPO; Fusen-Noble House, a company waiting for the IPO approval; Golden Monkey Food that has been merged and unlisted; Jifen Design, WSM and Nanling Automobile that have gone public on the NEEQ; and Rongtai Fitness, Doctor Glasses, Zilin Vinegar and Juewei Food to be issued in the A-share market.
Amidst growth of durable goods consumption, seize the historic opportunity of “develop from nothing”
The first growth of the consumption industry was driven by market demand, “develop from nothing”, owing to the reform and opening-up. This is in particular evidenced in the growth of durable goods consumption.
“If we draw a simple division of the last 30 years, we can find that the market growth was mainly driven by two factors”, the director pointed out, “The first factor was the increasing market coverage, evidenced by a high-speed growth of basic necessities such as color TV, refrigerator, air-conditioner, washing machine, home textile, etc. in particular at the beginning of when China opened its economy to the world, also a time lacking in durable goods. The second factor was the improvement of products, product upgrade and replacement demand that swelled the tide of consumption.”
“In recent years, the second factor has become even more obvious in driving consumption growth”, the director further explained that, “compared with the figures in 2013, the off-line market share of IH electromagnetic cooker has increased by 4.38 times and the retail sales volume 3.59 times in three years.
Investigation finds out that similar growth also occurs to the rolling washing machine, large-size TV, inverter air-conditioner and other products. In addition, some appliances of non-rigid demand such as kitchen ventilator, soymilk maker, water purifier and CADR air cleaner are favored by more households. Relevant data shows that with the wave of real estate transactions coming, the increasing rigid demand for household products pushes for the development of the whole industry.
To seize the “new dividend”, JD Capital searched for local home furnishing companies in-by-inch and invested in numerous well-growth ones.
To name a few, Monarch Sanitary Appliance is a leading company of Acrylic Bath. Fusen-Noble is successful in retail sales of household products in Sichuan Province; Maydos is a well-known coating manufacturer across China. Universal Stone is the number one decorative stone provider across China; Arte Mundi is professional and competitive in manufacturing the solid wood composite floor; Oupai Group builds up its reputation for wooden door manufacturing; Huida Sanitary Ware is one of the largest and time-honored sanitary appliance companies. Suncoo a leading company for popular sanitary wares; and Kamtat Lightening is known for its crystal light decoration.
In fast-moving consumer goods investment, channels are paramount and new stars can fight out
In the process of consumption upgrade, the fast-moving consumer goods (FMCG) market also witnesses fierce competitions.
In the early days of China opening its economy to the world, as foreign giants were grabbing China’s market share, domestic enterprises also began to fight the way out for existence and development.
“A lot of local consumption enterprises are growing steadily in recent years, as their distribution networks become more grounded,” the director explained. For those potential flagships, JD Capital not only funds for their early development, but helps them to scale up and rapidly duplicate successful models across regions through post-investment activities. Among them, Juewei Food is a typical case of successful investment.
“When we invested in Juewei Food, it had already enjoyed a good competitive advantage in central China with its business model and operation capacity winning market validation.” But at that time, direct sales still played a major role in the company, and many challenges presented in its shift to the capital market.
“Even so, we still chose to invest at that time, since the demand for cross-region development through incremental fund exited. On such a basis, JD Capital successfully helped Jiuwei Food to transform from direct sales to franchising, gradually meet listing requirements, and expand market across regions.
Owing to JD Capital’s investment, the income scale of Juewei Food grows from less than RMB 1 billion to nearly 3 billion, and its store number increases from less than 1,000 to 7,000.
New-generation consumer market promises consumption upgrade integration
In today’s consumer markets of China, many seemingly unbreakable industry structures are going through changes. Some domestic and international consumer brands that boast decades or even hundred years of history begin to fade. Particularly, a series of factors, such as the influence of Internet popularity, the change of people’s consumption habits, are changing the industry competition structure gradually.
Under new historic opportunities, sub-industry flagships with rich experience have sprung up. As a sophisticated investor, JD Capital focuses on household consumption and other industries, and, relying on its capital strength, help locomotives with integration.
Luolai Lifestyle（002293.SZ）is a typical cooperation case of JD Capital in the new market environment. In April 2016, JD Capital and Luolai Lifestyle reached the systematic strategic cooperation scheme as “participating in private placement + continuing cooperation”. Drawing upon years of experience in investment and research about industrial segments, JD Capital will support Luolai to realize its core development strategies featuring the M&A layout of “large home textiles – small household articles – complete household products”.
At present, bedding composes of Luolai Lifestyle’s main products. Looking into the future, the company will develop shops specializing in large household products alongside shops providing big textile and small household articles. The next plan heads for “large household products”. New business will mainly be achieved through M&A.
Luolai Lifestyle is arranging its household product ecosystem for the implementation of above-stated strategy. In recent years, this company has successively invested in or agreed to invest in UCHINO (Japan), Ujipin Network Technology Corp (Beijing), Taihuoniao Science and Technology Ltd. (Beijing), and MovieSeek Media Tech. Ltd. (Shenzhen). At the same time, it cooperates with such platforms of household vertical e-commerce, intelligent household, content marketing and fan economy and others, in the hope of gradually forming into a household product ecosystem.
“After participating in Luolai Lifestyle’s private placement, we will utilize our diversified resources to help optimize and upgrade its business model, and consolidate and promote its position as the industry flagship mainly through M&A investment,” JD Capital’s consumption and investment team said, “In the past, capitalists hired labors, while now clever capitalists hire capital instead.”