Three Squirrels' Shares Open for Purchase, More Twists and Turns Ahead?

At last, Three Squirrels (三只松鼠) is going public on China A-share through innumerable hardships.

On July 3, 41 million shares of this Chinese snack company opened to purchase on Shenzhen Stock Exchange with the price of RMB 14.68 per share. Its market value reached CNY 5.9 billion, or USD 860 million.

Founded in 2012, Three Squirrels is a leading snack brand that achieved USD 1.5 billion sales in 2018 through selling nuts, seeds, dried fruits and other snacks. It is not only the first food brand tapping into e-commerce, but also currently the largest snack retailer on major Chinese online retail sites. The company has turned a relatively mundane product into a successful and recognizable domestic brand.

Nonetheless, unexpected twists and turns were awaits on the way of initial public offering (IPO) for the cute nut-selling creatures. The company have entered the IPO listing queue three times but suspended the process twice. On March 29, 2017, it submitted an IPO prospectus to the  China Securities Regulatory Commission(CSRC), later in October, CSRC “suspended the review” due to “signing lawyer resignation”; another two months later, the eve before the Issuance Appraisal Committee's review, CSRC canceled the audit on the grounds that “there are still related matters that need further verification”; until June 25, 2018, the company entered the IPO queuing stage for the third time. Finally, the long wait ended on May 16, 2019 when CSRC announced at its 39th and 40th work conference that Three Squirrels passed IPO screening.

"Sunshine is always after wind and rain (a famous Chinese song)," -- it should be the case for Three Squirrels in terms of its IPO and a reasonable PE ratio of 22.99. However, the author still concerns its future.

As one of the greatest beneficiaries of Tao-brand (companies which emerged and grew big from e-commerce platform Taobao), Three Squirrels has been questioned for its outsourcing model that largely relied on original equipment manufacturer (OEM) and e-commerce platform marketing. The loose control of both upstream and downstream, not only put the company in great risk in quality control, but also became more dependent on those e-commerce platforms.

According to company prospectus, seven consumers sued Three Squirrels for discovering worms in its dried fruit products. The National Quality Inspection Department also found that several nuts products showed excessive fungus -- a direct result of OEM model. The outsourcing of manufacturers would be a hanging sword on its head. How to build a close tie with scattered manufactures? How to be fast in reaction to market shifts, for example, a new flavor of nuts or a new category of snack? Most importantly, how to control product quality?

Although Three Squirrels has been firmly on the e-commerce platform for sales champions, it ignored its offline channels. Its competitors like BESTORE (良品铺子)  and a listed company Laiyifen (来伊份) in China were quite strong in offline physical stores(1356 and 2697 physical stores respectively), which provide them more freedom to transit from online to offline after the slowdown of the Internet traffic premium. Considering the growing but still humble snack penetration rate online of 11 percent in 2017 and only 53 physical stores, how can Three Squirrels fight back while losing its first-mover advantage?

Last but not least, as the prospectus of the Three Squirrels shows that the sales volume of its online channels accounted for about 90% in 2018, the repurchase rate online was poor and pitiful. How to keep an increasing revenue while having one-time shoppers that accounts for more than 65% of the customers?

To be continued.