As Sanyuan Biotechnology's stock made a stunning debut on the first trading day in Shenzhen Stock Exchange, difficulties such as an overemphasis on erythritol, a lack of control over distributors, and a limited clientele seemed to emerge
Shares of Shandong Sanyuan Biotechnology (301206) (Chinese: 山东三元生物科技) , one of the world's largest suppliers of the sweetener erythritol, leaped 17.12% from its offer price of CNY 109.3 (USD 17.17) to CNY 128.01 per share after it began trading on the Shenzhen ChiNext Market. The company ended the day with a total market capitalization of CNY 17.27 billion on February 10.
Sanyuan had planned to raise CNY 3.686 billion from its initial public offering, of which 770 million will be used to produce 50,000 tons of erythritol annually and build technology centers. Erythritol is one of the most popular sweeteners that has been applied in food, beverage and pharmaceutical industries.
"The company plans to consolidate its global status in the erythritol industry," said Nie Zaijian, chairman of Sanyuan. Nie holds 45.9388% of the company's equity.
Driven by robust demand for sugar substitutes, revenues of Sanyuan, a producer and seller of food ingredients, multiplied in the past three years.
According to the prospectus, the company blamed its previous losses on slow production and a not fully open erythritol market. But starting in 2018, it turned losses into profits and managed to go public 15 years after its founding in 2007.
The prospectus also showed that Sanyuan recorded a net profit of CNY 68.09 million, CNY 136 million and CNY 233 million in 2018, 2019 and 2020, respectively. During the first half of 2021, it gained CNY 243 million in net income, and the figure was expected to hit between CNY 493 million and CNY 541 million for 2021, up 111.96% to 132.63% year on year.
Data from Frost & Sullivan, a business consulting firm, showed that Sanyuan's erythritol production in 2019 accounted for 54.9% of domestic output and 32.94% of the global total. As of June 2021, the company had an annual production capacity of 85,000 tons, whose clients included Saraya, Pepsi and Coca-cola.
Despite its substantial profits, Sanyuan faces risks amid the erythritol frenzy, since an overemphasis on the substance might hinder the company's development. The prospectus showed that Sanyuan reaped most of its gains since 2018 from erythritol.
Food industry analyst Zhu Danpeng believed that the rigid demand for erythritol led to a spike in the company's share price. However, as more companies enter the business, Sanyuan's core competency will be undermined.
Zhu added that more competition not only will increase the operational risks for Sanyuan, but also spells the possibility that its products will be replaced and stock prices will fluctuate if the company continues to rely solely on one product.
Besides, Sanyuan doesn't have much control over its sales model. The prospectus indicated that its erythritol has mostly been sold through distributors, who are free to buy products from the company's competitors. Sanyuan is not involved in the pricing and operation of the dealers.
The company's clientele is also highly concentrated, with the top five clients making up about half of its total revenue since 2018.
Other sugar substitute players have fierce competition. Notably, Baolingbao Biology (002286) (Chinese: 保龄宝生物), the only company manufacturing all kinds of multi-functional sweeteners, can produce 60,000 tons of erythritol and 30,000 tons of psicose every year.
Baolingbao's revenue in the first half of 2021 hit CNY 1.262 billion, up 24.1% year on year. The boom contributed to a net profit attributable to shareholders of the listed company of CNY 64,545,300, registering a year-on-year growth of 48.74%.
Another competitor, Zhejiang Huakang Pharmaceutical (605077) (Chinese: 浙江华康药业) , which makes and supplies crystal sugar alcohol products, posted a revenue of CNY 832 million during the first 9 months of 2021, on a scale similar to Sanyuan.