Shares in Wuhan-Based Snack Retailer Bestore Open for Subscription
COVID-19 and China
Image credit: Allie Smith on Unsplash

On February 12, 2019, Bestore (603719:SH) opened for subscriptions with 41 million shares on the Shanghai Stock Exchange, at the price of CNY 11.90 per share.

Closely following Three Squirrels – the best-selling snack company in China – Bestore is trying to get a foothold in this promising market, which is estimated to reach CNY 2 trillion in size by 2020 with a yearly CAGR of 22%.

However, the snack sector is hardly a cozy oligopoly. There is a growing number of both online and offline competitors.

What makes matters worse for the Wuhan-based Bestore is the virus outbreak, which is making investors and consumers wonder about this company’s performance.

In contrast to Three Squirrels, which gained 89.32% of revenue from its online sales in 2018, Bestore is targeting both online and offline. Its offline sales are preeminent compared to its snack competitors, who have different strategic focuses. As a matter of fact, only 44.49% of Bestore revenue is generated from online channels. That means over 50% of its revenue offline is greatly affected by the current epidemic.

In response to this concern, Bestore has stated publicly that a negative impact from the virus is inevitable – but that their offline stores in Hubei are gradually reopening. Of 800 stores in the province, more than 200 are open in a regular way; the company’s over 1,400 stores nationwide are also operating normally. But the statement seems too weak to fight investors’ pessimism.

Besides the influence of offline stores, Bestore also mentioned the risk of an overloaded inventory in its IPO prospectus. In the past few years, the absolute amount of the company’s inventory has been between CNY 400 million and CNY 600 million. Therefore, if overstocking happens, the company will need to make provision for depreciation of the inventory or report losses, which will adversely affect its financials. And the epidemic is undoubtedly likely to provoke hoarding behavior.

Facing this difficult time period, some market observers are still positive about the company’s future. At the end of the day, the influence of the Wuhan virus is not giving a hard time to the food & beverage industry only, let alone Bestore in the snack sector. How companies react to systematic risk, how they operate under tighter cash flow, limited labor and supply chain shortage will be more crucial to their performance during this period.

Editor: Luke Sheehan

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