Seeking a nesting ground

Chinese edible bird's nest producer Xiamen Yan Palace Bioengineering has applied for a long-sought initial public offering in Hong Kong which would be the first of its kind amid growing competition and greater scrutiny of IPOs in the mainland.

The proposed share sale could raise about US$200 million (HK$1.56 billion).

Founded in 1997, the company behind the Yanzhiwu brand was the largest edible bird's nest producer in China and globally last year, according to its preliminary prospectus citing a Frost & Sullivan report.

Usually added to soups or desserts, edible bird's nest is a costly ingredient in Chinese cuisine and is prized for its rarity, high protein and flavor.

A carton of 30 instant bird's nests - with each bowl weighing 138 grams - costs as much as 11,340 yuan (HK$12,200) on the company's website.

Ready-to-eat bird's nests are the company's main income earner, accounting for about 40 percent of its total sales over the past three years.

Yan Palace has around 89 of its own stores and 615 distributor-operated stores in the mainland.

The producer's revenue rose 14.8 percent to 1.73 billion yuan last year from a year ago, with its gross margin coming in at 50.8 percent in 2022.

Its net profit grew 14.6 percent to 191.8 million yuan last year from a year earlier and the net profit margin was 11.9 percent in 2022.

Like many other traditional health food peers in China, Yan Palace's unremarkable net profit margin was due to higher sales and marketing costs.

Yan Palace has enlisted Chinese actress Zhao Liying and China's national fencing team as its promoters over the last two years and has previously used actresses Carina Lau Ka-ling and Lin Chi-ling to endorse its products.

Its advertising and promotion fees, which stood at 278 million yuan on average in the past three years, accounts for 20 percent of its total revenue.

In comparison, it spent only 20.3 million yuan on research and development on average during the same period, though its name includes the word "bioengineering."

Meanwhile, although edible bird's nests contain high protein and minerals, their nutritional worth is often questioned in relation to their high price, while worries over how safe they are to eat have continued to dog the industry.

Yan Palace's journey toward an IPO has not been easy thus far.

In 2011, it sought a listing in Hong Kong but did not proceed with the plan after quality regulators in Zhejiang province found excessive levels of nitrite in edible bird's nests imported from Malaysia, triggering a scare among customers.

It then applied to go public in Shanghai in late 2021 but faced a series of questions from China's securities regulator over higher advertising costs, nutritional value and food safety, leading it to withdraw its application last year.

Meanwhile, it has been cutting prices amid intense competition from newer brands such as Xiaoxiandun which focuses on freshly stewed bird's nests and online sales, and is said to have ranked first in sales of freshly stewed bird's nests in China from 2017 to 2020.

The average price of Yan Palace's ready-to-eat bird's nest fell to 174 yuan a bowl last year from 180 yuan back in 2018, while the price of freshly stewed bird's nest fell to 54 yuan per bottle from 134 yuan over the same period.

Yan Palace intends to use the IPO proceeds to improve research and development, expand the sales network, and strengthen its brand building, marketing promotion, and supply chain management.

China International Capital Corporation (3908) and GF Securities are the two sponsors for the offering.