Nayuki Packaging Cost Spotlight: Per-Cup Packaging Spend Jumps 50.3% in Two Years as Top Supplier Capacity Draws Scrutiny

In China's freshly made tea sector, Nayuki Tea (02150.HK) is often labeled the brand with the highest average order value. It listed on the Hong Kong Stock Exchange late last month at HK$19.8 per share, yet its stock slipped below the issue price on debut.

Several trading days after listing, investor sentiment remains cautious. By the close on July 9, 2021, Nayuki traded at HK$16.72 per share, giving it a market capitalization of about HK$28.677 billion.

On listing day, Red Star Capital Bureau examined its cost structure. According to the prospectus, materials as a share of total revenue climbed from 35.3% in 2018 to 37.9% in 2020. At an average order value of RMB 43, materials alone account for RMB 16.3 per cup.

Milk tea is widely viewed as a high-gross-margin business, yet Nayuki has not been shy about spending on raw ingredients.

However, Red Star Capital Bureau found that

from 2018 to 2020, Nayuki's raw-material input did not increase; packaging materials did.

More notably,

the prospectus identifies Nayuki's largest packaging supplier as Dongguan Zundao Eco-Friendly Packaging Industrial Co., Ltd. (“Zundao Eco-Friendly”).

Tianyancha APP data shows that

Nayuki founders Peng Xin and Zhao Lin, a married couple, indirectly hold 50% of Zundao Eco-Friendly.

How much does packaging for one cup of milk tea actually cost?

Raw-material spending did not rise

Packaging materials drove the increase

Nayuki's material costs fall into two buckets: raw materials such as tea, fruit and dairy, and packaging materials and consumables such as cups and paper bags.

The prospectus shows raw materials accounted for 28.7% of total revenue in 2020, down from 29.2% in 2018.

Outer packaging costs, by contrast, rose from 6.1% of total revenue in 2018 to 9.2% in 2020.

In other words, the rise in Nayuki's material costs was mainly driven by packaging, not by using more or more expensive raw ingredients.

What level does Nayuki's packaging cost sit at?

Take a tea drink with an average order value of RMB 27. In 2018, packaging for one cup was about RMB 1.65; by 2020, it had reached RMB 2.48.

In only two years,

per-cup packaging spend jumped 50.3%, a striking increase.

After the prospectus was released, media asked a Nayuki executive about the relatively high packaging costs. The executive said: “This is very normal in this industry. For example, in Starbucks' gross margin cost, the biggest item is not its coffee, but its cup.”

Starbucks' financial reports show gross margin around 67%, well above Nayuki's. But coffee preparation is more standardized, supply-chain costs are lower, and Starbucks does not disclose detailed packaging costs, making a direct comparison of packaging's impact on gross margin difficult.

Still, Nayuki's prospectus prompted Red Star Capital Bureau to identify more details and questions around packaging costs.

Nayuki's largest packaging supplier is not simple

Nayuki's prospectus shows that

from 2018 to 2020, its largest supplier was Zundao Eco-Friendly, which mainly supplied packaging materials.

The prospectus also shows Nayuki purchased packaging materials from Zundao Eco-Friendly for RMB 37.612 million, RMB 94.611 million and RMB 94.447 million in 2018, 2019 and 2020, respectively, with purchases representing about 8% of total procurement.

Tianyancha APP shows Zundao Eco-Friendly was founded in October 2017 and has 50 to 99 employees. In 2018 it became Nayuki's largest packaging supplier; at the end of that year, a major equity change occurred: Shenzhen Xinlin Culture Communication Co., Ltd. took a 50% stake;

Peng Xin and Zhao Lin each hold 50% of Shenzhen Xinlin Culture Communication Co., Ltd.

Zundao Eco-Friendly's production capacity, however, raises questions.

An approval document from the Dongguan Environmental Protection Bureau shows Zundao Eco-Friendly planned relocation, renovation and expansion. The document is dated July 19, 2019.

According to the document, post-expansion capacity includes 1.2 million paper bags, 2.5 million cup sleeves, 1 million milk tea cups, 2.5 million bread boxes, 1.5 million double-cup holders and 100,000 six-cup boxes per year.

Based on capacity disclosed in the document,

if Zundao Eco-Friendly reached full production immediately after expansion, total annual output across product types would be about 8.8 million units.

On July 8, Red Star Capital Bureau visited the Chengdu International Hotel Supplies and Catering Expo, where Zundao Eco-Friendly exhibited. Based on its per-unit packaging pricing, even using the higher price range,

the actual value of 8.8 million products would not exceed RMB 6 million.

Yet in both 2019 and 2020, Nayuki paid Zundao more than RMB 90 million in packaging fees. At that amount, the number of products Nayuki ordered would far exceed 8.8 million.

If Nayuki's payments are compared with Zundao Eco-Friendly's actual capacity, the implied unit price would reach RMB 10 per item, making the total packaging cost of a complete cup of milk tea tens of RMB—clearly impossible.

A large order like Nayuki's could not be handled by Zundao Eco-Friendly's own capacity.

Red Star Capital Bureau checked Tianyancha and found that Luo Liangshan, a shareholder of Zundao Eco-Friendly, also owns Shenzhen Jinggongxin Technology Co., Ltd. (“Shenzhen Jinggongxin”). Established in November 2014, it focuses on R&D, design and sales of textiles and packaging products.

The capacity puzzle may be connected to Shenzhen Jinggongxin.

It is quite possible that Shenzhen Jinggongxin also supplied packaging materials to Nayuki, but Nayuki disclosed no further information. At the same time, “third-party” participation in Nayuki's packaging supply may exist, and whether it will affect future packaging costs deserves continued attention.

On questions including why Nayuki's largest packaging supplier from 2018 to 2020 was Zundao Eco-Friendly,

whether Zundao Eco-Friendly's capacity can meet Nayuki's demand, whether Shenzhen Jinggongxin is absorbing Nayuki orders, and why founders Peng Xin and Zhao Lin indirectly hold 50% of Zundao Eco-Friendly, Red Star Capital Bureau contacted Nayuki. No response was received by press time.

How much is milk tea outer packaging actually worth?

From July 8 to 10, the Chengdu International Hotel Supplies and Catering Expo was held.

Red Star Capital Bureau reporters visited several foodservice suppliers at the venue, including Zundao Eco-Friendly and another company, Fengyi Industrial, which claimed to also provide packaging materials to Nayuki.

The reporter asked sales staff at both companies about buying milk tea outer packaging materials. Both said prices vary by material. When asked about the price level of Nayuki's outer packaging, both sales staff said Nayuki uses relatively high-quality materials.

Generally, complete packaging for one cup of milk tea includes the cup, lid, straw, sleeve, holder and paper bag.

The sales staff listed per-unit prices for higher-quality packaging: PP frosted cups about RMB 0.7, PLA straws about RMB 0.15, PP lids about RMB 0.15, sleeves about RMB 0.1, holders about RMB 0.5, and premium eco-friendly paper bags about RMB 1.

If all higher-quality packaging were used, the total for one cup would be about RMB 2.6.

The sales staff added that this price applies to a minimum order of 50,000 units; larger volumes bring lower unit prices.

It is worth noting that this is a comprehensive price for a fully equipped single cup. Many milk tea shop customers dine in and usually do not need paper bags or holders. Packaging also varies by product; for example, Nayuki's “Baqi Yu Youpa” does not need a straw, lid, sleeve or holder, which reduces per-product packaging costs to some extent.

As a high-end tea drink brand, Nayuki pursues “premium” positioning in both raw materials and outer packaging. From the consumer experience, users do receive dual satisfaction in drinking and using.

But rising packaging costs, the complex relationship between supplier and brand, and the general packaging prices Red Star Capital Bureau learned from suppliers may all cast fog over Nayuki's packaging costs.

——This article is reprinted from China Packaging Network (pack.cn), original link: http://news.pack.cn/show-377772.html