Its IPO finally approved, Yan Palace flies towards uncertain future

China’s top “bird’s nest stock” faces ongoing challenges from high marketing costs and concerns over product efficacy as it nears the finish line in a long Hong Kong listing journey

Key Takeaways:

• Yan Palace reported its profit in the first five months of 2023 rose more than 20%, as its Hong Kong listing application was finally approved after several failed attempts
• China’s No. 1 “bird’s nest stock” is spending heavily on marketing and building up distribution channels to maintain its growth

By Li Shi Ta

Edible products using bird’s nests as a key ingredient have a long history in China. Legend says the idea was first introduced to China by famous explorer Zheng He after his historic voyages during the Ming Dynasty in the early 15^th century. In the 600 years that followed, bird’s nest became a delicacy known for its nourishing qualities and also a certain social status it brought to those who could afford it. Today, such products are quite common and are mostly considered as nutritional supplements in the health-conscious era. 

Xiamen Yan Palace Bird’s Nest Industry Co. Ltd. is at the top of the roost in the Mainland Chinese bird’s nest market, and looks set to take flight in Hong Kong after recently passing its listing hearing on the city’s stock exchange. 

This flight has been a long time coming. Yan Palace first applied to list as early as 2011, but the plan was grounded after reports that some customers were sickened by excessive nitrite in some products. A second try in 2021 also failed to take flight before this year’s success. 

The company was the largest maker of bird’s nest products in China last year in terms of retail sales, with a market share of 14%, according to its latest prospectus. It also ranks first in terms of the size of its bird’s nest store network and volume of its bird nest imports certified by the China Academy of Inspection and Quarantine.

Founded in 1997, the company makes products in three main categories: pure bird’s nest products; “bird’s nest+” products that can be added to bird’s nests; and “+bird’s nest” products, to which bird’s nest extract can be added. Among them, “instant bird’s nest in a bowl,” which was launched in 2012, is one of its most successful products.

Its revenue grew from 1.3 billion yuan ($182 million) in 2020 to 1.73 billion yuan in 2022, representing a compound annual growth rate of 15.3%. Third-party data in the prospectus shows it ranked No. 1 among China’s top five bird’s nest sellers in terms of retail sales from 2020 to 2022, with its total retail sales growing 12.3% annually during that time, well ahead of the industry average. 

It has also been quite profitable, with profits increasing from 122 million yuan in 2020 to 192 million yuan last year. It registered a profit of 95 million yuan in the first five months of this year, up 20.7% year-on-year.

High marketing expenses 

The company’s net profit margins have ranged between 9% and 12% over the last three years, well below its enviable gross margins as high as 50%, mainly as the result of heavy marketing and promotional spending.

The company took flight overnight in 2008, when Hong Kong actress and brand ambassador Carina Liu Jialing famously said “Yan Palace is my brand of choice for bird’s nest products.” In 2018, Taiwanese actress Lin Chiling became the brand’s new face, followed by another A-list actress, Zanilia Zhao Liying in 2022. Using such young, popular stars, Yan Palace made bird’s nest products very fashionable.

Its annual sales and distribution expenses rose from 320 million yuan in 2020 to 500 million yuan by 2022, growing from 24.4% to 29.1% of total revenue over that period. Its advertising and promotion expenses also rose from 240 million yuan to 330 million yuan over that period, though it actually fell as a percentage of total sales and distribution expenses from 74.3% to 64.8%. The company’s R&D spending was miniscule by comparison, rising from just 17.7 million yuan in 2020 to 24 million yuan in 2022

Uncertain efficacy 

Heavy marketing spending while neglecting product development is common in the bird’s nest industry, where it’s difficult to verify whether products are really effective and nourishing, or just represent unnecessary spending.

Yan Palace says that sialic acid, the main component found in bird’s nests, helps to regulate the immune system and prevents aging. But some studies have pointed out that sialic acid is commonly found in nature, including in some common foods. Moreover, Yan Palace isn’t licensed to sell pharmaceutical or health products, and instead mainly deals in canned foods and beverages.

When it applied to list on China’s domestic A-share market last year, the Mainland regulator asked the company to explain whether its promotional documents contained elements of false advertising and whether it was subject to administrative penalties as a result.

Low barriers to entry

While Yan Palace is sitting pretty on China’s bird’s nest perch, the market is also notable for its low barriers to entry and high margins, leading new entrants to flock to the space. The number of bird’s nest product makers in China grew from about 8,000 in 2017 to 13,000 in 2022, according to data in Yan Palace’s prospectus, and the company adds “there is no guarantee that there will always be sufficient customer demand to support the continued expansion of the bird’s nest industry.”

Other brands that have become well-known in recent years include Xiaoxiandun, Yananju, Yan Mansion, Xiyan Bird’s Nest, Tiancifu Bird’s Nest and traditional Chinese medicine brand Tong Ren Tang. Among them, Xiaoxiandun, established in 2014, stands out for its freshly stewed bird’s nests and differentiated online marketing. It achieved annual revenue of 1 billion yuan as early as in 2020, and completed its Series C financing in March 2021.

Faced with competition from the up-and-comers, Yan Palace has finally stepped up its R&D spending on a wide range of products, including ones based on bird’s nest but with additional ingredients. It has also launched a “Yan Palace” series of skin care products. These newer series, part of the “Bird’s Nest+” and “+Bird’s Nest” product lines, are still quite small but growing, rising from 3.3% of the company’s revenue in 2020 to 4.8% in the first five months of this year. 

While marketing is important, it can only do so much in an increasingly crowded nest. As the crowding gets worse, Yan Palace will need to spend more not just on marketing, but also product development to find its next new growth drivers and distinguish itself from rival “birds of a feather.”

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