Lantian takes swipe at IPO, but slow growth may dampen its prospects 

The disposable diaper maker’s Hong Kong listing could get a lukewarm reception as China’s population declines and birthrates plunge

Key Takeaways:

• Lantian Group has filed to list in Hong Kong, reporting its profit rose 13.8% year-on-year in the first nine months of 2023 to 44 million yuan 
• The company is still a relative baby in China’s disposable diaper realm, holding just 3% of the market in 2022

By Lau Chi Hang

Mothers across the globe have Valerie Hunter Gordon to thank for inventing disposable diapers. Fed up with the hassles of washing traditional cloth diapers repeatedly, she left her history-altering mark on the baby-care world in the 1940s with her new invention after numerous trials and errors. 

The luxury of disposable diapers wasn’t even thinkable in China until the 1990s, and attracted only a small audience at first as most households could hardly afford them. But that changed with the economy’s rapid takeoff that led to growing household wealth. The now-defunct one-child policy added to China’s new diaper fever, as parents rushed to coddle their little princes and princesses with the best products on the market. 

As those factors came together, disposable diaper sales in China went through the roof to reach more than 70 billion yuan ($9.73 billion) in 2019.

That boom gave birth to Lantian Group Holdings Ltd., which designs, manufactures and sells disposable diapers and earlier this month filed to float its shares in Hong Kong with an IPO. The company’s stable of diaper and pullup brands includes the likes of Qisezhu and Congbo. It sells its products both directly to consumers, and also through more than 30 distributors over online channels and via regional retail stores.

All grown up

Lantian began pumping out its diapers from a huge 38,300-square-meter production base in 2019 in the city of Meishan in Southwestern Sichuan province, better known for its spicy food than baby wares. Its facilities include a building for livestreaming activities to promote its products to a young generation of parents used to shopping online. The company also entered the OEM business in 2021, producing private-label brands for large e-commerce companies, which were among the seven new customers it added to its base in the first nine months last year.

Lantian’s average monthly transaction volume via its self-operated online stores has grown steadily from 280,000 in 2021 to 360,000 in the first nine months of last year, with average transaction value rising from 43.8 yuan to 53.5 yuan over that period.

According to its IPO prospectus filed on Feb. 8, the company’s revenue grew from 340 million yuan in 2021 to 538 million yuan in 2022, an increase of 58%. Its profit grew even faster, rising 129% to 46.5 million yuan from 20.5 million yuan over the same period. Its revenue for the first nine months of 2023 rose 28% year-on-year to 488 million yuan, while its profit grew 13.8% to 44 million yuan.

The company said it plans to use proceeds from a Hong Kong listing to finance the purchase of machines to produce its raw materials, and to improve its R&D and quality control capabilities and its brand profile, as well as to upgrade its internal IT systems.

Overly high expectations?

Income levels have risen steadily as China’s economy boomed over the last two decades, with per capita disposable income rising about 7% annually from 2018 to 2022. Coupled with China’s relaxation of its one-child policy in 2016 to allow couples to have two and later three children in 2021, the diaper market looked set to explode.

But the reality has been quite different. According to third-party data in the IPO prospectus, China’s diaper market actually fell more than 30% in value from 73 billion yuan in 2018 to 50.5 billion yuan in 2022, as the nation’s birth rate continued its steady decline. The impact of the Covid pandemic only made things worse.

Even with the end of the pandemic and demographic policy shifts and generous financial incentives to encourage more childbearing, market growth has been tepid. According to estimates in the prospectus, the size of the diaper market will only increase from 50.5 billion yuan in 2022 to 58.1 billion yuan in 2027, representing a piddly annual growth rate of just 2.8%. In other words, the market is showing rapid signs of aging with very limited potential for future growth.

Such limited prospects mean that companies can only grow by stealing business from their rivals, which will only heighten competition and erode profit margins for everyone.

Competition bloodbath

Such competition is already rearing its head in China as everyone jockeys for market share. Even stronger brands like Japan’s Kao and Unicharm are feeling the pinch. According to Nikkei Asia, Kao had about 10% of China’s disposable diaper market in the second half of the 2010s, but that is now down to the single-digits. As its business shriveled, Kao was forced to close a diaper factory last August in Hefei, capital of East China’s Anhui province.

Measured by total sales in 2022, Lantian only made it onto the list of China’s top 20 diaper suppliers with just 3% of the market. Its status as a relative small-fry is reinforced by the fact that the country’s top five suppliers alone command nearly 60% of the market combined. Accordingly, Lantian’s ability to wrestle any share from such giants might be a tall order. 

The company believes its competitive advantage lies in its focus at the lower end of the diaper market. That could work in its favor as consumers grow more frugal with the slowing Chinese economy. While its low-cost focus might help the company in the short-term, barriers to entry are inevitably lower at that end of the market and any business boom would inevitably attract its rivals. 

In terms of resources, size really does matter as well in this kind of a crowded and mature market. That means that bigger players are in a much stronger position to withstand any price wars and ultimately crush their smaller competitors.

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