The consumer products sector has always been a blue ocean market for institutional investment. Investments in this sector have become incredibly popular, particularly under the impact of the 2020 epidemic. Prices of liquor stocks on the secondary market have risen sharply. The soy sauce, pickled mustard tubers, milk and ham sectors have all seen their leading stocks. These stocks have received significant investments from major funds. The primary market has also been on the rise. After declining for several years, the amount and volume of investment rebounded in 2020. The investment amount for 2021 was up to RMB 100 billion.
However, since the second half of last year, consumer products investment has cooled down unexpectedly. Many investors and limited partners seem to have gradually lost confidence in consumer products investment. According to the data, such investments are going through a recessionary phase. Consumer goods investment is facing multiple uncertainties, such as the epidemic and diminishing traffic dividends. Where will this investment go from here? Mr. Tim Zhang, Senior Deputy General Manager and Chief Investment Officer of CR Capital Management, was invited to share his views in the program "Dialogue with Investors" produced by Chuangyzbh of Securities Times.
Tim said that the current national consumption does face a lot of uncertainties and challenges. However, the consumer products sector still offers the best opportunities for venture capital. "There will be three drivers of growth in the consumer products sector. We will continue to plan and deploy around our industrial strategy," said Tim.
01
The "VUCA era" is upon us. You should think twice before you invest during the economic downturn.
Mr. Tim Zhang, Senior Deputy General Manager and Chief Investment Officer of CR Capital Management
Securities Times
Since last year, the venture capital community has felt a cold winter chill in investments in the consumer products sector. The statistics also confirm that investments in this sector have indeed plummeted in both volume and value. What are your observations and opinions on this?
Tim: I do not agree that "consumer products investment is going through a cold winter". However, I agree that consumption is currently sluggish. First, after the economic growth slowdown, we have entered a new normal of stable development. In addition, the three-year epidemic has had a significant impact on our spending power and supply chain. Moreover, many countries around the world have suffered a number of disasters this year, including inflation and regional wars. All of these disasters have dramatically affected each of us in terms of employment, income, and expectations for the future. As a result, many consumers are becoming more frugal and spending more cautiously.
From an investment perspective, we are seeing a gradual fall in valuation expectations for many projects. As long as we control the valuation and leave enough room for mistakes, we can control the investment risk even if the portfolio company has operational difficulties at a later stage. Therefore, we can always have investable projects in times of economic growth and recession. We can invest in a project as long as its valuation is reasonable and its risk is manageable.
Consumers will become more frugal when everyone believes that consumer product investments are going through a cold winter. This may lead to a shortage of funds. As a buyer, we should take advantage of this opportunity to buy items when valuations come down.
Securities Times: Consumer product investments were extremely popular in the first half of last year, which pushed valuations very high. However, this sector has been in a cold winter since the second half of last year. Based on your observations, are there currently any pullbacks in project valuations in this sector?
Securities Times: Consumer product investments were extremely popular in the first half of last year, which pushed valuations very high. However, this sector has been in a cold winter since the second half of last year. Based on your observations, are there currently any pullbacks in project valuations in this sector?
Tim: I think the stock market has done a good job of adjusting valuations over the past year. However, in the primary market for private equity, companies still have high valuation expectations. This has always been the norm. However, investors are no longer going after potential investments at high valuations as they did in previous years. Therefore, companies must accept this new environment and adjust their valuations appropriately. I believe that while many project valuations have pulled back, these pullbacks are not yet appropriate. Many entrepreneurs still have high valuation expectations. I think it will take some time for people to gradually return to reality.
Investors pursued investments at high valuations in previous years. They felt that if they did not invest or did not invest quickly enough, the project would likely be taken by someone else. Today, however, even if they do not invest or move slowly, more investment opportunities will still present themselves. We are now in an era of volatility, uncertainty, complexity, and ambiguity (VUCA). It is a good strategy for financial investors to take their time and observe and think carefully before taking action. As an industrial capital institution, CR Capital Management invests not only to pursue financial returns in the short term but to build industries. Therefore, we invest in long-term industry value and long-term corporate development. The current market does not affect our investment decisions. We will still try to find suitable targets and partners based on reasonable prices for strategic reasons.
02
Three growth drivers in the "deep water" area
Securities Times: What is the logic of investment and growth in the consumer products sector after entering the "deep water" area?
Securities Times: What is the logic of investment and growth in the consumer products sector after entering the "deep water" area?
Tim: National consumption today does face many uncertainties and challenges. However, I always believe that venture capital investment in the consumer products sector offers the best opportunities. This is because China's household incomes are gradually rising in general. A large middle class is emerging. In addition, the new generation of post-90s and post-00s is becoming the current mainstream consumer group. This will bring structural changes to consumption and changes in the whole industry. I see three driving forces in this process of change: new channels, technological innovation, and new consumer groups.
The emergence of new channels such as e-commerce, social media, and private domain e-commerce has provided faster, easier, and more effective ways to spread consumer brands. Over the past few years, almost all of China's emerging consumer brands have an e-commerce background. Many of them started out in e-commerce. They are well known online and are rapidly expanding offline.
Thanks to technological innovation, new products, new features, and new brands are proliferating. Technological innovation has boosted our consumer products sector. For example, Oatly, an oat milk invested in by CR, is a food product that has never existed before in human history. However, with advances in technology, such products have been developed to meet the current quest for a healthy diet. The entry of such products into the market has boosted the quality of consumer products of our time.
In terms of new consumer groups, according to statistics, 70% of China's incremental consumption last year came from the new generation of post-90s and post-00s. Their consumption needs have changed. They seek to meet not only basic material needs, but also spiritual needs. They consume more to satisfy their spiritual needs than they do to satisfy their material needs. This has expanded the categories and characteristics of goods and services.
Securities Times
The traffic and capital dividends are becoming unsustainable. What should entrepreneurs in the consumer products sector do in this situation?
The traffic and capital dividends are becoming unsustainable. What should entrepreneurs in the consumer products sector do in this situation?
Tim:I think there are a few things that are important for entrepreneurs in this industry. First, choose the right niche. There are industry sectors that are experiencing exponential growth. Therefore, it is easier to succeed in these sectors. Second, develop new designs, new features, or new packaging, which means being innovative. Third, ensure that you can excel in product differentiation, i.e., develop "unique" products. Finally, make sure that you are patient. It is common for people to make mistakes when starting a business. Therefore, entrepreneurs should be prepared for mistakes and leave enough room to correct them. They can learn and grow patiently through their mistakes.
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Investing around industry sectors and favoring the catering industry chain
Securities Times
Some people believe that investments in the consumer products sector are cyclical. In the past cycle, unicorn brands like Hey Tea and Nayuki have thrived in this sector. However, another cycle may start in the next 3-5 years. We have not seen emerging unicorns yet. Additionally, it is increasingly difficult for brands to grow in an uncertain economic environment. What is your take on this view?
Some people believe that investments in the consumer products sector are cyclical. In the past cycle, unicorn brands like Hey Tea and Nayuki have thrived in this sector. However, another cycle may start in the next 3-5 years. We have not seen emerging unicorns yet. Additionally, it is increasingly difficult for brands to grow in an uncertain economic environment. What is your take on this view?
Tim: I think it is highly likely that investments pursuing unicorns will fail. However, high risk may lead to high return. Seeking unicorns is not in line with our investment philosophy. As an industrial capital, we will develop an industrial strategy based on the fields we are familiar with and invest based on this strategy. We are currently bullish on the catering industry. This industry is less cyclical than industries such as automotive and energy. This industry is stable and will not experience dramatic ups and downs. We believe that there are opportunities for outstanding companies to emerge in this industry chain. The catering industry is a good fit for CR. The niche markets in this industry, such as snacks, plant-based proteins, functional foods, nutritional products, cold foods, prepared foods, compound condiments, etc., are growing rapidly. I believe that great companies will emerge in all these areas.
Securities Times
What is the deployment of CR's industrial investment funds in the consumer products sector?
What is the deployment of CR's industrial investment funds in the consumer products sector?
Tim: CR Capital Management has several funds for the consumer products sector, including the Hunan Agricultural Products Distribution Alliance Fund, the CR State-Regulated Xiamen Consumption Fund, and the Liangrun Fund in China. In addition, the Company has the CR Verlinvest Health Investment Fund, the CR Enterprise Alliance Fund, and the Asia Food Growth Fund I in other countries. CR Capital Management is committed to incubating new industries and cultivating new economic growth points for the Group. For this purpose, we are accelerating the deployment of "3+2" new industries. The "3" refers to new materials, new forms of consumption, and new types of business in the real estate sector, while the "2" refers to carbon peaking and carbon neutrality, as well as innovation and entrepreneurship. CR, through its consumer products industry investment funds, has made appropriate investment arrangements in niche markets such as alcohol, supermarkets, condiments, agricultural products, plant-based proteins, snacks, prepared foods, catering supply chain, cold chain logistics, drones, and consumption for Chinese fashion trends. All of these are carried out in line with CR's industrial sectors and our strategic positioning.
Reporter: Zhuo Yo
