HERBS GROUP enters the Hong Kong Stock Exchange by selling health products, with a gross margin of nearly 75%. The "emphasis on marketing and light on research and development" development model raises questions

Source: Huaxia Times

With a gross profit margin of nearly 75%, the HERBS GROUP Holdings Limited (hereinafter referred to as "HERBS GROUP"), backed by TVB "Best Actor" Guo Jin'an, recently passed the listing hearing on the Hong Kong Stock Exchange.

Public information shows that HERBS GROUP was established in 2000 and is a diversified supplier of health and beauty products in Hong Kong, co-founded by Guo Jin'an and his sister Guo Zhiyin. From the equity structure, Guo Zhiyin and her spouse Li Risheng hold 90% and 10% of the company's shares, respectively. Guo Jin'an serves as a non-executive director of HERBS GROUP and is also the brand spokesperson for the company.

According to the prospectus, about 90% of the company's revenue comes from health products, indicating that HERBS GROUP's ability to "make money" from selling health products is quite strong. From 2021 to the first half of 2024, HERBS GROUP's revenues were HKD 189 million, HKD 208 million, HKD 251 million, and HKD 118 million, respectively; during the same period, net profits were HKD 23.181 million, HKD 27.972 million, HKD 39.502 million, and HKD 7.483 million, respectively; gross profit margins were approximately 72.0%, 71.9%, 73.8%, and 74.2%.

About 90% of Revenue Comes from Health Products

According to a Frost & Sullivan report, in 2023, among all international and local health product suppliers in Hong Kong, HERBS GROUP ranked fifth in retail sales of immune system health products, with a market share of approximately 4.9%; in terms of retail sales of health products, the group ranked tenth, with a market share of approximately 3.6%.

The prospectus shows that HERBS GROUP's products are mainly divided into health products, beauty and skincare products, and pet health products. From 2021 to the first half of 2024, about 90% of the company's revenue came from health products, while the revenue share from beauty and skincare products and other products was relatively low.

Equally noteworthy as the celebrity effect is HERBS GROUP's extremely high gross profit margin. The prospectus shows that from 2021 to the first half of 2024, the company's gross profit margins were approximately 72.0%, 71.9%, 73.8%, and 74.2%, respectively. Particularly in the first half of 2024, the gross profit margin for the company's anti-aging products reached 84.9%.

The average selling price of anti-aging products is also the highest among all health products offered by HERBS GROUP. In 2023, the average selling price of anti-aging products was HKD 501.7 per box (approximately RMB 468 per box), while the average selling price of other products was all below HKD 200 per item (approximately RMB 189 per box). The reporter saw on HERBS GROUP's official website ZINOMALL that one anti-aging product, "HERBS NMN24000+", is priced at HKD 1380 per box (approximately RMB 1288 per box). HERBS GROUP also stated that during the past performance period, sales of anti-aging products recorded significant growth, mainly due to the increased sales of "HERBS NMN10000+" and "HERBS NMN24000+" products.

Why Can Health Products Maintain High Gross Profit Margins?

"The high profits of health products can be maintained mainly due to the rise in public health awareness, as well as brand merchants adopting high-profile strategies, which means they know how to tell stories, describe effects, and use strong marketing methods to win over users," said Wu Daiqi, founder of Shenzhen Siqisheng Company, to a reporter from Huaxia Times. "Conversely, due to industry practices, consumers may doubt the efficacy of drugs or health products that are priced too cheaply." Therefore, companies will adopt high-margin practices to maintain the development of their product categories.

Being able to "make money" indeed relies on the tireless marketing efforts of HERBS GROUP.

The prospectus shows that during the reporting period, the company's sales and distribution costs accounted for more than 40% of revenue, mainly including salaries and commissions paid to product consultants and sales promoters; hiring artists (such as actors and singers), KOLs, and medical experts, as well as advertising and promotional expenses incurred in marketing and promotional activities.

In addition, among the 230 employees of HERBS GROUP, 186 belong to the sales and marketing team, accounting for 81%. It is worth noting that HERBS GROUP did not disclose information regarding the company's R&D expenditures in the prospectus, only stating that the company has a product development team. In contrast to the large sales and marketing team, the product development team has only 4 employees.

HERBS GROUP's emphasis on marketing over R&D is also reflected in this IPO, as three of the five projects funded by HERBS GROUP are related to marketing, such as strategic marketing and promotional activities, expanding, improving, and optimizing the sales network, and recruiting IT talents to support the continuously expanding online sales channels. HERBS GROUP stated: "We intend to hire at least one to two artists and KOLs as product ambassadors for our main products."

Wu Daiqi stated: "Without R&D personnel and support, it is highly likely that the products are outsourced, which poses significant risks for the company. The quality of OEM products is difficult to guarantee compared to those produced in the company's own factory, and the company has reached such a scale yet still does not prioritize research and development at the source, indicating a serious lack of emphasis on the foundation of the enterprise and brand system establishment. The greater the marketing effort, the higher the visibility, but it can easily lead to backlash."

Yang Huaiyu, a consumer industry analyst, pointed out to the reporter from Huaxia Times: "A lack of continuous R&D investment means that the company will struggle to launch truly innovative products. Over time, this can lead to product obsolescence, technological lag, and loss of market competitiveness. While excessive reliance on marketing activities can stimulate sales in the short term, without substantial product improvements and technological upgrades, it is difficult to establish long-term competitive barriers. Moreover, customers attracted solely by marketing often have low loyalty and can easily be replaced by other more attractive brands."

Founder Announces Divorce Before IPO

Xie Lianghong, an expert on small and medium-sized enterprises from the Ministry of Industry and Information Technology, also told the reporter from Huaxia Times that although HERBS GROUP's product gross margin is relatively high and performance is acceptable, it currently relies on the star effect to support brand awareness, leading to unstable operations. Once the industry experiences fluctuations or competition intensifies, it will face the issue of product updates and iterations, especially after going public. Only by increasing investment in product R&D and timely updating products to meet changing customer demands can it increase market share and achieve more stable performance growth.

Guo Jin'an is one of the founders of HERBS GROUP. From the equity structure, his sister Guo Zhiyin and brother-in-law Li Risheng hold 90% and 10% of the company's shares, respectively, making it a star family business.

Public information shows that Guo Jin'an is 60 years old this year and has appeared in several popular TVB dramas, including "Genesis," "The Legend of the Condor Heroes," "The Great Detective," "The New Adventures of A Wong," "The Loyal and the Treacherous," and "The World's No. 1," and has won the Best Actor award three times at the TVB Anniversary Awards The prospectus also revealed the salary of Guo Jinan at HERBS GROUP. From 2021 to 2023, Guo Jinan's annual salary, allowances, and benefits were fixed at HKD 640,000 (approximately RMB 598,000).

It is worth noting that on the eve of the IPO, Guo Jinan officially announced his divorce, ending his 18-year marriage to his 15-year younger wife, Ou Qianyi. Ou Qianyi is a Hong Kong actress and singer, who once sang the ending theme song "Problems Every Day" for the cartoon "Chibi Maruko-chan." As both are well-known figures, the news of their divorce quickly trended online.

"A listed company with a star background has both advantages and disadvantages. The advantage is that after the listing information is disclosed, if the star has high popularity and a good reputation, it can easily attract more attention to the company and increase its visibility in a short period. On the other hand, if the star experiences a 'collapse,' it can also bring negative effects to the company, potentially leading to a drop in stock prices," emphasized Wu Daiqi. "This is different from the effect of a star as a spokesperson. If a star is a spokesperson, it is merely a contractual relationship. Once the other party causes a breach of contract due to negative news, the contract can be terminated to distance themselves and reduce the impact. However, if the star is a controlling shareholder or a direct operator, the relationship between the star and the company is much closer and completely tied together, thus the positive and negative effects of the star are very significant."