On June 6th, Chongqing Dengkang Oral Care Products Co., Ltd., the parent company of Leng'an Ling toothpaste (referred to as 'Dengkang Oral'), officially submitted its prospectus and plans to be listed on the main board of the Shenzhen Stock Exchange. If successful, more than 50% of the total raised funds will be used for upgrading the omnichannel marketing network and brand promotion.
Dengkang Oral has built channel barriers in third- and fourth-tier cities through its distribution model. In recent years, the company has gradually focused on online channels. What are the advantages and disadvantages of e-commerce channels and the distribution model in lower-income markets for Dengkang Oral? How far can Dengkang Oral still rely on its low-price advantage? Analysts Zhu Renjie and Meng Ge from Frost & Sullivan (referred to as 'Frost & Sullivan') recently spoke with 'Finance World' magazine to discuss the listing path of Leng'an Ling.
Finance World Magazine
Q: Dengkang Oral's gross profit margin is 42.1% (40.96% for adult oral care, 55.01% for children's oral care, and 35.23% for electric products), which is at a medium level in the industry. Why is the gross profit margin of oral care products generally higher?
Analyst Zhu Renjie from Frost & Sullivan
Zhu Renjie:The gross profit margin of fast-moving consumer goods is generally high. Oral care products, as fast-moving consumer goods essential for daily use by consumers, are relatively less sensitive to price changes and have a higher brand loyalty. Therefore, oral care brands can sell at a higher gross profit price.
From the perspective of oral care brands, each brand will launch a large number of product SKUs with different efficacy and high-end product lines. The impact of different efficacies on raw material costs is not significant, and this part of the 'efficacy premium' is also a source of high gross profit. At the same time, oral care brands also need to spend a large proportion of their operating income on marketing and promotion each year. Only by ensuring a high gross profit can they maintain healthy revenue and development.
Q: Dengkang Oral has built channel barriers in third- and fourth-tier cities through its distribution model. In recent years, the company has gradually focused on online channels. Do you see an optimistic outlook for Dengkang Oral's channel transformation? What are the advantages and disadvantages of e-commerce channels and the distribution model in lower-income markets for Dengkang Oral?
Zhu Renjie:Online channels mainly include self-built brands, third-party platforms, live shopping, etc., and are currently the main retail channels for oral care products in China. According to Frost & Sullivan, online channels accounted for 38.5% of total retail sales of oral care products in 2020, with a compound annual growth rate of 30.6% from 2016 to 2020. It is expected that the proportion of online channels will increase to 44.7% by 2025. Therefore, focusing on online channels is one of Dengkang Oral's very important transformation strategies. However, as a latecomer in online channels, Dengkang Oral also faces many challenges, including the establishment of online channels, the cultivation of an online consumer group, and competition from other brands.
As an oral care brand focusing on mid- to low-end products, offline channels in lower-income markets will still be its foundation and an important sales channel, which can play a role in face-to-face consumer education. However, the company also needs to consider the impact of focusing on lower-income markets on its brand positioning. The label 'low-price in lower-income markets' may not be conducive for Leng'an Ling to launch higher-priced and more high-end product lines.
Q: Are oral care products, especially toothpaste and toothbrushes, highly demanding on research and development? What are the moats for toothpaste and toothbrush categories?
Analyst Meng Ge from Frost & Sullivan
Meng Ge:Since China's oral care product industry is relatively mature and competition among leading companies is fierce, innovation and R&D capabilities have become one of the key points for standing out. For example, Dengkang Oral has established the 'Leng'an Ling Tooth Sensitivity Resistance Research Center' and applied for more than 10 patents, proposing diversified and customized solutions for oral problems of special groups such as children, infants, pregnant women, and the elderly.
Currently, the main research and development innovations for toothpaste products focus on taste (especially for children's toothpaste), packaging, and efficacy (whitening, sensitivity resistance, gingival protection, fresh breath, etc.). Ordinary toothbrush products mainly focus on the material selection and design of their bristles to help consumers clean their mouths more comprehensively and improve oral health. In terms of electric toothbrushes, they can be divided into rotary electric toothbrushes and oscillating electric toothbrushes. Currently, the research and development innovation of electric toothbrushes mainly focuses on hardware technology, such as extending standby time, optimizing brush head accessories, and intelligent monitoring functions. Whether it is ordinary toothbrushes or electric toothbrushes, they will focus on enhancing product functionality while better protecting dental and gingival health.
Q: The average price of Dengkang Oral toothpaste is 2.54 yuan, and the average price of toothbrushes is 1.77 yuan. The combined revenue proportion of both exceeds 90%. Do you think the company can still rely on its low-price advantage for how far?
Meng Ge:According to the definition by the China Oral Care Products and Nursing Association, products in China's toothpaste market are classified into five grades according to the standard stick (100 grams per stick) unit price: AAA-grade toothpaste (>22 yuan per stick), AA-grade toothpaste (15 yuan - 22 yuan per stick), A-grade toothpaste (9 yuan - 15 yuan per stick), B-grade toothpaste (7 yuan - 9 yuan per stick), and C-grade toothpaste (<7 yuan per stick). In 2020, C-grade toothpaste accounted for 17% of sales. Looking at historical data, C-grade toothpaste is in a slow downward trend. According to the data conversion shown in Dengkang Oral's prospectus, the unit price of its adult toothpaste was 2.54 yuan, 2.55 yuan, and 2.62 yuan per stick from 2019 to 2021, all within the 'C-grade toothpaste' price range defined by the China Oral Care Products and Nursing Association. The company's prospectus also mentions that it will continuously optimize the product structure, increase the sales proportion of mid- to high-end products, and drive up the product price center. Therefore, it is expected that the average price of the company's toothpaste will gradually increase in the future, in line with the mainstream market development trend.
Regarding toothbrushes, the current average price of toothbrushes (excluding electric toothbrushes) on the market is about 3 yuan per stick, which is higher than the average price of Dengkang toothbrushes. According to the data disclosed in the prospectus, the price of toothbrushes shows a downward trend year by year, mainly due to cost control. Overall, in the future, the penetration rate of electric toothbrushes will gradually increase, and ordinary toothbrushes will be further replaced. Therefore, the price of ordinary toothbrushes is expected to remain stable at a certain level.
