Newmans Corp. Plunges on Debut

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On January 10th, a Hong Kong company by the name of Newman Science (stock code: 02530.HK) made its official debut on the stock market. However, the day unfolded dramatically, as the stock opened significantly lower and suffered a staggering drop of over 27%. Although there was a slight recovery afterwards, the shares remained below the issue price, prompting concerns among investors and market analysts alike.

Newman Science specializes in the marketing, sales, and distribution of finished nutritional products in China. Its range is marketed under proprietary brands like "Newman Science" and "Newmans," and can be categorized into five main types: algal oil DHA, probiotics, vitamins, multivitamins, and algal calcium products. The target demographics for these nutritional supplements primarily consist of pregnant women, postpartum women, and children from infancy through childhood, with the algal oil DHA product being the best seller among them.

Despite the alarming decline in share price following its stock market entry, a deeper analysis reveals that Newman Science isn't as weak as the market reaction might suggest.

According to the company’s prospectus, the revenues from fiscal years 2021 to 2023 indicate a steady growth trend. Specifically, their revenues were around 338 million RMB, 367 million RMB, and 427 million RMB respectively, with net profits of roughly 120 million RMB, 87.52 million RMB, and 159 million RMB in the corresponding periods.

Although the scale of the company’s operations might seem modest, the consistently high gross margins above 70% reflect a commendably robust performance. However, as the company entered the first half of 2024, it reported a concerning 23.94% decline in revenue to 146 million RMB, accompanied by a staggering 41.39% fall in net profit to 45.28 million RMB.

The declining net profit in the first half of 2024 can be attributed to two primary factors as stated in the company's prospectus: first, the revenue from algal oil DHA saw a downturn; second, a lackluster market environment for maternal and infant algal oil DHA products in China led to increased promotional expenses during the period.

It’s crucial to highlight that Newman Science is grappling with several challenges.

A particularly alarming issue is the heavy reliance on its algal oil DHA products, which accounted for over 96% of its revenue in the first half of 2024. This significant dependency raises concerns about the stability of its future performance.

Data clearly indicate that from fiscal year 2021 to the first half of 2024, Newman Science's procurement from its top five suppliers has been alarmingly high, with figures showing around 90.7%, 92.7%, 94.3%, and 92.4% of total procurement respectively. Such a concentration on a limited number of suppliers poses a notable risk. Should these primary suppliers encounter issues—such as disruptions in raw material supply, operational difficulties, or shifts in cooperative intent—Newman Science could face severe challenges in its supply chain, potentially crippling production and sales and posing a significant threat to operational stability.

Additionally, an overview of the company’s workforce reveals that Newman Science employs just over 40 individuals. Of these, 9 hold key positions in senior management and as executive directors, guiding the company’s strategic direction; 13 are dedicated to marketing and sales, tasked with expanding market reach and enhancing sales figures; 2 manage accounting and finances, ensuring proper funds management and financial record-keeping; 4 are involved in administrative and human resources, maintaining internal order; while 16 staff members are part of the logistics department, highlighting the importance of distribution in their operations. However, due to its business model, which relies on procuring finished products from suppliers, the company lacks research and development personnel, and consequently, there are no research expenses. This situation hints at a deficit in core competitiveness and operational autonomy, making it challenging for Newman Science to distinguish itself in the marketplace through innovation while navigating a rapidly changing competitive landscape.

Overall, while the earning potential of Newman Science cannot be underestimated given its high revenue generation per employee, concerns about its risk management capabilities are alarming. Issues such as supplier concentration and a lack of R&D investment may jeopardize its position in the face of market fluctuations and industry transformations, with performance stability being put into question. Moreover, the high level of equity concentration might lead to imbalanced decision-making, and potential trademark litigation could introduce further uncertainties. These matters necessitate ongoing vigilance from investors.

The sinking stock price of Newman Science post-IPO raises significant questions. Is the market misjudging the company, resulting in what some might label an unjust rejection, or do the setbacks accurately reflect underlying issues within the business? This dilemma warrants careful contemplation and measured evaluation by investors as they assess the investment landscape surrounding Newman Science.
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