Oriental Rise’s Nasdaq Debut: White Tea Boom Fuels 50% Stock Surge
Move over, bubble tea chains. Oriental Rise Holding Ltd. (ORIS) has just served up a new kind of tea offering on the Nasdaq, one far more traditional than the trendy new generation of bubble teas offered by the likes of ChaBaiDao (2555.HK) and Nayuki (2150.HK) in Hong Kong. Investors were clearly smitten with the flavor of Oriental Rise’s business, which focuses on cultivating and selling white tea leaves, driving the stock up by a whopping 50% on its first trading day, Thursday.
The company raised a relatively modest $7 million from the listing, issuing 1.75 million shares priced at $4 each. Tiger Securities acted as the sole underwriter.
A Niche Market with Big Potential
Unlike the fiercely competitive bubble tea market, China’s traditional tea sector is surprisingly underrepresented on public markets, despite the nation’s thousands of years of history in tea cultivation. China’s current focus on promoting high-tech companies in sectors like microchips and autonomous driving leaves little room for traditional tea producers to secure funding on the domestic financial markets.
However, these traditional companies hold significant potential due to the industry’s fragmented nature. It’s populated by a multitude of small producers operating in remote areas, often in mountainous regions, where the high elevations are ideal for tea cultivation.
Oriental Rise stands out with its specialization in white tea, a variety relatively unknown outside China compared to more common green and black teas. Renowned for its antioxidant properties and subtle taste, which results from a less intensive processing compared to other types, China’s white tea market is experiencing a growth trajectory far exceeding the overall tea market, according to Oriental Rise’s prospectus.
Third-party data cited in the document reveals that China’s white tea sales more than tripled from 2.9 billion yuan ($407 million) in 2017 to 9.1 billion yuan in 2021, signifying a remarkable 32.8% annual growth. This figure is projected to further climb to 16 billion yuan in annual sales by 2026.
In terms of volume, white tea leaf sales witnessed a similar impressive growth rate, expanding by 34.1% annually from 21,800 tons in 2017 to 70,500 tons in 2021. In contrast, overall domestic tea sales in China expanded at a much slower pace, growing by 6.1% annually from 1.8 million tons to 2.3 million tons over the same period, with the figure expected to reach 2.8 million tons in 2026, according to the prospectus.
Expansion Fuels Future Growth
While Oriental Rise’s own growth has been relatively less impressive, it’s largely attributed to the company’s limited land supply. Oriental Rise operates farms under contract with local villages in Zherong county of South China’s Fujian province, a region known for its year-round mild weather, abundant rainfall, and mountainous terrain, which is conducive to tea planting. The company works closely with local committees in the villages of Zhaizhong and Huangbai, forging contractual arrangements. This model is common in China, where land is typically controlled by local village committees, making strong relationships with these committees crucial for successful business operations.
However, such arrangements also present a considerable risk for companies like Oriental Rise and other agri-businesses, as land use policies in China are constantly evolving, and what’s permissible one day may become problematic the next.
Oriental Rise’s prospectus addresses this risk by stating, “Based on the advice of our PRC legal advisers, we believe that the village committees of Zhaizhong and Huangbai Village had been properly authorized to act on behalf of all of the farmer-households in the relevant villages.”
Oriental Rise’s revenue and profits have remained relatively steady in the past two years due to constraints caused by the size of its tea farms. Its revenue totaled $24.1 million last year, only slightly down from $24.3 million in 2022. Similarly, its net profit remained stable at $11.5 million last year compared to $11.9 million in 2022.
These figures showcase Oriental Rise’s robust gross margin, which climbed slightly to 53% last year from 52% in 2022. This margin is expected to further improve if the company successfully expands its operations and gains greater economies of scale. This brings us back to the issue of land constraints.
Oriental Rise has acknowledged that it received more orders than it could fulfill in the past two years, resulting in the rejection of approximately 92 million yuan worth of business in both 2022 and 2023. To address this, the company is planning a significant expansion, a crucial step that will be financed by its IPO proceeds.
Furthermore, Oriental Rise boasts a substantial cash reserve for a company of its size, holding $36.7 million in its coffers at the end of last year, a sharp increase from $25.7 million a year earlier.
Currently, the company produces its teas on 7.2 square kilometers of land in Zherong county. However, it has secured letters of intent with the two villages where it operates for rights to cultivate an additional 3.5 square kilometers, a move that would increase its land area by roughly 50%. The company anticipates that this land acquisition will cost around 87.6 million yuan, which it plans to finance through its cash flow and IPO proceeds.
In addition, Oriental Rise is in the process of constructing a new tea processing plant, which will require approximately $5 million for land acquisition and another $730,000 for construction and equipment. In total, the acquisition of new farmland and the construction of the new processing plant will cost the company about $18 million, a seemingly affordable expense considering its current cash reserves and positive cash flow.
A Promising Outlook
Oriental Rise’s impressive first-day surge, contrasting sharply with a 3.2% decline for the MSCI China Small-Cap Index on Thursday, has given the company a market value of approximately $132 million. Even after this initial jump, the company continues to trade at a relatively modest price-to-earnings (P/E) ratio of just 13. Most comparable tea producers, many from India, trade at significantly higher valuations, such as CCL Products (CCL.NS) with a P/E of 34 and Goodricke Group (GOODRICKE.BO) at 22. This suggests that Oriental Rise’s stock could possess substantial upside potential as it presents a unique and appealing tea flavor for western investors.