ChaCha Food

ChaCha Food is among China's leading seeds and nuts producers with well established brands, including the largest roasted seeds brand domestically.

Why do we like the investment?

ChaCha has been a leading player in China's packaged roasted seeds and nuts market since it was first set up in 1996. We view the company as well established within a fast-changing snack market. Its superior product quality, strong branding and deep-rooted distribution channels have the makings of a long-term winner.

This also reflects its stringent quality control of its production line and supply chain. ChaCha has historically been a strong offline channel player with an established distribution network. Among the major domestic snack players, ChaCha is also one of the few which manufactures its products in-house rather than resorting to outsourcing, thereby gaining an edge in food quality. It has local production and processing farms that are close to raw material and distribution terminals, resulting in more efficient and less costly transport of its products. A well-established supply chain also adds to the strength: ChaCha sources 80% of raw materials for its daily nuts directly from the main production areas during harvest season, then ships back, processes and sells the products within the same quarter.

Another core strength has been a nimble organisational structure after several rounds of management and strategy reform since 2015 (with the latest in the second half of 2021 following the return of chairman Chen Xianbao). The company has been resilient in a tough operating environment amid the pandemic. We have seen it maintain decent growth over the short term, with a smooth price increase in its seeds segment and recovery in its monthly shipments, at a time when most food and beverage categories have been seeing softening demand.

For ChaCha, the seeds segment has been its cash cow, thanks to a dominant market share in China. Looking ahead, the nuts division is set to drive growth, supported by its larger total addressable market and positioning as daily consumption over leisure snacks. The company is following a "nuts plus" strategy to build up a diversified nut product portfolio, and it has started selling upgraded nut milk products online. ChaCha uses the online channel mainly as an extension of its offline distribution strength, as well as a platform for the company to engage with younger consumers and as part of the trial and testing of new products.

All this has increased our conviction in ChaCha's outlook. We see high-growth potential for ChaCha, as the highly fragmented industry presents a consolidation opportunity for a focused, vertically integrated player with strong brands.

On the ESG front, ChaCha has only a B rating from MSCI because its levels of disclosure are not high. We recently engaged with ChaCha to gain visibility on its risk-management policies in key ESG topics and to encourage the company to issue its first ESG report. We came away with a positive impression because ChaCha surprised us with its comprehensive and some best-in-class ESG practices in its daily operations, and its efforts to improve disclosure and business integration. The call enhanced our view on its ESG quality, and strengthened our confidence that ChaCha would be rated higher by MSCI after improving its disclosure. This would be a key area that we would look to work with ChaCha in future.

Seeds of growth: ChaCha is a dominant player in a niche category of the foods industry in China. The company's cash cow is its seeds segment, which accounts for the bulk of sales. Its sunflower seed products cover different price bands from the classic red-bag seeds to flavoured blue-bag seeds and on up to the high-end Kuizhen series. Growth will come from ChaCha's nuts business, where the company is expanding its product portfolio and driving greater penetration.