Xinlong Holding Announces $500 Million Acquisition of 60% Stake in Yunyinglian, Parent Company of Maternal & Child Chain 'Ala Xiaoyou'

VCBeat has learned that Xinlong Holding, China’s first listed nonwoven fabrics enterprise, recently announced its plan to acquire a 60% equity stake in Yunyinglian Industrial (Shanghai) Co., Ltd., the owner of the Alaxiaoyou maternal and infant retail chain, for RMB 360 million, thereby becoming its new controlling shareholder. According to the valuation adjustment mechanism (VAM) agreement, Yunyinglian, which reported a net profit of RMB 2.1072 million last year, is required to achieve a net profit deducting non-recurring gains and losses of RMB 15 million this year.

According to the announcement, Xinlong Holdings plans to acquire a 60% equity stake in Yunyinglian Industrial (Shanghai) Co., Ltd. and a 51% equity stake in Shanghai Xuanmeng Network Technology Co., Ltd. for RMB 360 million and RMB 140 million, respectively. The controlling shareholder of both target companies is Li Maoyin. As an initial investment, Xinlong Holdings will provide loans of RMB 25.92 million and RMB 10.08 million to Yunyinglian and Xuanmeng Technology, respectively, through debt-to-equity swaps.

In relation to this transaction, Xinlong Holdings stated that Yunyinglian and Xuanmeng Technology possess influential sales networks in the maternal and infant industry, which will facilitate the company’s expansion from its core nonwoven fabrics business into finished products, thereby achieving strong industrial synergy in the manufacturing and sales of nonwoven end-products.

However, under the valuation adjustment mechanism (VAM) agreement, Yunyinglian committed that its net profit after deducting non-recurring gains and losses for the years 2019 to 2022 would be no less than RMB 15 million, RMB 17.7 million, RMB 27.7 million, and RMB 37.7 million, respectively. Furthermore, it was required to achieve RMB 620 million in sales of products such as cotton soft towels and diapers to Xinlong Holding within 48 months from the date of shipment, with the sales targets broken down on a monthly basis.

Xuanmeng Technology also committed to achieving 25,000, 32,000, 40,000, and 45,000 existing registered users in 2019, 2020, 2021, and 2022, respectively, with platform transaction volumes reaching no less than RMB 900 million, RMB 1.2 billion, RMB 1.5 billion, and RMB 2 billion, respectively. In the event of failure to meet these commitments, Yunyinglian and Xuanmeng Network shall provide performance compensation to Xinlong Holdings.

However, financial results show that Yunyinglian’s 2018 revenue was RMB 298 million, with a net profit of only RMB 2.1072 million. Xuanmeng Technology reported revenue of RMB 11.2598 million and a net loss of RMB 12.3827 million. This implies that to meet the 2019 valuation adjustment mechanism (VAM) performance targets alone, Yunyinglian would need to increase its annual net profit by at least 612%.

According to official information, Yunyinglian Industrial (Shanghai) Co., Ltd. was established in 2014, with its controlling shareholder, Li Maoyin, currently holding a 37.62% stake. In the year of its establishment, Yunyinglian restructured the national franchise chain business of “Aila Xiaoyou” operated by Shanghai Youyou Maternal and Infant Products Co., Ltd.

In 2017, the company established the goal of building an O2O platform comprising 10,000 physical stores, 200,000 mobile distribution terminals, and a community of 10 million members with strong relational ties. It aims to create the largest B2B supply chain integration platform and big data center in the maternal and infant industry. According to its official customer service, Ala Xiaoyou currently has approximately 5,000 stores.

However, from the perspective of an industry insider, Yunyinglian’s business model is not a typical maternal and infant retail chain. Its profitability relies primarily on B2B product distribution, with store franchising serving mainly as a channel for product distribution. In addition, Yunyinglian has secured distribution rights for multiple domestically produced infant formula brands.

Another industry insider believes that due to an oversupply of maternal and infant retail stores, profits in the maternal and infant channel began to decline around 2015, making development increasingly difficult; most high-performing companies have essentially been seeking financing or selling themselves. The underlying reason is that the rapid growth of e-commerce channels and cross-border shopping has placed significant pressure on traditional maternal and infant brick-and-mortar stores.

Source: The Beijing News, Framework Agreement on the Restructuring of Yunyinglian Industrial (Shanghai) Co., Ltd.