[SHARK TANK] – SEASON 7 – EPISODE 3 – DEAL 2 – IPP SACHI RICE CAKE – WHO IS THE REAL CHAIRMAN BEHIND IT?

Development Stage:

Transitioning from Seed to Series A funding.

Use of Funds:

1. Revalidate product-market fit and commence scaling the business model.
2. Expand product lines and models based on manufacturer capabilities and invest in marketing to attract more customers.

Key Metrics to Showcase to Investors:

1. Diverse product lines that align with customer preferences and market trends.
2. Significant market potential within the FMCG sector.

Highlights:

1. Product Origin: Sourced from Bình Định, a region with a rich historical and cultural heritage.
   • Cultural Significance: Connection to King Quang Trung, a prominent historical figure.
2. Unique Product Offerings:
   • Tây Sơn Steamed Rice Rolls
   • Ground Shrimp Spring Rolls
   • Clams with Rice Paper
   • Ready-to-eat snacks, free from additives and preservatives.
3. National Distribution: Products are available in modern trade channels such as convenience stores and supermarkets.
4. Innovative Manufacturing: The founder, with expertise in automation and economics, has designed and improved the production line.
5. Superior Ingredients: High-quality rice and coconut water from Bình Định, renowned for their taste and longevity.
6. State-of-the-Art Facility: A 20,000 square meter factory that meets international standards (FDA, ISO, OCOP 4-star) and is equipped for export.
7. Strategic Partnership: Backed by IPP Group, a seasoned FMCG distributor with 12 years of experience.
8. Export Market Penetration: Secured orders from the US, Canada, and Taiwan.

Past Production Challenges:

• Distribution Challenges: The rice paper was prone to breaking due to its brittle nature.

Market Penetration:

• Sachi products were widely available in restaurants across 7 central provinces.

Historical and Projected Financial Performance:

• 2022: VND15bn
• 2023: VND24bn
• 2024: VND50bn
• 2025: VND70bn
• 2029: VND250bn

Investment Terms:

• Investment: VND10bn
• Equity: 10% of the company
• Post-money valuation: VND100bn
• Pre-money valuation: VND90bn

Valuation Mechanism:

Pre-money valuation (VND90bn): This includes the old factory and the new factory. The valuation is broken down as follows:

• Old Factory:
  • Book value: VND17bn x 3x book value = VND51bn.
  • EBITDA: VND3.3bn. Considering the average pre-money valuation multiple for the food distribution industry is between 8x and 12x, we’ll use 10x as a midpoint, resulting in a valuation of VND33bn.
• New Factory:
  • Size: 20,000 m2.
  • Investment: VND33bn (including VND10bn in debt).
  • Valuation: VND40bn.

BOD’s valuation method:

The BOD has determined the company’s valuation by segregating the value of:

• Book value of the old factory.
• Value of the distribution network and 2023 financial performance.
• Book value of the new factory.

Enterprise Value calculation

• Enterprise Value = Equity + Debt – Cash and cash equivalents = 17 + 33 + 33 – X ≈ 83 – 90 billion.
• The pre-money valuation seems reasonable.

Investment and post-money valuation:

With an additional investment of 10 billion, a post-money valuation of 93-100 billion is appropriate.

Land ownership:

• The land for the old factory belongs to the founders’ parents.
• The land for the new factory has been leased from the government for 50 years in an industrial zone.

Shareholder Structure:

• Founder: 43%
• IPP Group: 40%
• Ms. Nhi: 17%

Revenue Breakdown:

• Online sales: 5%
• Traditional channels (groceries, supermarkets): 95%

Shark Minh’s Question:

“50% of your products are out of stock online. Is there an issue with your supply chain?”

Breakdown of Costs for Traditional Channels (GT):

• Cost of Goods Sold (COGS): 5,000 VND
• Wholesale Price (GT): 8,000 VND
• Retail Price (end user): 10,000 VND
• Most distributors are in the Central region.

Breakdown of distribution channels

• MT: Managed by IPP Group, an experienced FMCG player, accounting for 35% of production.
• GT: The remaining 65%.

Projected Financial Performance for 2024:

• Revenue: 50 billion VND
• EBITDA Margin: 16%
• Implied Pre-money Valuation for Distribution Network: Based on the EBITDA margin, the distribution network alone could be valued at around 80 billion VND (excluding property value).
• 6M24 revenue: 24 billion VND.
• Founder’s explanation for lower-than-expected profit margin: The founder attributes the lower-than-expected profit margin to investments in the new factory.

Discrepancy in Profit Margin:

• Founder’s claim: The founder claims that the 16% is the Net Profit After Tax (NPAT).
• Shark Hưng’s doubt: Shark Hưng questions this claim, arguing that if the NPAT is 16%, then the Earnings Before Tax (EBT) would be around 21.33%.
• Implications: If the EBT is 21.33%, then the EBITDA could be as high as 26-28%, which is considered quite high.
• Potential overvaluation: If the EBITDA is indeed 26%, implying an EBITDA of 13 billion VND, then the distribution network alone could be valued at around 130 billion VND, significantly higher than the previous estimate.
• Question on COGS: The sharks question the accuracy of the 60% COGS figure.

Deal Results:

• Sharks Minh, Hưng, and Bình: Out
• Shark Vân: D2C is the trend, so focus on sales and marketing.
• Shark Thái: 5 billion VND for 10% equity, 10 billion VND as a 2-year loan.

Overall Assessment:

1. All 5 sharks are not FMCG experts or wholesalers, so their guidance is not aligned with IPP Group and IPP Sachi’s strengths.
2. With a large fixed asset system, depreciation could reach 5%. D2C is a different skill set and requires a completely different company operation.
3. The IPP Group Chairman is a FMCG corporate expert and a major contractor for global brands. They won’t accept a significantly undervalued valuation.
4. FMCG companies typically have an EBITDA of 5-7%, but the market size is huge. Comparing this to industries where sharks have expertise is inappropriate.
5. The company’s capital structure has a significant portion of debt, leading to challenges related to interest rates and exchange rates. Exporting is the best solution.
6. Accounts receivable for MT channel sales are high (45-60 days), and raw material payments to farmers are immediate, increasing the capital turnover cycle, which might be not below three months, I guess.
7. IPP Group doesn’t need help with sales and distribution; they need help with large-scale exports.
8. D2C cannot replace traditional distribution channels for FMCG products.
9. The IPP Chairman has experience in retail and distribution exits. Pricing strategy is their core competency.
10. Expanding to national distributors should be the next step to maintain IPP Sachi’s focus.
11. The Chairman likely disagreed with Shark Thái’s loan and equity offer.
12. Shark Tank should have an investor specializing in wholesale and distribution systems.
13. During economic downturns, food and FMCG sectors contribute to growth.
14. IPP Group needs strategic investors with experience in East Asia, North America, and Europe for exports.
15. While the deal was declined, it’s a positive outcome. Sometimes, losing a deal can be a win in disguise.

#equitix

#lucas

#phunglelamhai

#IPPGroup

#IPPSachi

#real_shark

#FMCG

#Go_to_Market

#Strategic_Investor

#sharktankvietnam7