The Overlord of Shan Zhai

This year’s most popular Shan Zhai business (see my recent article about the Shan Zhai phenomenon) has to be BaWang International. Back in July, the Chinese herbal shampoo manufacturer caught the world’s attention by pricing its initial public offering at the top end of an indicative range after the retail portion of its offering was 446 times subscribed. What’s more, BaWang’s share price rose as much as 34 percent on its market debut in Hong Kong when the overall market dropped.

In response to the astonishing results, Neil Hume doubted that it was just a bubble as he believed that was how the Hong Kong market works – when something is hot, everyone simply wants a piece of it.

But after further looking into the company, the business of BaWang seemed to me a real deal.

Since its entrance into the Chinese shampoo market in 2005, BaWang (Overlord in English) has rapidly become the fourth largest player, competing against other consumer products giants, such as Proctor & Gamble, Unilever and C-Bons. Also according to the company’s prospectus, BaWang’s 2008 sales revenues amounted to RMB1.4 billion (approximately USD205 million), which was 45 times what it made only 5 years ago. What’s even more amazing, BaWang carries zero liabilities throughout its business – this is a very positive indicator to investors in today’s debt-aversive market.

The future looks bright for the Overlord too. Chinese consumers nowadays have begun to be health conscious, and thus willing to consume more natural and healthy products like BaWang’s herbal shampoo products. Euromonitor anticipated that retail sales of Chinese herbal shampoo grow at a CAGR of 14.7 percent from 2007 to 2012 as well. In other words, BaWang’s reign may continue gloriously.

BaWang’s success also provides some more insights about the characteristics of successful Shan Zhai businesses.

First, many top Shan Zhai businesses, like BaWang, initially engage in mass distribution in lower-tier markets where they can quickly grow their businesses. Originally as a Shan Zhai manufacturer of Olive’s Beer Shampoo, which was the bestselling shampoo at that time, BaWang selected second-tier and third-tier cities in northeastern China as its target markets in order to avoid direct competition with the market leaders. It also took advantage of the underrated consumption power of those less developed markets, which actually contained about 60 percent of the country’s population. Even though BaWang sold their products for as cheap as 3 yuan (approximately 44 cents), the low production costs and the massive aggregate demand – thanks to Shan Zhai – were able to earn BaWang handsome profits.

Second, when successful Shan Zhai businesses achieve a certain scale and presence, they will rebrand themselves so that they can secure a unique segment of the market. As for BaWang, the former Shan Zhai shampoo maker repositioned itself as a family-run Chinese herbal shampoo company in 2005, pushing its business to the top-end market – now BaWang’s products are even more expensive than those of Vidal Sassoon in China. Furthermore, BaWang has been investing heavily in mass advertising throughout China for the past few years to amplify its presence. As a result, most people in China are very familiar, or perhaps annoyed, with BaWang’s entertaining commercials featuring its proud spokesperson Jackie Chan.

BaWang’s historic IPO is not necessarily a stock bubble that came out of the blue; it rather tells yet another story about the rise of a successful Shan Zhai business.

And we can tell that the Shan Zhai phenomenon keeps working its magic.