Microalliance Group Inc.

What they do

Microalliance Group Inc., through its PRC subsidiaries, develops, produces, markets, and sells coffee products, including its flagship 'coffee tea' (specialty coffee with Chinese black tea taste), black coffee, and other coffee products. It also sells liquor products, including 'coffee spirit' and vintage 'Baijiu', through licensed retail stores, sales agents, distributors, and franchisees across China. The company sells coffee wholesale to retail partners and corporate customers and directly to consumers via e-commerce channels.

Revenue drivers

• Coffee products — Includes 'coffee tea', black coffee, and other coffee products. Sold wholesale to retail partners and corporate customers, and directly via e-commerce channels. Five coffee products offered.
• Liquor products — Includes 'coffee spirit' and vintage 'Baijiu'. Sold through sales agents, distributors, and franchisees. 'Nainiang Liquor' retail stores operate in a dozen Chinese cities. Six liquor products offered; liquor generates more revenue than coffee.
• Franchise fees and income — Upfront franchise fees, renewal fees, and services provided to franchisees. Recognized as revenue when performance obligations are satisfied, typically over a 3-year franchise term.
• Sales to franchisees — Sales of wine and liquor products to franchisees; revenue recognized upon delivery.

Recent performance

Annual revenue grew from $1.2M in 2020 to $37.4M in 2021, with net income of $18.7M in 2021 versus a loss in 2020. Quarterly revenue declined from $8.5M in Q4 2021 to $3.8M in Q3 2022. As of September 30, 2022, total assets were $31.9M, cash & equivalents $3.7M, and shareholder equity $30.5M. The company held approximately $16.1 million of vintage Baijiu inventory at cost.

Strategy

The company aims to build the first 'coffee tea' brand culture in China and expand its liquor business, which it describes as having a massive market. It sells through franchise agreements and licensed retail stores, maintaining uniform pricing and providing training to franchisees. It also markets through tasting events and has international expansion plans, though these have stalled due to COVID-19.

Risks

• COVID-19 impact — The pandemic has caused temporary closures of its coffee factory in Dongguan, offices, contracted liquor producers, and licensed stores in Shenzhen, and reduced consumer demand for liquor during lockdowns.
• China regulatory and political risk — The Chinese government may intervene or exert more control over operations and foreign offerings, which could materially change operations and the value of securities.
• Dependence on China operations — Substantially all operations are in the PRC, making financial results sensitive to Chinese economic, political, and legal developments.
• International expansion stalled — Plans to expand internationally have largely stalled due to COVID-19, limiting growth opportunities.

Outlook

Management notes difficulty predicting the full impact of COVID-19 on the coffee and liquor business. They continue to face temporary closures and reduced demand, but remain committed to expanding their brand and product offerings. The company also faces risks from potential future Chinese regulations affecting its industry.