F-1/A: Oriental Rise Holdings Faces Steep Profit Decline Amid China's Tea Market Oversupply, Pursues Capital Raise and Expansion

Oriental Rise Holdings Limited, a Cayman Islands-based tea supplier operating in mainland China, reported a significant 81.85% drop in net profit for 2024, driven by falling tea prices and market oversupply, as it seeks to raise up to $10 million through a new unit offering to fund ambitious expansion plans.

Summary

• Oriental Rise Holdings Limited, a Cayman Islands holding company, operates as a vertically integrated tea supplier in mainland China, covering cultivation, processing, and sales of primarily-processed white and black tea, and refined tea.
• The company reported a substantial decrease in total revenue by 37.76% from $24.122 million in 2023 to $15.014 million in 2024.
• Gross profit plummeted by 69.26% from $12.784 million in 2023 to $3.930 million in 2024, with gross margin falling from 53.0% to 26.2%.
• Net profit for the year decreased by 81.85% from $11.501 million in 2023 to $2.088 million in 2024.
• The decline in primarily-processed white tea revenue was 43.5%, from $19.9 million in 2023 to $11.2 million in 2024, primarily due to a sharp drop in average selling price from $41 per kg to $23 per kg.
• Primarily-processed black tea revenue also decreased by 31.9% from $3.8 million to $2.6 million, with average selling price falling from $39 per kg to $27 per kg.
• In contrast, refined tea revenue grew significantly by 173.7% from $438,000 in 2023 to $1.2 million in 2024, driven by a sharp rise in sales volume from 1,923 kg to 11,060 kg.
• Selling and distribution costs increased by 500% from $73,000 in 2023 to $438,000 in 2024, mainly due to a surge in advertising and promotional expenses.
• The company is offering up to 16,129,032 Units, each consisting of one Ordinary Share or one Pre-Funded Warrant and one Common Warrant, at an assumed public offering price of $0.62 per Unit, aiming to raise up to $10 million in gross proceeds.
• Net proceeds from the offering are estimated at approximately $9.1 million, intended for sales network expansion (28%), production and capacity expansion (34%), and working capital (38%).
• The company plans to expand tea gardens through acquisitions (additional 3,533,351 square meters for approximately $13.1 million), construct a new production plant (initial phase 9,783.0 square meters, estimated bidding price $5.0 million), and purchase new automatic production lines for white tea ($0.73 million) and refined tea ($0.62 million).
• The Common Warrants included in the offering are immediately exercisable at an initial price of $0.62 per share, with a zero exercise price option that allows holders to receive two times the number of shares issuable upon cash exercise, potentially leading to the issuance of up to 64,516,129 additional Ordinary Shares without further cash payment to the company.
• The company completed an initial public offering (IPO) on Nasdaq on October 18, 2024, raising $7 million gross, with an additional $1.05 million from over-allotment shares, totaling $8.05 million in gross proceeds.

Sentiment

Score: 3

Explanation: The company faces significant financial deterioration, with substantial declines in revenue, gross profit, and net profit, primarily due to market oversupply and economic slowdown in China. While it is actively pursuing expansion and has successfully raised capital, numerous operational and regulatory compliance risks, coupled with the highly dilutive nature of the current offering's warrants, present a challenging and uncertain outlook for investors.

Positives

• The company operates a vertically integrated business model covering cultivation, processing, and sales, which is believed to distinguish it from many competitors and allows for stable raw material supply and cost monitoring.
• The company benefits from large-scale, geographically focused production in Zherong County, Fujian Province, which provides economies of scale and reduced operational costs, enhanced by mechanized operations.
• Strong internal quality control systems are in place, including inspection of fresh tea leaves, daily monitoring of tea gardens, and annual external quality checks for contaminants and pesticide residue.
• The tea gardens are located in Zherong County, recognized as a National-level Ecology and Civilization Construction Demonstration County, offering optimal ecological conditions for high-quality tea cultivation.
• There is rising consumer awareness and local government support for white tea, a key product, with the mainland China white tea market experiencing a strong compound annual growth rate of approximately 32.80% between 2017 and 2021.
• Revenue from refined tea significantly increased by 173.7% in 2024, indicating resilient demand in the premium tea segment and successful product diversification.
• The company has a competent management team with extensive experience and industry know-how in the tea industry, including CEO Dezhi Liu with over eight years of experience.
• The company successfully completed an IPO on Nasdaq in October 2024, raising $8.05 million in gross proceeds, demonstrating access to capital markets.
• The current offering aims to raise up to $10 million gross, with net proceeds allocated to strategic initiatives like sales network expansion, production and capacity expansion, and working capital, which could address past capacity limitations.
• The company has obtained all material requisite permissions and approvals from PRC government authorities for its current business operations in China and received a CSRC filing notice for its IPO, indicating compliance with new overseas listing rules.

Negatives

• Total revenue decreased significantly by 37.76% from $24.122 million in 2023 to $15.014 million in 2024.
• Gross profit experienced a substantial decline of 69.26% from $12.784 million in 2023 to $3.930 million in 2024, with gross profit margin dropping from 53.0% to 26.2%.
• Net profit for the year decreased sharply by 81.85% from $11.501 million in 2023 to $2.088 million in 2024.
• The average selling price for primarily-processed white tea, the company's leading product, fell by approximately 43.9% from $41 per kg in 2023 to $23 per kg in 2024, primarily due to an economic slowdown in China and market oversupply.
• The average selling price for primarily-processed black tea also declined by 30.8% from $39 per kg in 2023 to $27 per kg in 2024, reflecting weaker consumer demand.
• Selling and distribution costs increased by 500% from $73,000 in 2023 to $438,000 in 2024, largely due to a significant rise in advertising and promotional expenses.
• The company has a limited operating history as Oriental Rise Holdings Limited, incorporated in 2019, and has limited sales to date, posing inherent risks for an emerging growth company.
• A large portion of revenue (37.3% in 2024) is generated from the top five customers, and the company does not have long-term contracts with them, creating customer concentration risk.
• The company relies on independent tea business operators for sales, over whom it has limited control regarding further processing, packaging, and resale to end-users.
• The company experiences seasonal fluctuations in revenue and profitability, with highest sales typically from March to October, making period-to-period comparisons potentially misleading.
• The company has historically not kept production records in accordance with PRC laws, potentially leading to fines of RMB2,000 to RMB20,000, although it is now compliant.
• The company has not fully complied with social insurance and housing provident fund contributions for employees, with an approximate shortfall of $150,000, risking fines and penalties.
• The company did not conduct asset appraisal for approximately 5,644,659 square meters of tea gardens as required by PRC regulations, which may prevent obtaining forest rights certificates and incur penalties.
• The company did not conduct fire safety completion inspection and acceptance procedures for its production plant, risking orders to suspend operations and fines between RMB30,000 and RMB300,000.
• The company operates automatic production facilities on facility agricultural land, which may exceed permitted use under PRC regulations, risking orders to remediate, halt production, and incur fines.
• The company has not obtained forest rights certificates for approximately 4,942,667 square meters of tea gardens, which could lead to third-party claims, disputes, or challenges to its right to operate these lands.
• The Common Warrants offered include a zero exercise price option and price reset features, which could lead to substantial dilution for existing stockholders, with up to 64,516,129 Ordinary Shares potentially issued without additional cash payment to the company.
• Nasdaq has expressed public interest concerns regarding highly dilutive offerings with zero exercise price warrants, posing a risk of delisting for the company's Ordinary Shares.
• The company does not expect to pay cash dividends in the foreseeable future, meaning investors must rely solely on share price appreciation for returns.
• Certain existing shareholders (founders Mr. Chun Sun Wong and Mr. Wai Kwong Fong) will retain substantial influence (34.16% voting power after offering), potentially leading to decisions not aligned with other shareholders' interests.
• The company's management team has limited public company experience, which may lead to challenges in compliance and financial reporting.

Risks

• The company is an emerging growth company with a limited operating history and limited sales, facing inherent risks in establishing and successfully operating its business.
• Operating results are substantially affected by the volatile selling prices of tea products, which are influenced by market supply and demand, government regulations, competition, diseases/pests, consumer preferences, labor costs, weather, and transportation costs.
• A large portion of revenue is generated from a few top customers, and the absence of long-term contracts with these customers creates a risk of reduced sales and profits if relationships change or orders decrease.
• The company has limited control over independent tea business operators who further process or package its products, potentially affecting brand image, product demand, and sales volume.
• Seasonal fluctuations in revenue and profitability make period-to-period comparisons unreliable indicators of future performance.
• Changes in consumer preferences, perception, and demand for tea products, or failure to enrich product offerings, could adversely affect the business.
• Unfavorable fluctuations in fees paid to tea garden managers or interruptions in their services could materially increase costs of sales.
• Dependence on the availability of large numbers of local workers for manual labor in remote areas poses a risk of labor shortages and increased costs.
• Adverse weather conditions or natural disasters in Zherong County could materially and adversely affect the quantity and quality of tea harvests.
• Historical growth rates, revenue, and profit margins may not be indicative of future performance due to market conditions, competition, and economic factors.
• Implementation of expansion plans may lead to increased operating expenses and higher depreciation, which may adversely affect profit margins if not offset by increased sales.
• Competition from existing and new industry participants, including larger and better-funded players, could lead to price reductions, reduced margins, and loss of market share.
• The realization of deferred tax assets is subject to accounting uncertainties and depends on the availability of sufficient future taxable profits.
• Efforts to enhance production capabilities are subject to risks and uncertainties, including unexpected delays, cost overruns, and potential overcapacity if demand is weaker than anticipated.
• Operations are subject to PRC environmental laws, and non-compliance could lead to penalties, fines, or suspensions.
• Disruption of operations at production facilities due to utility issues, force majeure, adverse weather, disease outbreaks, pollution, labor disputes, or accidents could materially affect business and financial performance.
• Inability to obtain forest rights certificates for approximately 4,942,667 square meters of tea gardens may prevent enforcement of rights against third parties and continued operation of those land lots.
• Failure to conduct asset appraisal for approximately 5,644,659 square meters of tea gardens as required by PRC laws may prevent obtaining forest rights certificates and incur penalties.
• Non-compliance with fire safety completion inspection and acceptance procedures for the production plant could lead to orders to suspend use or operation and fines.
• Non-compliance with laws and regulations regarding the use of facility agricultural land for tea production purposes could lead to remediation orders, production halts, and fines.
• Historical non-compliance with food product labeling requirements (now compliant) could still lead to past penalties.
• Historical non-compliance with PRC tax laws, specifically failure to provide invoices for certain transactions, could lead to rectification orders, fines, and confiscation of illegal gains.
• Non-compliance with social insurance and housing provident fund contribution laws in the PRC, with an approximate shortfall of $150,000, could lead to orders for rectification, late payment fees, and fines.
• The management team has limited public company experience, which may lead to challenges in compliance with public company regulations and accurate financial reporting.
• The company is dependent on key management personnel, and their loss without suitable replacement could adversely affect business operations.
• Credit risks from delays and/or defaults in payments by customers could adversely affect business and financial condition.
• Inability to adequately protect intellectual property and know-how could materially and adversely affect the business due to counterfeiting, infringement, or disputes.
• Exposure to fraud or other misconduct by employees, customers, or third parties could lead to financial losses, claims, and reputational damage.
• Improvements to risk management and internal control systems may not be adequate or effective in preventing fraud or ensuring accurate financial reporting.
• Personal injuries, property damage, or fatal accidents in production facilities could lead to significant costs, legal liabilities, and reputational harm.
• Insurance coverage may not be adequate to cover all risks, including business interruptions or third-party environmental liabilities.
• The company's operations in China are subject to complex and rapidly evolving PRC laws and regulations, with significant government oversight and discretion, which could intervene in or influence operations at any time.
• Changes in China's economic, political, or social conditions or government policies, and international economic tensions, could have an adverse effect on the business.
• Uncertainties with respect to the PRC legal system, including enforcement of laws and sudden changes in regulations, could limit legal protections.
• New Administrative Rules regarding Overseas Listings may significantly limit or hinder the ability to offer securities to investors, despite the company having completed the IPO filing.
• Restrictions under PRC law on PRC Subsidiaries' ability to make dividends and other distributions could materially and adversely affect the company's ability to grow, invest, or pay dividends.
• Governmental control of currency conversion may limit the ability to utilize cash balances effectively or pay dividends in foreign currencies.
• PRC laws and regulations have complex procedures for acquisitions of Chinese companies by foreign investors, potentially delaying or preventing growth through acquisitions.
• The business and profitability may be negatively affected by rising labor costs and potential obligations to make additional contributions to social insurance and housing funds.
• The company may be classified as a mainland China resident enterprise for tax purposes, potentially resulting in a 25% enterprise income tax rate on worldwide income and withholding taxes on dividends.
• Uncertainties exist regarding withholding tax liabilities of PRC Subsidiaries and whether dividends qualify for treaty benefits.
• Uncertainty exists with respect to indirect transfer of equity interests in Chinese resident enterprises by non-Chinese holding companies, potentially leading to PRC enterprise income tax.
• Fluctuations in the value of Renminbi against the U.S. dollar may materially adversely affect the value of investments.
• The company may become subject to scrutiny, criticism, and negative publicity involving U.S.-listed Chinese companies, leading to significant resource expenditure and potential stock price decline.
• Despite the auditor being PCAOB-registered and currently inspected, if the PCAOB is later unable to inspect or investigate the auditor completely, investors could be deprived of inspection benefits, and Ordinary Shares may be delisted under the HFCAA.
• The dilutive nature of the Common Warrants, particularly the zero exercise price option and price reset features, could lead to substantial dilution for existing stockholders.
• The speculative nature of the Common Warrants and Pre-Funded Warrants, with no established public trading market, limits their liquidity.
• The company will likely not receive any additional funds upon the exercise of the Common Warrants (due to zero exercise price option) or Pre-Funded Warrants (due to nominal exercise price).
• The trading price of Ordinary Shares has been and may continue to be volatile, leading to substantial losses for investors.
• Substantial future sales or perceived potential sales of Ordinary Shares in the public market could cause the price to decline.
• The approval of the China Securities Regulatory Commission (CSRC) under the M&A Rules may be required for this offering, and uncertainty remains regarding its interpretation and application.
• Management will have broad discretion over the use of net proceeds from the offering, and such use may not produce income or increase the share price.
• The company may need additional capital in the future and may sell additional equity or incur indebtedness, leading to further dilution or increased debt service obligations.
• As an emerging growth company and foreign private issuer, the company benefits from reduced reporting requirements, but this also means less information and protection for investors compared to U.S. domestic issuers.
• The company will incur increased costs as a public company, and failure to establish and maintain proper internal financial reporting controls could impair its ability to produce accurate financial statements.
• Purchasers who enter into a securities purchase agreement may have rights not available to other purchasers, creating potential disparities among investors.
• This is a best efforts offering with no minimum amount of securities required to be sold, meaning the company may not raise the capital it believes is required for its business plans.

Future Outlook

The company aims to achieve sustainable growth and strengthen its market position by expanding tea gardens through acquisitions, constructing a new production plant to increase processing capacity, and purchasing automatic production lines to enhance efficiency and quality. It also plans to set up an online shop to broaden its customer base. For the foreseeable future, the company intends to reinvest earnings into research and development, new product development, and production capacity expansion, and does not expect to pay cash dividends.

Management Comments

• Mr. Dezhi Liu, Chief Executive Officer and Chairman of the Board of Directors, has over eight years of experience in the tea industry.
• Mr. Bangjie Hu, Chief Financial Officer, has significant experience in finance and preparing financial reports.
• Management believes their vertically integrated business model distinguishes them from competitors and allows for reduced business and operational risks and better cost monitoring.
• Management believes the size and scale of the tea gardens operated, quality of white tea product, and quality control systems provide an exciting opportunity to service the blooming white tea market in mainland China.
• Management believes that by playing a more active role in promoting the health benefits of drinking tea while continuously improving product quality, they will have a positive guiding effect on consumers.
• Management believes the reliance between the company and its top five customers is mutual and complementary, as customers rely on a stable supply of quality tea.
• Management believes the acquisition of new automatic production lines is crucial for development, increasing production efficiency and enhancing tea product quality.
• Management believes that the contractual management rights agreements with village committees are legally binding, valid, and enforceable.

Industry Context

The tea industry in mainland China is fragmented, with over 50,000 participants in the broader tea industry and approximately 1,000 in the white tea industry, most of which are small and medium-sized enterprises. The white tea market, in particular, has experienced strong growth, increasing from approximately US$400 million in 2017 to US$1.3 billion in 2021, representing a compound annual growth rate of approximately 32.80%. This growth is driven by rising awareness of health benefits and local government support. However, the industry faces challenges from market oversupply, especially in white tea due to widespread cultivation in new regions, and competition from substitute beverage products.

Comparison to Industry Standards

• The company's vertically integrated business model, covering cultivation, processing, and sales, is highlighted as a distinguishing factor from other tea product suppliers in mainland China, most of whom are mainly engaged in only distinct parts of the value chain.
• The company's ability to conduct large-scale production is presented as a competitive strength, allowing for economies of scale and reduced operational costs, in contrast to other competitors in the fragmented mainland China tea industry.
• The customer concentration, with top five customers accounting for 37.3% of total revenue in 2024, is stated to be 'within the common industrial range', implying it is not an outlier compared to industry norms, though no specific comparable companies or benchmarks are provided to substantiate this claim.

Management Changes

Corporate Governance

Legal Proceedings

• Neither the company nor any of its subsidiaries is a party to any pending legal proceedings, nor is the company aware of any such proceedings threatened against it or its subsidiaries as of the date of the prospectus.

Related Party Transactions

• Employment agreements are in place with Chief Executive Officer Dezhi Liu and Chief Financial Officer Bangjie Hu.
• The company has received unsecured, interest-free advances repayable on demand from Mr. Zhuo Wang (former Director and shareholder) and Mr. Chun Sun Wong (controlling shareholder). As of December 31, 2024, amounts due were $586,000 to Mr. Chun Sun Wong and $836,000 to Mr. Zhuo Wang.
• On January 19, 2023, the company issued 4,480,000 Ordinary Shares (which became 5,600,000 shares after a subdivision) to WZ Global (BVI) Limited, a company controlled by former Director Zhuo Wang, for a consideration of $2,240,000.

Stakeholder Impact

• Shareholders face potential substantial dilution from the Common Warrants, which include a zero exercise price option and price reset features, potentially issuing a large number of shares without additional cash payment to the company.
• Shareholders should not rely on dividend income as the company does not expect to pay cash dividends in the foreseeable future, relying instead on price appreciation.
• Shareholders are exposed to significant volatility in the Ordinary Shares' trading price, which may be unrelated to the company's operating performance.
• Shareholders face the risk of delisting from Nasdaq due to public interest concerns regarding the highly dilutive nature of the Common Warrants.
• Shareholders' investment returns are subject to numerous risks related to doing business in China, including regulatory changes, government intervention, and uncertainties in the legal system.
• Employees may be impacted by rising labor costs and the company's historical non-compliance with social insurance and housing provident fund contributions, which could lead to penalties or claims.
• Customers may experience lost sales opportunities if the company's production capacity cannot accommodate all purchase orders, potentially leading them to competitors.
• Suppliers, particularly tea garden managers, are critical to operations, and any unsatisfactory performance or significant price increases for their services could adversely affect the company's costs and product quality.
• Creditors may face risks if the company's financial performance continues to decline, impacting its ability to meet obligations, although current liabilities have decreased.
• Regulatory bodies in China (CSRC, CAC, tax authorities) have significant oversight, and any non-compliance or changes in policy could lead to fines, operational limitations, or restrictions on fund transfers, impacting all stakeholders.

Next Steps

• Progressively transfer contractual management rights for remaining related land lots in 2025.
• Carry out a series of tea garden improvement works, including improving irrigation systems, constructing walking paths, and increasing soil fertility.
• Establish and construct a new production plant in the Zherong Tea Industrial Zone, with an initial phase of approximately 9,783.0 square meters.
• Acquire four automatic production lines for primarily-processed white tea at an anticipated cost of approximately $0.73 million.
• Purchase an additional automatic production line for refined tea at an anticipated cost of approximately $0.62 million.
• Negotiate with various online sale platform operators to set up an online shop to serve as an additional sales channel.
• Utilize earnings for research and development, new product development, and expansion of production capacity.
• Submit a filing with the CSRC within three business days after the completion of the current offering.

Key Dates

Recommendation

Keywords

Tea Industry, White Tea, Black Tea, China Agriculture, SEC Filing, F-1/A, Public Offering, Warrants, Dilution, PRC Regulation, Financial Performance, Supply Chain, Cultivation, Tea Processing, Nasdaq Listing, Corporate Governance, Risk Factors, Capital Raise, Market Oversupply