Summary of Key Points
In its bid to list on the Hong Kong Stock Exchange (under an A+H structure), Child King has temporarily boosted its net profit by acquiring the hair care brand Siyu Biology through a cross-industry merger. However, this growth is not due to a revival in its core maternal and infant business, which remains stagnant. Instead, it faces issues such as high inventory levels and weak bargaining power in the supply chain. Additionally, there are significant differences between the business models of maternal and infant retailing and hair care services, making cross-business integration challenging. The merger has also brought financial risks, including substantial goodwill and tighter cash flow constraints. The long-term effectiveness of Child King's "maternal and infant + hair care" dual-driven strategy remains to be seen.
I. The Secret Behind the Surging Profits: Acquiring a High-Profit Hair Care Company
The sudden increase in Child King's net profit is not due to an improvement in its maternal and infant business, but rather from the acquisition of 65% of Siyu Biology for 1.65 billion yuan in 2025. Siyu specializes in scalp care products, such as those designed to prevent hair loss after childbirth, a much more profitable segment than maternal and infant retailing:
- In the second half of 2025 (July to December), Siyu earned a net profit of 121 million yuan, with Child King receiving approximately 78.65 million yuan from this acquisition, which significantly contributed to its overall profits.
- Siyu's gross margin was as high as 67.2%, three times that of Child King's maternal and infant segment (21.2%). Maternal and infant retailing, which sells products like milk powder and toys, faces fierce competition and consequently lower profit margins, while hair care services offer higher margins.
It's important to note, however, that Child King's revenue only increased by 2.46% in the first quarter of 2026, indicating that its core business is still not performing well, and its profits rely entirely on the acquired hair care business.
II. Maternal and Infant vs. Hair Care: Two Very Different Businesses
Child King aims to attract its maternal and infant customer base to its hair care services, but the two businesses operate using fundamentally different approaches:
- Maternal and Infant Retailing: The focus is on selling products, relying on a competitive supply chain (e.g., obtaining cheaper milk powder), efficient inventory management (to avoid overstocking), and repeat purchases by customers.
- Hair Care Services: The focus is on providing quality services, with the expertise of technicians and a pleasant in-store experience. Uniform standards must be maintained across franchise stores.
For example, a maternal and infant store only needs to display products neatly and set appropriate prices, while a hair care store must train technicians on scalp massage techniques and ensure that franchisees do not overcharge or provide substandard services. The evaluation and management of employees in these two businesses are vastly different, and simply creating a shared customer database through advertising may not be effective; it could require significant investment and effort, with the potential for superficial engagement without real benefits.
Furthermore, 93% of Siyu's 2,600+ stores are franchisees. If the headquarters cannot effectively manage these franchises, issues such as dishonest practices (e.g., customers being charged excessively or services not meeting standards) could damage both Siyu's and Child King's reputations.
III. The Maternal and Infant Business: Stagnant Growth and Persistent Problems
Child King's maternal and infant business has hit a ceiling:
- Weak Core Products: Milk powder accounts for a large portion of its revenue (51.95%), but its growth rate from 2023 to 2025 was only 5.3%, slower than the overall company growth rate of 8.3%. This is due to declining birth rates and increased competition.
- High Inventory Levels: As of March 2026, inventory amounted to 934 million yuan, a 3.5% increase from the previous year, with an inventory turnover of only 1.92 times per year, indicating accumulating unsold products.
- Watered Down Profits: In the first quarter of 2026, 60% of the net profit came from government subsidies and financial investments. Excluding these one-time gains, the actual profit was only 18.91 million yuan, with a growth rate of 12%, showing little improvement in profitability.
- Supply Chain Constraints: Child King relies heavily on top-tier brands for milk powder (e.g., Feihe, Yili), and the top five suppliers control a significant portion of its purchases, leaving it with limited bargaining power. If these brands sell directly to consumers, Child King's margins could be squeezed.
IV. Hidden Financial Risks in the Merger
While the acquisition of Siyu seemed profitable, it carries several risks:
- Substantial Goodwill: The 1.65 billion yuan acquisition cost included 1.028 billion yuan in goodwill. Together with the goodwill from previous acquisitions, Child King's total goodwill amounts to 1.932 billion yuan, accounting for 45% of its net assets. If Siyu's business performs poorly (e.g., increased competition in hair care or franchise closures), this goodwill could be impaired, resulting in significant losses.
- Lack of Performance Guarantees: No performance targets were set during the acquisition, meaning Child King must bear all potential risks if Siyu's profits decline.
- Tight Cash Flow: Operating cash flow decreased by 24% in the first quarter of 2026, and the upcoming Hong Kong stock market fundraising is needed to supplement working capital, indicating financial strain. Continuous expansion and acquisitions have put a lot of pressure on the company's cash flow.
Conclusion
Child King has temporarily improved its financial performance through the hair care business acquisition, providing a compelling story for its potential Hong Kong listing. However, it has not resolved the issues in its core maternal and infant business, and cross-business integration is more difficult than expected. If the hair care business fails to sustain growth or if goodwill is impaired, the company could face significant challenges. Whether this "dual-driven" strategy will be successful will depend on future operational results over the next one to two years.
(The translation maintains the original Markdown structure, using clear and straightforward language suitable for financial journalism, while adapting expressions to fit the target audience's cultural and reading habits.)