Platform-building is woven into Lunar’s DNA. The business that began as Linktone in 1999 subsequently gave birth to two further companies, Intrinsic and SmartPay. Together they formed the bulwark of Fund I and each of the three has now been fully exited, generating attractive returns.
Another platform-building opportunity arose when we acquired Yeehoo in 2011. The move was true to our core consumer belief that China is undergoing a steady migration toward higher quality branded products across the spectrum. Private equity firms had already participated in the space but exposure was limited to minority ownership. The timing also seemed right as a falling off in public market valuations had rationalized sellers’ expectations. We targeted babywear because it was a niche area in which competition was generally weak.
Further, we concluded that baby-related businesses would benefit from a flight to quality as concerns about product safety spread from baby formula into other segments with ties to infant health. Demographics were another favorable factor, with spending power likely to rise as the one-child policy is gradually liberalized.
Yeehoo emerged as the most desirable target by virtue of its reputation for quality. Private equity firms had targeted the company for minority investment many times but they failed to recognize that the company’s ownership was highly fragmented and it lacked a professional management culture. Also overlooked was the potential to build on Yeehoo’s success in its core market – baby underwear – while leveraging company’s distribution and presence to enter new niches.
Yeehoo started selling outerwear under the Peekaboo brand in 2007, primarily targeting 3-7 year-olds. It was a logical move that complemented the core business but Peekaboo was running at a loss. Yeehoo was also constantly approaching foreign brands in search of distribution deals. Again, the synergies were clear but the business models were different to babywear retail.
To address this mixed bag of opportunities, we split the company into three: Yeehoo, focusing on its own-brand baby underwear; kids outerwear brand Peekaboo; and SohoBaby, which was positioned as a leading distributor of imported hard baby goods. Once functioning as individual pieces of a single platform – known as Little Star Brands Group – each business operated according to a clean development plan and metrics, and margins subsequently improved. We now account for and manage these businesses independently, as is reflected in our monthly updates and valuation reports.
Since our investment, Yeehoo’s revenues have nearly doubled and the business has expanded into new geographies. The other group businesses are steadily emerging as independent businesses, and we are in the final stages of our restructuring of our fourth business, I Pinco Pallino.
The catalysts for further growth are consistent with those identified in the investment thesis, and we anticipate the platform will give rise to more related businesses and opportunities in the future.