The debate over food additives has once again erupted, this time focusing on the soy sauce industry, with the vortex centered on Haitian (603288.SH), the leading soy sauce company. Recently, netizens and self-media claimed that Haitian's product ingredient lists differ between domestic and overseas sales, with domestic soy sauce containing additives and overseas products not. This led to Haitian being embroiled in a 'double standard' controversy over soy sauce additives. On September 30 and October 4, Haitian issued statements twice denying 'double standards,' and the China Condiment Association and China Food Industry Association also responded, but doubts remain.

Titanium Media APP noted that as the incident escalated, the public once again focused on food additives, and 'zero-additive' soy sauce, which is positioned in opposition, received unprecedented attention. However, in reality, driven by internal and external difficulties in the soy sauce industry, the 'zero-additive' battle among Haitian and others has long been underway, and the endless stream of soy sauce concepts and products is an inevitable result of fierce competition among soy sauce companies. Analysts believe the zero-additive battle in the soy sauce industry may intensify.

Image source: Soy sauce products displayed in a supermarket, source: Titanium Media APP

01

No Unified Standard for Zero-Additive

In recent years, with the awakening of health awareness among Chinese people, there has been a 'fear of food additives,' and remarks and videos demonizing food additives frequently appear, stirring public nerves. According to China's Food Safety Law, food additives refer to synthetic or natural substances added to food to improve quality, color, aroma, taste, and for preservation, freshness, and processing needs, including nutritional fortifiers. Many domestic soy sauce companies, including A-share listed companies like Haitian, Qianhe (603027.SH), Jiajia (002650.SZ), and Zhongju High-tech (600872.SH), produce both soy sauce with additives and soy sauce without additives or MSG.

(Source: China Food Industry Association's 'Several Issues to Clarify Regarding the Soy Sauce Storm' released on October 6)

Titanium Media APP noted that Haitian's products, including 'Weijixian' soy sauce, 'Jinbiao Shengchou,' and Laochouwang (brewed soy sauce), and Qianhe's 'Yipinxian' extra-grade Shengchou, 'Weijixian' extra-grade Shengchou, and 'Texian' Shengchou, use additives including monosodium glutamate, disodium 5'-ribonucleotide, disodium 5'-inosinate, sucralose, and sodium benzoate. Jiajia's 'Weijixian' soy sauce and 'Jinbiao Shengchou' also add potassium sorbate. Zhongju High-tech's Chubang 'Tejixian' Shengchou and 'Weijixian' extra-grade brewed soy sauce add potassium sorbate, caramel color, glycyrrhizic acid trimethyl, and sucralose.

According to the National Food Safety Standard for the Use of Food Additives, monosodium glutamate, disodium 5'-ribonucleotide, and disodium 5'-inosinate are flavor enhancers; sucralose, glycyrrhizic acid tripotassium, and sucralose are sweeteners; sodium benzoate is a preservative; potassium sorbate is a preservative and antioxidant; and caramel color is a coloring agent.

On the other side of soy sauce with additives is zero-additive soy sauce, which actually lacks a unified standard.

'Zero-additive has no unified standard; it is defined by each company itself,' a senior executive from a condiment company specializing in soy sauce told Titanium Media APP. He understands zero-additive literally as naturally brewed soy sauce without any food additives.

Titanium Media APP also found that companies' definitions of 'zero-additive' are inconsistent. For example, Qianhe's zero-additive soy sauce 180 days has an ingredient list of only water, non-GMO soybeans, wheat, edible salt (iodine-free), and white sugar, with zero-additive defined as no MSG, coloring, or preservatives, respecting original flavor, with 0% addition of MSG (monosodium glutamate), caramel color, sodium benzoate, potassium sorbate, disodium ribonucleotide, sucralose, and acesulfame potassium.

(Qianhe zero-additive soy sauce 180 days bottle label, source: Titanium Media APP)

Haitian's zero-additive soy sauce 0 Jinbiao Shengchou ingredient list includes water, non-GMO soybeans, edible salt (iodine-free), wheat, white sugar, and yeast extract, with zero-additive defined as 'sun-dried, truly 0% added preservatives (sodium benzoate, potassium sorbate), sweeteners (sucralose, acesulfame potassium), MSG, and defatted soybeans.'

Chubang's zero-additive pure brewed soy sauce ingredient list is similar to Haitian's, with zero-additive defined as '0% added MSG, caramel color (ordinary method), sodium benzoate, and potassium sorbate.'

Jiajia previously explicitly replied to investors on the interactive platform, 'The company has launched zero-additive series products, where zero-additive means 0% added white sugar, 0% added genetically modified defatted soybeans, 0% added preservatives, and 0% added food flavors.'

Although there is no unified standard for zero-additive, zero-additive soy sauce prices are generally higher than regular soy sauce.

Based on current prices on companies' Tmall flagship stores, Qianhe Chunqu Yuanjiang 1L is 14.14 yuan, while Qianhe Toudao Yuanxiang zero-additive soy sauce 180 days, 280 days, and 380 days 500ML are 17.3 yuan, 16.73 yuan, and 27.3 yuan respectively. Haitian Jinbiao Shengchou 500ML is 14.9 yuan, discounted to 11.9 yuan, and Haitian zero-additive soy sauce Weijixian 750ML is 18.80 yuan, discounted to 16.92 yuan. Chubang Tejixian Shengchou 410ML is 10.9 yuan, Chubang Jinpin Shengchou 410ML is 9 yuan, while Chubang zero-additive pure brewed soy sauce 500ML is 15.1 yuan after discount. Lee Kum Kee Jinbiao Shengchou 500ML is 8.9 yuan, while Lee Kum Kee zero-additive Chunweixian extra-grade soy sauce 500ML is 16.5 yuan.

The higher price is due to increased costs. The condiment company executive told Titanium Media APP, 'The cost of zero-additive is mainly time cost; typically, zero-additive soy sauce takes a long time to brew, leading to lower fixed asset turnover.'

In comparison, from 2019 to 2021 and 2022H1, Qianhe, which focuses on zero-additive products, had fixed asset turnover rates of 2.45, 2.23, 2.31, and 1.16 times, while Haitian had 5.50, 6.19, 6.64, and 3.45 times.

As for the pros and cons of soy sauce produced with additives, Haitian stated in its statement: 'Food additives are widely used in food manufacturing worldwide. All legitimate food companies use food additives legally and compliantly according to regulations and product characteristics, and label them clearly. It is a misunderstanding to simply think that overseas products have fewer additives or that products with additives are bad.' It also said that Haitian's internal control standards are mostly higher or even far higher than national standards, and for the same quality products, domestic and international internal control standards are consistent.

The China Food Industry Association also emphasized in 'Several Issues to Clarify Regarding the Soy Sauce Storm': 'The scope and limit values of food additives specified in China's current national food safety standard GB2760 are proven safe and reliable through scientific research and risk assessment. Products produced by enterprises according to standards will not harm consumers' health.'

02

Fierce Competition in the Zero-Additive Arena

Behind zero-additive is complex commercial competition.

According to the China Food Industry Association's statement, soy sauce originated in China, with records of 'jiangqing, doujiangqing, jiangzhi, qingjiang' in 'Qimin Yaoshu' 1800 years ago. The history of soy sauce consumption in China is very long. The current structure of the domestic soy sauce industry dates back to the 1980s.

In 1955, 25 old sauce workshops in Foshan merged to form a local soy sauce factory, the predecessor of Haitian Soy Sauce Factory. However, under traditional brewing processes, the production capacity ceiling was never resolved. The turning point came with the arrival of Pang Kang. In 1982, Pang Kang came to Haitian Soy Sauce Factory as a grassroots technician and later rose to become chairman and president of Haitian. By introducing foreign production lines to expand capacity, and aggressively advertising and expanding channels, he developed the 300-year-old 'Foshan Sauce Workshop' into Haitian, the soy sauce producer with the highest market share in the country.

In 1989, Guangdong Meiweixian Condiment Food Company (hereinafter 'Meiweixian') was established, formerly the 100-year-old 'Xiangshan Sauce Workshop.' In 1999, Meiweixian was acquired by Zhongju High-tech. In 2005, the 'Chubang' trademark was registered. In 2015, Baoneng participated in Zhongju High-tech's placement and fixed increase, and over four years, Yao Zhenhua became its actual controller. Over 30 years, Meiweixian changed hands several times but still occupies a place in China's soy sauce industry.

Three years after Meiweixian's establishment, Hong Kong-funded Lee Kum Kee, riding the wave of reform and opening up, began entering mainland China, gradually developing into a common soy sauce brand in Chinese kitchens over 30 years.

Around the turn of the century was also the era of Yang Zhen. In 1996, Yang Zhen, a 34-year-old Chinese teacher from Hunan, registered Jiajia Soy Sauce Company in Hong Kong, rising with the unique approach of 'one bottle used as two,' and listed in 2012, becoming the 'first soy sauce stock in China.'

Besides the 'one super, many strong' structure led by Haitian, there are regional soy sauce brands everywhere, and the industry structure is already formed. New entrants must find another way to carve out a share in the relatively stable market. Qianhe, for example, carved a path with 'zero-additive.'

Qianhe's predecessor, Hengtai Industrial, was established in 1996, mainly producing caramel color, a condiment additive. But with the rapid development of Shengchou and fresh soy sauce, the proportion of Laochou declined, and the market capacity for caramel color decreased. Around 2001, Qianhe decided to develop downstream into soy sauce and other condiments. Facing strong competitors like Haitian and Chubang, Qianhe launched its first 'zero-additive' soy sauce in 2008, differentiating itself from Haitian. In 2012, the company was restructured into a joint-stock company and renamed 'Qianhe,' forming an enterprise integrating 'Qianhe' series soy sauce, vinegar, cooking wine, compound seasoning juice, and other condiments. In 2014, Qianhe began focusing on developing condiments represented by zero-additive soy sauce, and listed on the A-share market in 2016. Now, when it comes to zero-additive soy sauce, many people's first reaction is Qianhe.

According to replies on the interactive platform, Qianhe's zero-additive condiment revenue now accounts for over 50% of the company's condiment revenue. With the continuous growth of zero-additive product revenue, Qianhe's revenue has increased year after year since listing, from 771 million yuan in 2016 to 1.925 billion yuan in 2021, a 2.5-fold increase in five years. In 2022H1, revenue reached 1.015 billion yuan, a year-on-year increase of 14.56%. Net profit attributable to parent also grew from just over 100 million yuan in 2016 to 221 million yuan in 2021; in 2022H1, net profit attributable to parent was 119 million yuan, a year-on-year increase of 80.56%.

(Qianhe revenue trend, source: wind)

Of course, facing Qianhe's aggressive approach, established soy sauce companies will not sit idly by. Haitian launched zero-additive soy sauce products as early as 10 years ago, intending to encircle Qianhe. Lee Kum Kee also laid out zero-additive products a few years ago.

Jiajia and Chubang reacted much more slowly. Public information shows that Jiajia, after its first loss in ten years and various problems, only launched a 1-liter zero-additive extra-grade Weijixian in April this year. The company's actual controller and honorary chairman Yang Zhen, at a recent special meeting on 'Breaking and Rebuilding, Building a Supply Chain System,' clearly stated that Jiajia needs to make determinations in three aspects, the first being 'to go all out and firmly implement the strategic plan for zero-additive series and salt-reduced series products,' showing the company's high hopes for zero-additive.

Similarly, in April this year, Zhongju High-tech's Chubang Meiweixian launched the high-end 'Xiaomanyao' series new products: Chubang zero-additive original juice black soybean extra-grade Shengchou and zero-additive original juice extra-grade Shengchou. The company stated during research visits, 'Launching zero-additive new products is strategically a product positioning issue, to fill the gap in high-end products.' In fact, not only zero-additive, but in recent years, with consumption upgrading, more soy sauce companies have launched new concepts such as salt-reduced, freshness-enhancing, organic, and children's soy sauce.

A typical example is Jiajia, which began focusing on salt-reduced brewing technology research in 2018 and officially launched the 'salt-reduced' concept and products in 2019, now using salt reduction as its 'trump card' for a comeback. Following suit, Haitian launched light-salt Shengchou, and Lee Kum Kee and Chubang also launched higher-end, healthier low-salt soy sauce products, such as Lee Kum Kee thin-salt Shengchou and thin-salt Chunweixian, and Chubang light-salt soy sauce, with fierce competition in the 'light-salt' field as well.

03

Internal and External Difficulties in the Industry

Behind the endless concepts like zero-additive and light-salt is the looming ceiling of the soy sauce industry.

Data shows that from 2014 to 2020, China's condiment market size grew from 259.5 billion yuan to 395 billion yuan, with an average annual growth rate of only 7.25%. Among them, soy sauce production declined significantly. According to National Bureau of Statistics data, China's soy sauce production declined for three consecutive years starting in 2016, from 10.119 million tons in 2015 to 5.756 million tons in 2018, nearly halved. Production began to slowly climb in 2019, but in 2021 it was still only 7.8815 million tons. Meanwhile, per capita soy sauce demand fell from 7.28 kg in 2015 to 4.86 kg in 2020.

(China's soy sauce production and growth rate, source: Huajing Industry Research Institute)

Ping An Securities research report also pointed out that since 2016, the retail sales growth rate of the domestic soy sauce industry has been below 10%.

Regarding the slowdown or even decline in the soy sauce industry, a securities analyst who has long tracked the condiment industry told Titanium Media APP: 'On one hand, as soy sauce penetration increases and even saturates, the industry's incremental growth is hard to achieve fast growth. On the other hand, with people's emphasis on healthy eating, demand for soy sauce has shifted from eating less, eating refined, to eating well, leading to a decline in demand and elimination of backward production capacity. Additionally, the emergence of compound condiments will also replace some soy sauce usage on the C-end.'

After the COVID-19 outbreak, the soy sauce industry faced even harder times. 'Under the pandemic, consumption is weak, the catering channel has been hit hard, community group buying has grown wildly, and costs of raw materials like soybeans, wheat, packaging, and logistics have risen, making soy sauce companies overall weak,' the analyst said. In the fourth quarter of last year, condiment companies raised prices to smooth costs.

But even so, soy sauce companies still face enormous pressure. Taking Haitian as an example, in 2021, its revenue grew only 9.71% year-on-year, and net profit attributable to parent grew only 4.18%, the lowest since listing. In 2022H1, this decline continued, with revenue growth of 9.73% and net profit growth of only 1.21%. Since 2011, Haitian had maintained double-digit growth in both revenue and net profit for 10 consecutive years.

(Haitian performance trend, source: wind)

If the leader is like this, what about other soy sauce companies? Zhongju High-tech's subsidiary Meiweixian achieved revenue of 4.618 billion yuan in 2021, a year-on-year decrease of 7.24%. In 2021 and 2022H1, Jiajia achieved revenue of 1.755 billion yuan and 943 million yuan, with year-on-year growth of -15.34% and 12.02%, and net profit attributable to parent of -80.1639 million yuan and 3.1539 million yuan, down 145.48% and 83.47% year-on-year.

More directly reflected is the change in gross margin. Wind data shows that Haitian's sales gross margin has declined year by year from 46.47% in 2018 to 36.63% in the first half of this year. Zhongju High-tech fell from 39.55% in 2019 to 31.99% now. Jiajia fell rapidly from 29.09% in 2020 to less than 20% in 2022H1. Even Qianhe, which focuses on zero-additive, saw its gross margin fall from 46.21% in 2019 to 35.37% in the first half of this year.

04

Long-Term Optimism for the Industry

Of course, whether it's the Haitian 'double standard' incident or the internal and external difficulties of the entire soy sauce industry, investors are more concerned about the investment value of soy sauce companies. After this battle, will the industry structure change? Will soy sauce companies have a 'spring'?

Some analysts pointed out that with the popularity of 'Heike Technology' on the internet and the discussion of Haitian's 'double standard' incident, to some extent, it has increased consumer attention to food additives and accelerated the industry's in-depth research on zero-additive. 'From investors flooding the interactive platform with questions and the consultation and purchase situation on various soy sauce companies' online flagship stores, it may affect Haitian's sales in the short term, but the long-term impact is not significant, and it is beneficial to companies like Qianhe that focus on zero-additive.'

The industry analyst also told Titanium Media APP that in the long run, the soy sauce and condiment industry is not pessimistic. 'On one hand, the domestic soy sauce industry concentration is relatively low. From the perspective of foreign development trends, leading enterprises have the ability to continuously expand and seize market share from small and medium-sized enterprises, meaning industry concentration will continue to increase, and leading enterprises, including the four A-share listed soy sauce companies, will benefit first. On the other hand, from our channel research, compared to last year, by July and August this year, the condiment industry channel recovery has been good. And with the improvement of the pandemic, economic recovery expectations, and catering improvement, it is generally believed that the condiment industry is still relatively optimistic.'

According to data from the Condiment Association, in 2020, the CR3 of Japan's soy sauce industry reached 53%, while China's soy sauce CR3 was about 24%, with the leading enterprise Haitian holding a 17.70% market share, and the second-ranked company by production, Zhongju High-tech, holding 3.74%. In comparison, there is still much room for improvement in the concentration of China's soy sauce industry.

Qichacha data also shows that as of July 2022, there were 5,276 soy sauce manufacturing enterprises in existence or operating in China, with 852 related enterprises established in the three years (July 2019-July 2022), 134 enterprises cancelled or with abnormal registration status, and a net increase of 239 enterprises per year. With the industry cooling in 2021, the number of newly registered enterprises plummeted to 161, and only 32 were registered in the first half of 2022.

Galaxy Securities' latest research report also pointed out that benefiting from the low base effect last year, the marginal weakening of community group buying's impact on channels, and some companies significantly reducing expense investment, the condiment industry's revenue and profit sides showed a sequential acceleration in recovery in Q2 this year. In July, the C-end was still in a destocking state, with demand growth slowing, while the B-end benefited from weak recovery in catering demand, expected to improve sequentially. Looking to the second half of the year, the industry's marginal improvement is viewed optimistically.

It is worth mentioning that the industry analyst also believes that internal and external difficulties are forcing soy sauce companies to find their own ways out, and consumption upgrading and diversified development may also be new performance growth points for soy sauce stocks.

Taking Haitian as an example, as early as 2014, it entered the fermented bean curd industry through mergers and acquisitions, and in 2017 and 2019, it made two more 'buy buy buy' moves, laying out in vinegar and sesame oil fields. By 2020, Haitian's diversification was unstoppable, from hot pot base to Chinese compound seasonings, cooking oil to rice, and even launching apple cider vinegar drinks and carrot fermented fruit and vegetable juices, rapidly expanding product categories.

Similarly, Zhongju High-tech's products also cover 11 categories including soy sauce, chicken essence powder, cooking oil, oyster sauce, cooking wine, etc., with over 300 SKUs in the full series. Qianhe's product categories have also expanded from soy sauce to cooking wine, vinegar, oyster sauce, sesame oil, convenient seasonings, etc.

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