In 2018, revenue fell 4.71%, net profit plunged 44.87%, and net operating cash flow declined another 11.48% on top of a 38.66% drop in 2017... Entering its 17th year since listing, Bright Dairy, the 'first dairy stock in China,' delivered such a dismal report card.

Bright Dairy's 2018 performance not only showed a serious decline compared to its own historical performance, but the gap with peers Yili and Mengniu was even more pronounced. Mengniu achieved operating revenue of 68.977 billion yuan in 2018, a year-on-year increase of 14.66%; net profit was 3.043 billion yuan, up 48.6%. Yili achieved operating revenue of 79.553 billion yuan in 2018, 10.623 billion yuan (15.4%) more than Mengniu; net profit was 6.452 billion yuan, 3.409 billion yuan (112%) more than Mengniu.

// The Top Three Dairy Companies Drift Apart Bright Dairy's Market Cap Surpassed by New Hope Dairy //

The performance gap has led to secondary market investors voting with their feet. As of April 8, 2019, Bright Dairy's stock price was 10.27 yuan, still about 60% below its historical high of 28.27 yuan in 2015. In contrast, Yili's stock closed at 28.62 yuan on April 8, not only surpassing its high of around 18 yuan during the 2015 bull market, but also close to its historical high of 34.53 yuan. Mengniu Dairy closed at 29.2 Hong Kong dollars on April 8, not only surpassing its 2015 high of around 24 yuan, but also setting a new historical high.

Reflected in market capitalization, as of the close on April 8, Bright Dairy's market cap was approximately 12.6 billion yuan. On the same day, Yili's market cap was approximately 181 billion yuan, and Mengniu's market cap was 80.599 billion Hong Kong dollars, equivalent to approximately 68.977 billion yuan. The once closely matched 'top three dairy companies' in China have drifted apart, with the gap widening.

If Yili is far ahead and Mengniu is still struggling to catch up, Bright Dairy even needs to work hard to stay in the top three. After all, New Hope Dairy, which just completed its IPO this year, had a market cap of 16.5 billion yuan on April 8.

According to statistics from China.com Finance, over the 17 years since listing, Bright Dairy's annual revenue rose from 5.02 billion yuan in 2002 to 20.986 billion yuan, an increase of about 4 times; net profit rose from 226 million yuan in 2002 to 342 million yuan, an increase of about 50%. In Bright Dairy's stock forum, an investor lamented, '17 years is like a dream,' and said, 'If back then (Bright Dairy) had directly used all (5 billion yuan) revenue to buy houses in Shanghai, it would now be worth at least 100 billion, enough to privatize Mengniu.'

//The Difficult 2018: Who Will 'Save Bright'? //

The just-passed 2018 was arguably difficult for Bright Dairy.

First, in August 2018, Bright Dairy's third-quarter report revealed a net profit plunge of over 60%, further widening the gap with Mengniu and Yili. Subsequently, Chairman Zhang Chongjian and General Manager Zhu Hangming both resigned, and Pu Shaohua, who had 'no dairy industry work experience,' took over as chairman. Then in October 2018, management turmoil continued as Director Sang Shude and Deputy General Manager Wang Wei submitted resignations. By March this year, Bright Dairy's annual report disclosed not only a 'double decline' in revenue and net profit, but also 'the first quarterly loss in nearly a decade'—a loss of 52.05 million yuan in the fourth quarter of 2018.

The alarming data prompted loyal users in Shanghai, Bright Dairy's 'home base,' to call for 'saving Bright.' An online post titled 'Save Bright! A Call from a Child Raised on Bright Milk' quickly went viral on WeChat Moments in Shanghai, resonating with many who 'grew up drinking Bright milk and eating White Rabbit candy.'

Many Shanghai users also launched 'Save Bright' purchasing campaigns via social media.

According to reports, a Shanghai user told media that they participated in the 'Save Bright' campaign last November: 'When I saw the news, I went to the supermarket and bought a lot of Bright dairy products, then distributed them to relatives and friends, hoping to do my small part,' adding it was 'for the sake of nostalgia.' Another user who 'impulsively bought two boxes of Bright milk' said they had 'given up supporting Bright and switched to other brands of dairy products.' '(Bright's) management has been very unstable, and product quality varies greatly. I used to drink Youbei, but now I don't. In the marketplace, nostalgia alone cannot stand.'

// Four Changes of Leadership in Ten Years: A 'Cadre Exchange Point' for Shanghai State-Owned Assets? //

As the aforementioned user said, Bright Dairy's 'management has been very unstable,' and this intense 'volatility' has occurred multiple times in the past decade: According to statistics from China.com Finance, from March 2008 when 'dairy iron lady' Wang Jiafen retired from the chairmanship of Bright Dairy, to August 2018 when Pu Shaohua took office, this was the fourth time Bright Dairy changed its chairman, with an average change every less than three years.

First, in March 2008, Zhao Baili, general manager of Shanghai Fuxing Yimin (Group) Co., Ltd., succeeded Wang Jiafen as chairman of Bright Dairy. Two years later, in April 2010, Zhao Baili left, and Zhuang Guowei, former vice president of Shanghai Nonggongshang Group Co., Ltd., took over as chairman. Five years later, Zhang Chongjian, who had also long served at Shanghai Nonggongshang Group, succeeded Zhuang Guowei as chairman. In August 2018, before Zhuang Guowei's term ended, Pu Shaohua, former party secretary, chairman, and president of Shanghai Fisheries Group Co., Ltd., took over as chairman of Bright Dairy.

Before 2008, 'dairy iron lady' Wang Jiafen led Bright Dairy for 12 years (1996-2008). If including her four years as general manager of Shanghai Milk Company (1992-1996), Bright Dairy's management was stable for 16 years.

In contrast, those 16 years were the 'brightest' period in Bright Dairy's history, especially before 2004, when it could be said to crush Yili and Mengniu. From the earliest available data, Bright Dairy's revenue in 1999 was 1.463 billion yuan, with net profit of 76.9161 million yuan. By 2004, total revenue was 6.786 billion yuan (a five-year increase of 363.8%), and net profit was 318 million yuan (a five-year increase of 313%). This net profit level was not surpassed for the next eight years; it was not until 2013 that net profit of 406 million yuan first exceeded the 2004 level.

In fact, the 'seat changes' among the 'top three dairy companies'—Yili, Mengniu, and Bright—over the past decade or so are positively correlated with the frequency of management changes at these three companies. It is hard to call this a coincidence.

First, Yili entered a turbulent period around 2004 when 'dairy godfather' Zheng Junhuai was imprisoned. During this period, Bright Dairy was in its heyday under the leadership of 'iron lady' Wang Jiafen, while Mengniu was in its prime under Niu Gensheng. Yili not only failed to shake Bright's 'number one' position but was even surpassed by 'little brother' Mengniu. However, after this period, Yili's leadership entered a 15-year stable period, during which Yili not only overtook Mengniu but also left Bright far behind.

Second, Mengniu. After COFCO became the major shareholder in 2009 and Niu Gensheng and other founding team members gradually exited, Mengniu's leadership entered a turbulent period, with three chairmen and two presidents changed in succession. During this time, Mengniu not only lost its early advantage and was overtaken by Yili, but the gap has been widening. However, compared to Bright, Mengniu's new chairmen and presidents all came from the COFCO system, especially the presidents, who had relatively rich dairy industry experience. Thus, although gradually falling behind, Mengniu is still trying to keep pace with Yili.

The most desolate is Bright Dairy. Over more than a decade, it changed four chairmen. The result of the revolving door of leadership is that performance has fallen from the original 'number one' to now having revenue and profit that are only a fraction of Yili's. Compared to Mengniu, Bright Dairy's frequently changing management also lacks industry experience—after Wang Jiafen, the four chairmen, whether Zhao Baili from Yimin Group or Zhuang Guowei and Zhang Chongjian from Nonggongshang Group, all lacked dairy industry experience. The latest chairman, Pu Shaohua, comes from Shanghai Fisheries Group, which is even further from the dairy industry than Yimin Group (which deals in food and commerce) or Nonggongshang Group (which has some connection to agriculture and animal husbandry). A dairy market insider even joked, 'Bright Dairy has become a cadre exchange point for Shanghai state-owned assets.'

After the 2018 performance slump, some dairy industry analysts offered suggestions for Bright Dairy to 'regain its luster,' proposing strategies such as strengthening 'big single products,' improving the supply chain system, and expanding into third- and fourth-tier city markets. However, in the view of the aforementioned dairy market insider, these are only 'treating the symptoms': The dairy industry is a highly specialized industry with a long upstream and downstream chain, quite different from other agricultural products. To truly understand it, more than five years is not enough. Bright Dairy's urgent task for 'treating the root cause' is to build a core management team that truly understands the dairy industry, can 'share the same breath and fate' with the company's business frontline and even distributors, and can ensure long-term stability.

Source: Dairy News (ID: mymilk365) -END-