"As one of the first central enterprise reform pilot units, COFCO Group's mixed-ownership reform is in full swing and accelerating."

On May 28, Jiugui Liquor, one of COFCO Group's five A-share listed platforms, announced that its acquisition offer by COFCO Wine Co., Ltd. (hereinafter "COFCO Wine") had been approved by the China Securities Regulatory Commission (CSRC).

As one of the first batch of pilot state-owned capital investment companies, since last year, COFCO Group has implemented professional restructuring and integration of its businesses, forming 18 specialized company platforms including COFCO Coca-Cola. Currently, 14 of COFCO's subsidiaries have completed mixed-ownership reform, with plans to complete all 18 by the end of this year.

"COFCO must transform from big to strong, from extensive growth to intensive development, and reform is essential," said Zhao Shuanglian, Secretary of the Party Group and Chairman of COFCO Group, pointedly.

On May 25 last year, China Foods announced that it had entered into an agreement with COFCO Fortune Holdings Limited, a wholly-owned subsidiary of China Agri-Industries. According to the agreement, China Foods would sell its 100% equity in COFCO Fortune Food Marketing Co., Ltd. to COFCO for RMB 1.05 billion.

The announcement showed that COFCO Fortune is mainly engaged in the sales, distribution, and marketing of small-pack cooking oil and other kitchen foods (including small-pack sugar, soy sauce, vinegar, MSG, seasoning paste, and coarse grains). It primarily sells its products under the "Fortune" brand, a well-known small-pack cooking oil brand in China.

China Foods successively sold non-beverage businesses such as Le Conte Chocolate, Fortune, and Great Wall. After asset optimization, Coca-Cola became the main operating brand of China Foods. Through business adjustments and asset optimization, China Foods has become COFCO's only specialized beverage business platform.

Through such slimming down, on March 27 this year, China Foods, the listed company under COFCO Coca-Cola, released its first "report card" after becoming a specialized company. In 2017, China Foods' continuing operations achieved sales revenue of HK$15.461 billion (in HKD, same below), up 37% year-on-year; total profit for the year was HK$2.512 billion, a substantial increase of 249.7%.

In the eyes of outsiders, this performance report is the first report card after China Foods' professional restructuring. The good performance demonstrates the dividends of reform and gives confidence and momentum for transformation.

Fortunately, in 2017, COFCO Group's subsidiaries such as COFCO Land, COFCO Coca-Cola Beverages, and COFCO Capital grew against the trend, COFCO Oils & Fats fully exceeded its budget, and COFCO Grains & Oils saw rapid growth in operating volume and efficiency, exceeding expectations. So, the burdens that China Foods shed also became profits at China Agri-Industries Holdings.

COFCO seems to have encountered a rare favorable environment, which helps reduce pain and complete the mixed-ownership reform tasks.

The latest move involving Jiugui Liquor, viewed by platform, indicates that COFCO Group uses Jiugui Liquor as the core platform for its liquor business. This matter is not particularly prominent in COFCO Group's overall mixed-ownership reform plan to build four major business segments: agriculture and grain, food, real estate, and finance.

Analysts believe that this move means that Jiugui Liquor, as a specialized capital platform under COFCO Group, may in the future bear the important task of integrating and operating the group's liquor assets.

It is worth mentioning that COFCO Wine, as the professional management platform for COFCO Group's liquor business, also owns 13 factories, including 2 overseas wineries, and holds well-known brands such as "Great Wall," "Sanggan," and "Jiugui."

According to the acquisition report, COFCO Group transferred the 34.92% and 15.08% equity stakes in Zhonghuang Company held by its indirect wholly-owned subsidiaries Zhongtang Logistics and Zhongtang Huafeng, respectively, to COFCO Wine. After the transfer, COFCO Wine will directly hold 50% of Zhonghuang Company and indirectly control 31% of Jiugui Liquor through Zhonghuang Company.

The acquisition method is state-owned equity transfer, which is complex, specifically six consecutive transfer steps:

  • Zhongtang Logistics and Zhongtang Huafeng each transfer their 34.92% and 15.08% stakes in Zhonghuang Company to China Sugar Industry without compensation;
  • China Sugar Industry transfers its 50% stake in Zhonghuang Company to Huafu Group without compensation;
  • Huafu Group transfers its 50% stake in Zhonghuang Company to COFCO Hong Kong without compensation;
  • COFCO Hong Kong transfers its 50% stake in Zhonghuang Company to China Foods Holdings, receiving 1 ordinary share as consideration;
  • China Foods Holdings transfers its 50% stake in Zhonghuang Company to COFCO Wine Holdings, receiving 1 ordinary share as consideration;
  • COFCO Wine Holdings transfers its 50% stake in Zhonghuang Company to COFCO Wine Investment without compensation.

The company stated that this acquisition, implemented through layer-by-layer transfers, helps COFCO Group rationalize the investment relationships among entities at various levels. After the transfer, the various equity entities involved in COFCO's sugar business—Zhongtang Logistics, Zhongtang Huafeng, China Sugar Industry, and Huafu Group—can reduce the long-term equity investment of the parent company (transferee) in the subsidiary (transferor) at each step through the "subsidiary-to-parent" layer-by-layer transfer method;

For the liquor business, the various equity entities—COFCO Hong Kong, China Foods Holdings, COFCO Wine Holdings, and COFCO Wine Investment—can increase the long-term equity investment of the parent company (transferor) in the subsidiary (transferee) at each step through the "parent-to-subsidiary" layer-by-layer transfer method, thereby achieving rational allocation of internal resources within COFCO Group.

"If a direct transfer were adopted, the investment relationships among entities at intermediate levels could not be reasonably reflected, and the investment relationships would be difficult to rationalize."

After COFCO Group fully took over Jiugui Liquor in 2016, it made breakthroughs in overall strategic layout, product structure adjustment, senior management appointments, and internal control system optimization, driving Jiugui Liquor's performance growth into the fast lane.

In 2016, Jiugui Liquor achieved operating revenue of RMB 655 million and net profit of RMB 109 million, successfully removing the ST label. The 2017 annual report showed that the company achieved operating revenue of RMB 878 million, a year-on-year increase of 34.13%; net profit of RMB 176 million, a year-on-year increase of 62.18%. The latest quarterly report showed that during the reporting period, the company achieved operating revenue of RMB 265 million, a year-on-year increase of 46.12%; net profit of RMB 62.54 million, a year-on-year increase of 68.88%.

Isn't it magical? Data shows that COFCO's mixed-ownership reform is continuously stimulating endogenous momentum. Except for the core main business responsible for ensuring national food security, COFCO does not seek absolute control over other businesses, nor does it engage in "one dominant share" or "fake mixed reform."

According to the deployment of the State-owned Assets Supervision and Administration Commission (SASAC), COFCO Group is promoting employee stock ownership pilots, expanding the proportion and scope of employee shareholding, and further expanding market-based selection of professional managers. Currently, 6 specialized companies have raised RMB 27 billion through equity operations such as mixed-ownership reform, employee stock ownership, listings, and fund establishment; 14 specialized companies have completed mixed-ownership reform or achieved equity diversification. Feed, liquor, grain, and textile will complete mixed-ownership reform by the end of the year, and all 18 specialized companies will achieve equity diversification.

The latest performance report shows that COFCO Group achieved operating revenue of RMB 482.5 billion in 2017, total profit of RMB 11.8 billion, and total assets of RMB 538.8 billion. The main grain and oil business grew rapidly—system restructuring and mixed-ownership reform are bringing real benefits.

There is still a gap from the target. In 2016, Zhao Shuanglian, who succeeded Ning Gaoning as Party Secretary and Chairman of COFCO Group, formulated the "13th Five-Year Plan" for COFCO Group. According to the plan, COFCO Group aims to achieve operating revenue of RMB 750 billion, total assets of RMB 600 billion, and total profit of RMB 15 billion by 2020, and decided to accelerate integration with core products as the main line, promoting the deep integration of specialized companies.

According to the group's overall internal plan, COFCO Group will next accelerate capital and business integration, build four major business segments: agriculture and grain, food, real estate, and finance, and strive to achieve overall listing by segment before 2020.

From the frequent moves of COFCO Group's listed companies recently, it is not difficult to see that its mixed-ownership reform pace is accelerating.

  • On the evening of April 24, Zhongyuan Special Steel announced a major asset restructuring plan, intending to inject COFCO Capital, the financial asset platform under COFCO Group, into the listed company.
  • On May 12, COFCO Biochemical announced plans to acquire agricultural product deep processing and chemical assets under COFCO Group. After the restructuring, COFCO Biochemical will become a specialized platform for corn deep processing integrating research and production under COFCO Group. At the same time, COFCO Real Estate is also promoting the restructuring of COFCO Group's asset, Joy City Real Estate.

With the dust settling on the equity transfer of Jiugui Liquor, COFCO Group's specialized operating platforms for agriculture and grain, food, real estate, and finance have basically been completed, and the A-share mixed-ownership reform path is becoming increasingly clear.

However, while shuffling between left and right hands, there are also external sales. In December 2017, on the Beijing Equity Exchange, COFCO Tunhe Sugar Co., Ltd. (600737.SH) listed several tomato product enterprises for transfer.

It is worth noting that this is another transfer of tomato product enterprises by COFCO Sugar since April 2017. In March this year, COFCO Sugar announced the establishment of a new company to inject all tomato businesses into it, but recently it has been continuously selling tomato business companies.

COFCO Sugar announced that it plans to transfer the equity of 11 subsidiaries and the assets of 1 branch through public listing. Among the transferred company equities and assets, at least 6 are clearly related to tomato product enterprises. Regarding the reasons for transferring the equity of multiple subsidiaries, COFCO Sugar stated that it is "according to operational planning." In addition, these 12 companies have already ceased production due to raw material and market supply-demand factors. The Huinong Tomato and Baicheng Tomato proposed for transfer in this announcement are among the above 11 subsidiaries.

Currently, sugar prices are in a downward cycle, with international raw sugar futures even falling to a nine-year low, with sugar prices falling below 12 cents per pound.

At a conference co-hosted by the International Sugar Organization (ISO) and consulting firm Datagro, ISO Executive Director Jose Orive warned of declining demand, believing that consumption this year will grow at the weakest pace since at least 2000, a "dangerous" slowdown that exacerbates oversupply.

A relevant person from COFCO Sugar said in an interview, "Considering factors such as the downturn in the domestic sugar market in 2018, lower selling prices, and lower gross margins, it is expected that the company's operating revenue will decline in 2018. According to the company's sugar business '13th Five-Year Plan' goals, the company continues to seek sugar projects in major sugar-producing areas such as Guangxi, Xinjiang, and Inner Mongolia that align with the company's strategic main business."

According to Wind data statistics, COFCO Sugar's market value has fluctuated over the past decade. At the same time, many investors have reflected on stock forums that the market value of COFCO Sugar shares purchased years ago has fallen by more than half.

On April 25, 2018, COFCO Tunhe Sugar Co., Ltd. ("COFCO Sugar") announced that it would transfer 38.89% of the equity of its wholly-owned subsidiary COFCO Tunhe Tomato Co., Ltd. ("COFCO Tomato") to external parties, having signed the "Property Rights Transaction Agreement" with three parties on April 20.

COFCO Tunhe Sugar Co., Ltd. (referred to as COFCO Sugar) released its 2017 annual report on the evening of April 17. The report showed that in 2017, the company achieved operating revenue of RMB 19.157 billion, a year-on-year increase of 41.31%; total profit of RMB 1.003 billion, a year-on-year increase of 50.3%.

Then, in recent days, international sugar prices have continued to fall. Some newspapers have lowered expectations for COFCO Sugar's impact, saying that 2018 performance is expected to see a decline in revenue, which may be a good thing for the overall mixed-ownership reform—a relief.

Source: Consumer Daily Exposure -END-