On March 27, China Foods Limited, a subsidiary of COFCO Group, announced its annual results for the year ended December 31, 2017. The report shows that the group's continuing operations achieved total revenue of HK$15.461 billion, up 37%, and net profit of HK$2.27 billion, up 205%, a record high since the company's listing. Net profit from continuing operations was HK$1.83 billion, up 232%. This is also the first financial report from China Foods after its parent company COFCO initiated mixed-ownership reform and restructuring. Industry insiders say that based on the performance announced by China Foods, it has made a significant contribution to COFCO's goal of exceeding 10 billion yuan in overall performance for 2017.
COFCO's Mixed-Ownership Reform and Restructuring: China Foods Continues to Slim Down In fact, over the past two years, China Foods has been continuously divesting its assets.
In 2015, China Foods began to divest its snack food business, mainly Le Conte chocolate; in 2016, the company completed the divestiture of wine assets such as Chateau Junding. At that time, most of the businesses divested by China Foods had been loss-making for years.
In May 2017, China Foods began to divest its subsidiary mainly engaged in food business, Fulinmen, despite the fact that this business brought in nearly 40% of the company's revenue in 2016.
On October 16, 2017, China Foods announced the sale of all its wine business and other non-beverage businesses to China Foods (Holdings) Company Limited, a wholly-owned subsidiary of its controlling shareholder COFCO Group, for a total transaction value of approximately HK$5.069 billion. After the completion of this transaction, China Foods will retain only its original beverage business. Behind China Foods' continuous asset divestiture is a strategic shift across the entire COFCO Group. According to the State-owned Assets Report, COFCO's long-standing biggest problem lies in the lack of business model design, namely the separation of production, supply, and sales. Production enterprises and sales enterprises operate as two separate layers: production enterprises do not understand the market, and marketing enterprises do not understand production. This ultimately leads to poor performance of many products, which COFCO's Party Group summarizes as a "death model." In response, COFCO Group Chairman Zhao Shuanglian once stated: "At this stage, COFCO must adopt a specialized development and operation model. This is a fundamental issue of attitude, confidence, and direction." On July 18, 2016, COFCO Group fully launched the reform of state-owned capital investment companies. In accordance with the requirements of the central government's "top-level design" for SOE reform, COFCO formed a three-tier control structure: "Group headquarters capital layer - specialized company asset layer - production unit execution layer." On this basis, COFCO established 18 new specialized company platforms, including COFCO International. At the same time, COFCO vigorously promoted asset integration, reorganizing and integrating resources and assets scattered across different listed companies and enterprises into various specialized companies according to core product lines. Up to now, COFCO Group has completed "mixed-ownership reform" for 14 specialized companies, including COFCO Tea and COFCO Meat. It is reported that COFCO Group aims to complete the mixed-ownership reform of all 18 specialized companies by the end of 2018.
Key Points for the Rise in Performance Industry insiders say that after divesting non-beverage businesses, China Foods' core business has become clearer, allowing it to focus more on the Chinese beverage market, which has greater growth potential. Currently, China Foods' core business mainly includes the production, marketing, and distribution of nearly 20 brands across 8 major categories, including carbonated drinks, fruit juices, bottled water, fruit milk, ready-to-drink coffee, energy drinks, ready-to-drink tea, and functional water, in 19 provinces, municipalities, and autonomous regions covering 81% of China's territory. The beverage business has always been a strong driver of China Foods' performance growth. From 2011 to 2016, the compound annual growth rate of EBITDA for the beverage business was 5.6%. In 2017, during Coca-Cola China's "dual bottler" business restructuring, COFCO Coca-Cola Beverages Limited, controlled by China Foods, further expanded its operating area and business scale, becoming Coca-Cola's fifth-largest bottling partner globally. At the same time, through transactions with Swire Bottling Group and Coca-Cola Bottling Group, it obtained one-time gains of HK$1.57 billion from the sale of three bottling plants in Jiangxi, Hainan, and Zhanjiang, as well as minority stakes in four plants in Guangdong, Hangzhou, Nanjing, and Shanghai. This is one of the key factors for China Foods' profits reaching a new high. In terms of revenue from continuing operations, the beverage business continued to grow steadily. The large-scale mergers and acquisitions in 2017 did not cause significant profit fluctuations as seen in other companies in the past, achieving a smooth transition and performance growth. Luan Xiuju, Managing Director of China Foods, stated: "2018 is the first complete year of independent operation after China Foods became a specialized beverage business platform. This will be a new starting point for China Foods. Standing on the specialized track, the future opportunities are limitless. These include the industry development space shown by the relatively low per capita consumption of non-alcoholic ready-to-drink beverages in China, the continued development of traditional advantageous categories in the process of developing into a full-category beverage company, as well as the entry and improvement of new categories and the integration benefits brought by the connection of regions after restructuring. All of these will greatly enhance China Foods' profitability." According to the disclosed data, COFCO Coca-Cola's sales network has covered 100% of cities, 97% of counties, and 65% of townships in its operating area, accounting for 50% of all retail outlets in the region. For an FMCG company, this may be the strongest supporting force and development guarantee. To meet the market demand for "healthy beverages," Coca-Cola has continuously launched new products in recent years, releasing more than 500 new products in the Asia-Pacific region in the past three years alone. James Quincey, CEO of Coca-Cola Company, previously stated: "The company is currently accelerating its transformation into a comprehensive beverage company, developing new business areas such as water, fruit juice, coffee, and tea drinks. China Foods, as an important global partner, will surely benefit from this and gain more development opportunities." Analysts point out that China Foods' performance in 2017 exceeded expectations, becoming a sample of the initial success of COFCO's mixed-ownership reform, confirming the success of COFCO's specialization strategy and the new efficiency of SOE reform. The positive effects of this business restructuring and optimization will continue to be prominent for some time to come. This article is compiled and edited by New Distribution. -END-