Introduction: For Dong-E E-Jiao, the biggest challenge is how to continue its 'white horse stock' performance legend without relying on price increases. In 2009, Zhao Danyang, known as the 'godfather of private equity,' bid $2.11 million for a lunch with Warren Buffett. He brought two gifts for the stock god: one was Moutai, known as the 'national liquor,' and the other was Dong-E E-Jiao, known as the 'national treasure of nourishment.' Alongside Moutai, Dong-E E-Jiao has its confidence. Men have been drinking Moutai for only a few hundred years, but women have been consuming E-Jiao for over a thousand years. Dong-E E-Jiao has a history of at least 1,500 years. During the Northern and Southern Dynasties, Tao Hongjing's 'Ming Yi Bie Lu' recorded: 'E-Jiao, produced in Dong-E, hence the name.' The popular TV dramas 'The Grand Mansion 1912' and 'Empresses in the Palace' both mentioned Dong-E E-Jiao multiple times, and its high-end, orthodox cultural identity earned it the title 'Moutai in traditional Chinese medicine.' Over the past decade or so, Dong-E E-Jiao has embarked on a 'premiumization' strategy similar to Moutai, repeatedly raising its 'status.' From 2006 to 2018, Dong-E E-Jiao raised prices 17 times, with a cumulative increase of over 37 times. Its net profit also grew for 12 consecutive years, making it a recognized 'white horse stock' in the capital market. Dong-E E-Jiao followed Moutai's growth path but also fell into Moutai's 'pit.' From 2012 to 2014, under the combined effects of the plasticizer scandal, restrictions on 'three public consumption' policies, drunk driving penalties, and inventory clearance, Guizhou Moutai's stock price fell from 190 yuan per share in July 2012 to 76.98 yuan per share in early 2014. From 2017 to 2019, Dong-E E-Jiao also fell from 70 yuan to below 30 yuan amid doubts, more than halving. Now Moutai's stock price has broken through the 1,200 yuan high, with a market value of 1.5 trillion. According to Moutai's growth curve, is there a 'thrilling' story waiting for the 'Moutai in E-Jiao'? But on closer thought, there are many differences between Dong-E E-Jiao and Moutai. Moreover, the health product industry changes rapidly, with various products like energy boosters, anti-aging, stomach care, sleep aids, and memory enhancers coming and going. Around 2000, stars like Apollo, Sanzhu, and Hongtao K emerged, but almost none escaped the fate of 'being popular for three to five years.' Can Dong-E E-Jiao escape? -01- Worst Performance In recent years, public opinion such as 'boiled donkey hide,' 'IQ tax,' and 'traditional Chinese medicine is useless,' coupled with medical insurance cost control policies, have rapidly deteriorated Dong-E E-Jiao's survival environment. Under the pressure of inventory clearance, in 2019, Dong-E E-Jiao, facing internal and external difficulties, ended its 12-year streak of performance growth, with its stock price nearly halving compared to 2016. In 2018, the decline in Dong-E E-Jiao's performance had already caused significant market shock. The Q1 report missed expectations, and the stock price hit the limit down at the open, with over 23,000 lots of sell orders sealing the limit down by the close, shrinking market value by 3.852 billion yuan compared to the previous trading day. Entering 2019, Dong-E E-Jiao's performance further declined. In Q1, profit fell 35.48%; in the interim report, profit fell 77.62%; and the Q3 report released on October 30 dropped another bombshell. According to the financial report, in Q3, Dong-E E-Jiao achieved operating revenue of 940 million yuan, a year-on-year decrease of 32.79%; net profit of 15.94 million yuan, a year-on-year decrease of 95.61%; and non-GAAP net profit of -4.57 million yuan, a year-on-year decrease of 101.41%. Basic earnings per share were 0.02 yuan, a year-on-year decrease of 95.57%. In Q3, revenue decreased by 32.79%, but net profit decreased by three times. The continuous decline in net profit has become a hot topic in the market. The claims of 'Dong-E E-Jiao bleeding heavily' and 'donkey hide bubble burst' emerged. In fact, Dong-E E-Jiao has taken measures against the sharp decline in stock price. On May 24, 2019, Dong-E E-Jiao announced a share buyback plan: to spend no less than 750 million yuan and no more than 1.5 billion yuan to repurchase company shares at a price not exceeding 45 yuan per share. However, with declining performance, share buybacks cannot solve the problem, and many institutions voted with their feet. According to Choice data from East Money, the number of institutional shareholders in Dong-E E-Jiao in Q3 2019 was only 13, a sharp decrease of 181 from 194 in the 2018 annual report. -02- Strongest Growth A decade ago, if you had money, the best investment might have been buying a house, but in front of Dong-E E-Jiao's price increases, even housing price gains would lose. Before 2006, Dong-E E-Jiao used low prices to expand business channels and suppress competitors, capturing 70% market share. However, low prices led to an aging and low-income customer base, while high-income groups gradually moved away from E-Jiao to choose supplements like Cordyceps and ginseng. As the E-Jiao category became marginalized, the company's economic benefits were no longer optimistic, with return on equity hovering below 14% for a long time. In 2006, Qin Yufeng, who had worked at Dong-E E-Jiao for 32 years and was known as the 'young marshal of E-Jiao,' took over. He formulated a 'value return' strategy for Dong-E E-Jiao. He said: 'In the Ming Dynasty, commercial history records detailed the circulation of E-Jiao. At that time, each jin of E-Jiao was taxed 1.6 qian of silver. According to the tax convention, circulation tax accounted for 1/20 of sales, so the price of E-Jiao was roughly 3.2 liang of silver per jin, equivalent to 4,000-6,000 RMB per jin today.' In his view, E-Jiao is a truly aristocratic food. Thus, the retail price of Dong-E E-Jiao products increased from 80 yuan per kilogram in 2001 to 160 yuan per kilogram in 2006, and then rapidly to 5,996 yuan per kilogram in 2019, a 74-fold increase over 18 years, with a compound annual price increase of 27.1%, far exceeding China's economic growth rate and even the crazy housing prices. In 2007, Qin Yufeng, to build E-Jiao into a 'national treasure of nourishment,' resumed the production of Jiuchao Gongjiao, which had been discontinued for a century. It is said that the process of Jiuchao Gongjiao is very particular, with strict requirements on production time and place; it must be made at midnight on the winter solstice using the yin water from the A Well. Dong-E E-Jiao started with the keyword 'imperial tribute' and worked to create a high-cold persona for tribute gifts. In various interviews and speeches, Qin Yufeng repeatedly mentioned stories of imperial E-Jiao in ancient poetry and opera. At the same time, Dong-E E-Jiao launched convenient, ready-to-eat low-priced products like Taohuaji E-Jiao Cake, which, along with E-Jiao blocks and compound E-Jiao syrup, formed the three main products. It also explored E-Jiao series products, such as Dong-E E-Jiao blue hat health jujubes, Dong-E E-Jiao donkey meat, and Dong-E E-Jiao facial masks. The market responded well to these moves. In 2007, Dong-E E-Jiao, with a net profit of only 200 million yuan, reached a market value of 20 billion yuan, with a P/E ratio of 100 times. At that time, Dong-E E-Jiao was extremely glorious, with momentum no less than Moutai's current. With thousands of years of nourishing top-grade products, cultural moat, pricing power, high profit margins, and high-quality cash flow, Dong-E E-Jiao seemed perfect. Its later performance was indeed commendable, with profits increasing from 200 million to 2 billion, a tenfold increase. During the same period, Moutai's profits also rose from 2.8 billion to 35.2 billion, a 12.5-fold increase, with very similar growth curves. However, behind the consecutive performance growth, Moutai's market value soared like a rocket, while Dong-E E-Jiao, after climbing to 40 billion, quickly halved within two years, falling back to 'pre-liberation' levels. -03- Performance Growth Not Matching Price Increases According to media reports, from 2006 to 2018, Dong-E E-Jiao raised the ex-factory price of its main product, E-Jiao blocks, a total of 17 times. In 2010 alone, Dong-E E-Jiao made three small price increases, with a cumulative increase of over 50%. Starting December 28, 2010, E-Jiao blocks were no longer price-controlled by the government, giving more room for price increases. In January 2011, Dong-E E-Jiao made the largest price increase in its history, raising ex-factory prices by 61% directly. In 2014, Dong-E E-Jiao also raised prices three times. From 2015, the frequency of price increases slowed to once a year, concentrated in November, which is the peak sales season for E-Jiao. The company used consumers' herd mentality, gift-giving sentiments, and comparison awareness to make significant price hikes. According to Dong-E E-Jiao's official website and flagship store, the current price of its high-end product Jiuchao Gongjiao is 103,996 yuan per kilogram, gold-standard E-Jiao is 8,600 yuan per kilogram, and red-standard Dong-E E-Jiao is 5,996 yuan per kilogram. McKinsey once conducted statistics on the average economic indicators of 1,200 global listed companies over five years: on average, for every 1% increase in product price, operating profit increased by 8.7%, with a leverage of 8.7 times. But Dong-E E-Jiao's crazy price increases did not bring equally crazy performance growth. From 2006 to 2018, Dong-E E-Jiao's prices increased more than 30 times, but operating revenue only grew nearly 7 times, from 1.069 billion yuan to 7.338 billion yuan, and net profit grew from 154 million yuan to 2.087 billion yuan, an increase of less than 14 times. The market share loss due to price increases is evident. The brand stubbornly raised prices, opening up price depth and directly raising the industry's reputation. While the big brand expanded, the mid-to-low-end market was inevitably ceded to 'little brothers.' During the price increase process, Dong-E E-Jiao's market share fell from 70% in 2006 to 30% in 2013, and has since hovered between 30% and 40%. Fu Pai E-Jiao, also in Shandong and separated by the Yellow River, captured 32% market share with low-end pricing, becoming another oligarch in the market. Dong-E E-Jiao did not want to abandon the low-end market, but its path to mass-market success was not smooth. The lower-positioned Taohuaji E-Jiao Cake, launched in 2007, had little practical effect until 2014-2015 when mass consumption capacity and awareness rose, and it began to gain some market. Dong-E E-Jiao's previous diversification attempts also did not bring greater improvement. Recently, the first product of the 'Zhenyan Chinelle' brand targeting the 'millennial generation,' 'E-Jiao Low-Molecular-Weight Peptide Essence Drink,' was launched, with unknown effects but a risk of impacting Taohuaji. The 'Coffee So Much Jiao' E-Jiao drink launched with Pacific Coffee also did not make waves. -04- Performance Shackles: 'LV Skin' Since positioning as high-end, losing some low-value customers is understandable. With price increases exceeding 30 times, why hasn't profitability improved correspondingly? The answer lies in donkey hide—the 'shackle' of Dong-E E-Jiao—which sets it apart from Moutai. Unlike Moutai, whose main raw material is grain with relatively small price fluctuations, Dong-E E-Jiao's raw material price increases are as crazy as its finished products. Around 2000, the market price of a donkey hide was about 20 yuan; by 2016, it had surged to over 5,000 yuan per hide. At its peak, donkey hide prices increased 250 times, making it a true 'LV skin.' The reasons for the soaring donkey hide prices include not only the E-Jiao craze but also severe supply shortage. From 1998 to 2018, the donkey population decreased at an average annual rate of 6.5%. China's donkey population fell from 9.558 million in 1998 to 2.5328 million in 2018. As an important raw material for E-Jiao, media reported that 'China needs to buy donkeys worldwide.' However, donkey hide imports are subject to annual quotas, and the procedures for importing donkey hides are difficult, so few merchants can directly open overseas supply channels, leading to rampant smuggling. According to 'China Business Network,' there was a time when smuggling donkey hides was more profitable than drug trafficking. AFP reported that thousands of donkeys are killed in Africa each year for export to China to make a special traditional Chinese medicine. In 2017, Botswana indefinitely suspended donkey product exports, becoming the sixth African country to restrict donkey exports after Niger, Senegal, Mali, Burkina Faso, and Gambia. Zimbabwe and Ethiopia also introduced related restrictions. Besides importing donkey hides, another important method is self-breeding. Due to the low output of donkeys, farmers' enthusiasm for breeding has decreased. If a donkey's value output could reach 5,000 yuan, farmers' enthusiasm would rise, and donkey hide prices would naturally fall. This is the origin of Qin Yufeng's 'whole industry chain donkey' and the '3+X+2' integrated development model. '3+X+2' means upstream development of donkey breeding, trading, and processing; midstream focus on the E-Jiao main business, cultivating multiple products and brands; downstream development of health services and wellness tourism, forming a 10-billion-yuan industry chain. Now, Dong-E E-Jiao has established 20 standard donkey breeding demonstration bases nationwide. According to the 2010 official website introduction, the company controlled over 90% of the country's donkey hide resources, becoming a monopoly of scarce resources, but no further data has been disclosed since. However, running this industry chain is not something that can be achieved overnight; the whole industry chain is completely different from boiling donkey hide into glue. -05- Hoarding: Success and Failure Since donkey hide prices rise every year, hoarding is naturally the best way to profit. From 2014 to 2018, Dong-E E-Jiao's cumulative net profit was 8.37 billion yuan, but operating cash flow was only 5 billion yuan, a difference of over 3 billion yuan. Where did this money go? 'We strategically stockpiled a lot of raw materials,' was Qin Yufeng's answer. According to 'China Business Network,' the company has three forms of donkey hide procurement: self-collection, supplier delivery, and slaughterhouse retention. Currently, suppliers provide 80% of donkey hides. From 2014 to 2017, Dong-E E-Jiao's raw material inventory surged astonishingly. From the market trough in 2015 to 2017, the speed of hoarding donkey hides far exceeded the growth rate of operating costs, reaching an astonishing 2.5 billion yuan in mid-2017. But the story soon took a dramatic turn. The once-skyrocketing donkey hide prices suddenly hit a low in 2017, plummeting about 70%. According to 'Current Status and Problems of Donkey Industry Development in Gansu Province,' after October 2017, on one hand, due to new environmental policies, some E-Jiao manufacturers, including a Shandong E-Jiao factory, sharply reduced domestic donkey hide purchases; on the other hand, high domestic donkey hide prices forced manufacturers to seek alternatives, importing from Africa and West Asia, severely suppressing the domestic donkey hide market. Market prices for donkey hides fell to less than a quarter of two years ago, with adult donkey hides currently maintaining at around 650-800 yuan. The hoarding that once brought Dong-E E-Jiao benefits now planted bitter fruits. With raw material prices plummeting, Dong-E E-Jiao's donkey hide hoarding strategy began to slow down temporarily. According to disclosed financial reports, in 2017 and 2018, the book value of raw materials in inventory was 1.954 billion yuan and 1.822 billion yuan, respectively. The slowdown in price increases starting in 2015, the subsequent soaring donkey hide prices, the inventory accumulated at high prices, and the market outlook changes due to raw material price crashes all cast a shadow over Dong-E E-Jiao's profits. The consistency between price increases and profit growth was broken. As long as the market exists, products still need to be produced, and inventory will be digested, gradually smoothing out the raw material price gap. At the low point of raw material prices, Dong-E E-Jiao suspended donkey hide purchases. This operation is closely related to its high inventory and bleak market performance. At the end of 2013, Dong-E E-Jiao's inventory was 555 million yuan, surging to 1.468 billion yuan by the end of 2014. In 2017 and 2018, inventory was 3.607 billion yuan and 3.369 billion yuan, respectively. Excluding raw materials, work-in-progress and finished goods were 1.653 billion yuan and 1.547 billion yuan. Whether the high inventory is due to Dong-E E-Jiao's 'reluctance to sell' to maintain its high-end image or forced by poor sales, readers can judge for themselves. The direct sales that Dong-E E-Jiao has been touting for years have had little effect, an indisputable fact, and the market environment has also hit a low in recent years. In 2018, the growth rate of total retail sales of consumer goods nationwide was 9%, the first single-digit growth since 2004. According to CMH monitoring data, in 2018, the growth rate of the tonic market fell from over 20% in the past to 5.8%. The macro environment put pressure on corporate performance, and 'value return' could no longer continue. Clearing inventory is not simple, as these goods are not only in the company's hands but also stuck with a large number of distributors. E-Jiao has a shelf life of five years, and distributors hoarding goods can earn significant price differences. The 'price increase-hoard-price increase again-hoard again' model affects the entire industry. Moreover, to seize the market, Dong-E E-Jiao changed from prepayment for goods at the beginning of 'value return' to credit for distributors, facilitating their hoarding. Reflected in the accounts, Dong-E E-Jiao's accounts receivable scale increased from within 200 million yuan in the early period to 453 million yuan, 1.057 billion yuan, and 2.407 billion yuan in 2016-2018. Now the channel has changed. Starting in 2018, the magnitude and frequency of price increases began to slow, and distributors were no longer actively hoarding, especially since goods were not selling well. The performance that the company overdrew by pressing goods on distributors will eventually need to be repaid. Dong-E E-Jiao's worst performance has thus emerged. The blood loss caused by inventory clearance is hard to reverse in the short term. Qin Yufeng said, 'Now the channel has changed, from relying on hoarding to relying on turnover rate. We adapted to the channel change and adjusted to reduce inventory, bringing short-term fluctuations in sales performance.' Dong-E E-Jiao stated that channel inventory digestion will take about 1-2 years. But the actual inventory may be higher than the company expects, and market enthusiasm may be lower than the company predicts, making the pain period longer. With raw material prices falling, Dong-E E-Jiao's discounting to clear inventory may face greater difficulty under multiple pressures. It is certain that before digesting the channel bubble and high-priced donkey hide, Dong-E E-Jiao will find it hard to produce good financial numbers again. -06- Conclusion As an industry leader, Dong-E E-Jiao has high market recognition and a certain cultural moat, but it is not unbreakable. Currently, there are over 200 E-Jiao manufacturers nationwide. Dong-E E-Jiao focuses on the high-end market, with the highest single-product price in the country. Fu Jiao occupies the mid-to-low-end market with the highest production capacity. With major pharmaceutical groups like Tongrentang, Taiji Group, and Jiuzhitang deepening their layout in E-Jiao, industry competition and reshuffling are intensifying. Under 'value return,' the soaring prices have exceeded market acceptance, market growth has slowed, raw material prices have fallen, and under multiple pressures, Dong-E E-Jiao's proactive compression of channel customer inventory and control of shipments is inevitable. Moutai can achieve channel regulation by shortening prepayment periods, and the ability to control channels is also key to a company's success. While adjusting channels, Dong-E E-Jiao must not harm distributors' interests to ensure prosperity continues after the pain. Dong-E E-Jiao has also stated that, involving distributors' interests, it does not rule out private subsidy agreements with distributors. For Dong-E E-Jiao, this is the first major test of the 'value return' pain. The years of price surges and market deterioration can be glimpsed from the increase in credit limits. According to CCTV Finance Channel reports, Dong-E E-Jiao's prices have now dropped to 60% of previous levels. But relying solely on discounting as a simple and crude way to clear inventory is hard to form a long-term mechanism. For Dong-E E-Jiao, a better way to break through is to develop new products and find new users, but currently, this path is also difficult. Saying that Dong-E E-Jiao's donkey hide bubble has burst is indeed alarmist, but returning to sustained growth in the short term should be difficult. Chinese people have been eating E-Jiao for a thousand years, and there is still room for development, but the real value must be returned, not artificially making products that could fly into ordinary homes scarce and expensive. Brand premiumization is understandable, but brands with the broadest market and huge profits are all those that care about and serve consumers. Changing from 'gift' to 'food' can truly enhance the market value of products. Currently, the whole industry chain donkey and the not-so-popular new products seem unlikely to become Dong-E E-Jiao's second growth curve. Although the pain of inventory clearance will eventually pass, Dong-E E-Jiao's greater challenge is how to continue the 'white horse stock' performance legend without relying on price increases. Source: Lishi Business Review (ID: libusiness) Tips will be paid 400-2000 yuan once adopted.