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Failed merger with Huiyuan and a sharp drop in net profit are not the end for Tiandi No.1.

On July 29, Tiandi No.1 (832898.OC) released its 2019 semi-annual report, showing that in the first half of 2019, Tiandi No.1 achieved operating revenue of 766 million yuan, a year-on-year increase of 28.96%; net profit was -8.21 million yuan, a year-on-year decrease of 357.21%.

Just a few days earlier, Tiandi No.1 had ended its restructuring plan with Huiyuan—a cooperation that Tiandi No.1 founder Chen Sheng had described as "a strong alliance between China's fruit vinegar giant and China's fruit juice giant, complementing each other's advantages." This deal, which outsiders had dubbed a "snake swallowing an elephant," ultimately fell through because "the conditions for the transaction may not yet be mature."

The failed merger with Huiyuan and the sharp drop in net profit are not the end for Tiandi No.1. As a company focused on fruit vinegar, Tiandi No.1 also faces the threat of beverage giants such as PepsiCo entering the fruit vinegar field.

Rising selling expenses are hard-pressed to support performance growth

Regarding the reasons for the sharp drop in net profit and the swing to a loss, Tiandi No.1 explained: "The main reason for the decline in net profit is the company's increased market expense investment. In the first half of 2019, selling expenses increased by 36.73% year-on-year."

A review of Tiandi No.1's financial reports over the years by a reporter from China Times found that the company's selling expenses have been on an upward trend. From 2016 to 2018, selling expenses were 458 million yuan, 548 million yuan, and 779 million yuan, respectively, with year-on-year increases of 29.75%, 19.65%, and 42.15%. During the same period, the company's total operating revenue was 1.401 billion yuan, 1.711 billion yuan, and 2.117 billion yuan, with year-on-year changes of -11.00%, 22.13%, and 23.73%.

From the data, Tiandi No.1's selling expense investment has not injected much momentum into performance growth. Even in 2016, when selling expenses grew by nearly 30%, revenue actually declined.

Tiandi No.1's financial report shows that in the first half of 2019, the company's selling expenses were 402 million yuan, a year-on-year increase of 36.73%. Among them, to increase product promotion and market expansion, labor costs increased by 24.95% year-on-year; due to the increase in total product sales tonnage, transportation/loading and warehousing costs increased by 28.26% year-on-year; and the intensity of free sample promotions in the first half increased compared with the same period last year, up 214.09% year-on-year.

History tends to repeat itself. While selling expenses increased significantly, Tiandi No.1's total revenue in the first half of 2019 was 766 million yuan, only a slight increase of 7.20% compared with the same period in 2018.

Failing to boost revenue, the heavy selling expenses instead eroded Tiandi No.1's profits. From 2016 to 2018, the company's net profit growth rates were -48.42%, 34.65%, and 10.75%. The input-output ratio remains far from optimistic. In the first half of 2019, the company achieved a net profit of -8.21 million yuan, a sharp drop of 357.21% compared with 3.19 million yuan in the same period last year.

Tiandi No.1 admitted that the company may incur higher-than-expected expenses in business expansion and new market development, including but not limited to marketing expenses, and cannot guarantee that its market expansion will proceed smoothly. If the company's plans to expand into new markets and promote new products fail, the company's business, financial condition, operating results, and prospects may be adversely affected.

Shen Meng, director of Chanson Capital, analyzed that due to the lack of product barrier advantages, Tiandi No.1 has relied on high selling expenses to support performance growth in recent years. Once the selling expense investment is withdrawn, Tiandi No.1 will inevitably face survival problems.

Tiandi No.1's public data shows that in 2018, the company mainly generated revenue from two products, "330 Apple Cider Vinegar" and "650 Apple Cider Vinegar," accounting for 95.24% of total revenue.

Failed "marriage" with Huiyuan

Recently, for Tiandi No.1, it has undoubtedly been a period of "leaking roof and continuous night rain." Just a few days before the release of the semi-annual report, Tiandi No.1 had just ended its restructuring plan with Huiyuan.

On April 26, 2019, Huiyuan Juice (01886.HK) announced that it had signed a cooperation framework agreement with Tiandi No.1 and Guangzhou Hezhi to establish a joint venture. According to the framework agreement, Tiandi No.1 and others would contribute 3.6 billion yuan in cash to the potential joint venture, holding 60% of the shares; Huiyuan Juice would contribute 2.4 billion yuan in assets, including the "Huiyuan" trademark.

Although there was no shortage of external evaluations calling Tiandi No.1's move a "snake swallowing an elephant," the parties involved were "mutually compatible." On April 29, Tiandi No.1 founder Chen Sheng publicly stated to the media for the first time: "The cooperation between Tiandi No.1 and Huiyuan is a strong alliance between China's fruit vinegar giant and China's fruit juice giant, complementing each other's advantages. It is not a sellout, nor is it a snake swallowing an elephant."

Huiyuan Juice stated that the company and Tiandi No.1 achieve complementary advantages in product categories, marketing regions, and marketing channels, which is conducive to better expanding and developing the fruit juice beverage business, thereby consolidating and accelerating the group's overall growth and development in the future.

But in less than three months, on July 16, Huiyuan Juice announced that the company believed that the conditions for further advancing the transactions proposed under the agreement might not yet be mature. The cooperation framework agreement was valid for 60 days from the date of its signing. Since the parties did not enter into a final agreement within that 60-day period, the cooperation framework agreement automatically terminated and no longer had any effect.

Regarding this failed "marriage," Shen Meng, director of Chanson Capital, commented that Tiandi No.1 has relied on marketing to support performance growth in recent years and urgently needs a platform like Huiyuan, which has products, brands, and a mature distribution channel system, to find a foothold for continued development. Tiandi No.1 wanted to use the platform built by Huiyuan, while Huiyuan wanted to shed its heavy burden. Both sides had their own demands, but it was difficult for them to compromise with each other, so the possibility of reaching cooperation was not high.

Northern expansion strategy fizzles

Tiandi No.1 has also had its moments of glory. According to data, in 1997, Tiandi No.1 founder Chen Sheng developed and launched the first bottle of vinegar beverage under the Tiandi No.1 brand. In November 2007, Tiandi No.1 apple cider vinegar beverage was officially launched. In 2015, Tiandi No.1 was listed on the New Third Board, and on November 17 of that year, the company's stock price once rose to 33 yuan per share. After a brief peak, Tiandi No.1's stock price began to decline in 2016, even falling below 10 yuan in 2018.

At the time of its listing in 2015, Tiandi No.1's market value once reached 10 billion yuan. After 2016, Tiandi No.1's market value continued to decline, and as of September 9, 2018, its market value was only 4.43 billion yuan, a shrinkage of nearly 6 billion yuan.

If one were to find the turning point in Tiandi No.1's fate, the northern expansion strategy could be considered one. In March 2016, based on the Guangdong market, Tiandi No.1 announced the launch of its northern expansion strategy, saying, "Sharpening swords and blowing the charge, opening a new chapter of comprehensive northern expedition."

The first to react to the northern expansion strategy were the company's financial figures. According to Tiandi No.1's financial report, in the first half of 2016, the company achieved total revenue of 451 million yuan, a year-on-year decrease of 29.49%, and net profit of 40.9 million yuan, a year-on-year decrease of 72.40%.

Exchanging performance for northern market share, Tiandi No.1 was clearly satisfied with this result. The company stated: "The accelerated progress of the northern expansion plan has had a certain impact on the sales team. Newly expanded markets include Hubei, Anhui, Fujian, and other places. By the first half of this year, more than 100 county-level markets had been developed, far faster than expected."

At present, Tiandi No.1's northern expansion seems to be running out of steam. In 2018, traditional markets such as Guangdong, Guangxi, and Hainan achieved revenue of 1.753 billion yuan, accounting for 82.82% of total revenue; while emerging markets contributed 356 million yuan in revenue after three years of the northern expansion plan, accounting for 16.80% of total revenue; in 2017, emerging markets' revenue accounted for 13.08% of total revenue.

While the new territory had not yet been conquered, the home front was nearly stolen. While Tiandi No.1 was busy with the northern expansion, foreign invaders were eyeing the fruit vinegar market—in August 2017, Pangaoshou Pharmaceutical under Guangzhou Pharmaceutical Group, together with Guangdong Guanbao Beverage Co., Ltd., launched Pangaoshou apple cider vinegar beverage; in March 2018, Huiyuan, based on traditional apple cider vinegar beverages, added tangerine peel and honey to release tangerine peel apple cider vinegar beverage; in August 2018, PepsiCo launched "Vinegar Talk" fruit vinegar sparkling beverage...

On July 31, a China Times reporter called Tiandi No.1's board secretary office regarding issues such as the impact of selling expenses on performance. The relevant person claimed to have conveyed the questions to the responsible person. Meanwhile, the reporter sent related questions to Tiandi No.1's company email, but as of the publication date, no reply had been received.

Source: China Times (ID: chinatimes)