China's new milk powder policy has accelerated industry reshuffling, putting former leading domestic milk powder stock Beingmate under multiple pressures. After two consecutive years of net losses totaling 1.8 billion yuan, Beingmate has entered a difficult battle to maintain its listing status. From the former 'leading domestic milk powder maker' to the 'biggest loser in the dairy industry', founder Xie Hong, who had previously stepped down due to illness, has returned, but time is running out for him and Beingmate.

'Face-Changing King' Beingmate Warned for Financial Fraud

When it rains, it pours. For Beingmate, once a star domestic milk powder company but now in a difficult 'shell protection battle', measures such as selling properties, selling subsidiaries, and obtaining government subsidies have failed to stop the decline in performance. After a net loss of 1.056 billion yuan in 2017, Beingmate still could not avoid the ST label.

Moreover, penalties from regulators have added insult to injury. On June 4, the Zhejiang Securities Regulatory Bureau disclosed a decision to issue warning letters to Beingmate Infant Food Co., Ltd. and related personnel, citing internal control deficiencies, non-standard financial management, and imprudent 2017 performance forecasts. Among the financial management issues, Beingmate's controlling shareholder, Beingmate Group Co., Ltd.'s subsidiary Hangzhou Hongsheng Yuhang Industrial Co., Ltd. paid a total of 71.63 million yuan to 16 units including Korla Minghui Trading Co., Ltd. in September 2017. These 16 companies then transferred the 71.63 million yuan into the listed company's account, and Beingmate returned the total 71.63 million yuan to these 16 units in October and December 2017. The Zhejiang Securities Regulatory Bureau pointed out that these fund flows lacked substantive transactions. In the view of industry insiders, this behavior is a typical case of a listed company inflating performance, essentially a form of financial fraud. 'It is estimated that they saw no hope of turning losses around in 2017 and returned the funds.'

The Zhejiang Securities Regulatory Bureau also noted that when forecasting 2017 performance, Beingmate was not prudent in accruing inventory write-downs, bad debt provisions for accounts receivable, and estimated liabilities, under-accruing by about 300 million yuan compared to the 2017 annual report, leading to inaccurate performance forecasts. Beingmate has frequently been questioned by regulators for drastic performance changes. Since 2013, Beingmate has experienced seven performance 'face changes' in four years, earning the title of 'Face-Changing King' and being labeled as dishonest.

Internal Management Chaos Is the Main Cause of Huge Losses

It seems to be caught in a vicious cycle: performance losses have caused Beingmate's stock price to plummet and market value to shrink significantly. As of yesterday's close, Beingmate's market value was 4.918 billion yuan, a sharp decline from the peak of over 30 billion yuan in 2015.

After selling two properties, selling subsidiaries, and obtaining government subsidies, Beingmate, listed for seven years, still failed to stop the decline. Where does Beingmate's problem lie?

Regarding the 2017 performance decline, Beingmate stated that the reasons were that formula registration was not released at the expected time, the industry order remained chaotic during the transition period of the new milk powder registration system, the company faced fierce market competition, and channel distributors adopted a cautious wait-and-see attitude, leading to a decline in current sales revenue. Additionally, market investment costs increased and accounts receivable collection was unfavorable.

However, in the view of industry insiders, internal factors such as chaotic management and channel confusion are the root causes of Beingmate's huge losses. Beingmate frequently changed its leadership, with three professional managers in seven years. 'Although founder Xie Hong stepped back to the second line, he has been controlling Beingmate behind the scenes. He does not fully trust the professional managers he hired,' a former Beingmate executive told Beijing Morning Post reporters.

Beingmate's deteriorating performance has intensified conflicts with Fonterra. In 2015, Fonterra invested 3.5 billion yuan at 18 yuan per share to become Beingmate's second-largest shareholder. However, the honeymoon period was short-lived. After Beingmate issued its performance correction announcement this year, Fonterra publicly stated, 'We are extremely disappointed with this announcement and Beingmate's long-term performance.' Fonterra also said that under the new formula registration rules, Beingmate, which has 51 infant formula formulas, did not maximize the opportunities brought by early registration approval.

Can Founder's Return Save Beingmate?

'The listed company has stumbled, and I am returning to the front line without hesitation,' Xie Hong said in an internal letter to all employees on May 18. On that day, Xie Hong was re-elected as chairman of the listed company after a seven-year hiatus, writing on WeChat Moments, 'Starting over at 53.'

The founder's return is seen as the last bargaining chip for Beingmate in its 'shell resource defense battle.' 'Beingmate needs thorough reform,' Xie Hong once said. In addition to protecting the shell, Beingmate will comprehensively restructure its channels, systems, teams, brand, culture, and goodwill.

Although Xie Hong appears confident, for Beingmate, which missed the golden period of the infant formula market, completing the shell protection task this year is not easy.

'Given its loss of 960 million yuan last year and revenue of about 2.6 billion yuan, it must make a profit of at least 1 billion yuan this year to turn around, and revenue must increase by at least 2 billion yuan to reach at least 5 billion yuan to be profitable,' said dairy expert Wang Dingmian, who believes that Beingmate's goal of turning losses into profits this year is very difficult.

Beingmate's first-quarter 2018 report shows that the company's fundamentals continued to deteriorate. In the first quarter, revenue fell 35.8% year-on-year to 544 million yuan, net profit dropped from 10.92 million yuan in the same period last year to 7.915 million yuan, and after deducting non-recurring gains and losses, the company suffered a huge loss of 40.736 million yuan, a year-on-year decline of 443.85%.

Clearly, the first-quarter performance is unlikely to improve, and time is running out for Xie Hong and Beingmate.

Source: Beijing Morning Post -END-