Since January 1, 2017, the new salt reform policy has been implemented, and now more than a year has passed. During this year, some have cried, and some have smiled.

Recently, listed salt companies such as Yunnan Energy Investment, Lantai Industrial, and Jingshen Shares have released their first-year "report cards" after the salt reform. Today, we will examine these companies to see what the salt reform has brought to them and what impact it has had on the entire industry.

1 | First Year of Salt Reform | Salt Companies' Performance Mixed

From January 1, 2017, the ex-factory, wholesale, and retail prices of edible salt were liberalized, allowing enterprises to set prices independently. At the same time, the policy relaxed restrictions so that salt production enterprises could sell salt themselves, and provincial-level salt wholesale enterprises could sell salt across provinces. The implementation of the salt reform policy marked the full liberalization of prices for all salt products in China.

A year later, how are salt companies doing?

Recently, Yunnan Energy Investment, Lantai Industrial, and Jingshen Shares disclosed their 2017 performance reports.

Lantai Industrial, the largest salt production and sales company in Inner Mongolia, underwent technological transformation, industrial chain extension, and acquisition of major shareholder assets to resolve horizontal competition issues in 2017. It is expected that the net profit attributable to shareholders of the listed company for 2017 will increase by approximately 127.37 million yuan compared to the same period last year, an increase of about 152.95%.

Jingshen Shares, the largest well-salt production enterprise in Jiangsu, expects its net profit attributable to shareholders of the listed company for 2017 to increase by 150 million to 159 million yuan year-on-year, an increase of 653% to 693%.

Different companies have different fortunes. It can be seen that Lantai Industrial and Jingshen Shares experienced explosive growth in 2017, especially Jingshen Shares, which nearly multiplied its net profit sevenfold. However, another listed salt company, Yunnan Energy Investment, saw both its operating revenue and net profit decline in 2017, and both fell simultaneously.

Yunnan Energy Investment expects to achieve operating revenue of 1,446.9474 million yuan in 2017, a decrease of 0.55% from the previous year, and net profit attributable to shareholders of the listed company of 162.2388 million yuan, a decrease of 39.94% from the previous year.

Regarding the simultaneous decline in operating revenue and net profit, Yunnan Energy Investment explained that due to the salt reform, the revenue and profit from the salt segment were lower than the same period last year. After the implementation of the salt reform, although the sales volume of edible salt increased compared to the same period last year, the comprehensive average price of edible salt fell significantly due to intensified market competition, leading to a sharp decline in gross profit.

Yunnan Energy Investment's explanation clearly illustrates the two major changes that salt companies have undergone since the salt reform: first, cross-regional operations have changed sales volumes compared to previous years; second, the price of edible salt has dropped significantly.

2 What Did Salt Companies Experience in 2017?

The ability to sell salt across provinces dismantled the protective barriers between regions, and many salt companies began competing across provinces.

This also led to price wars. For example, in 2017, Haitian, located in Foshan, Guangzhou, to lower the purchase price of salt, conducted a national tender and ultimately obtained production salt that was originally over 800 yuan per ton for just over 400 yuan, greatly reducing salt costs. Hunan Salt Industry was the winner of this tender.

The sharp decline in salt prices caused many salt companies' gross margins to fall. In 2016, Hunan Energy Investment's gross margin was 59.97%, but by mid-2017 it had dropped to 42.52%, with the gross margin for salt and nitrate products falling from 69.76% to 54.45%.

Affected by the salt reform, Lantai Industrial's gross margin for salt products also declined, from 48.02% in 2016 to 32.17%.

In contrast, Jingshen Shares not only saw both operating revenue and net profit increase but also saw its gross margin rise, from 27.65% in 2016 to 31.22% by mid-2017.

The main reason for this difference is that Yunnan Energy Investment and Lantai Industrial were originally integrated production and sales enterprises, while Jingshen Shares was originally only a salt production enterprise without sales qualifications. After the salt reform, it could sell salt, and the sales segment became a major source of profit.

Generally, the ex-factory price of edible salt from designated production enterprises is often around 600 yuan per ton, but after going through the circulation chain, the price at which salt sales enterprises ultimately sell to supermarkets and other terminals is around 3,500 yuan per ton. The huge profit in between is captured by salt sales enterprises.

The 2017 salt reform can be said to be a huge boon for salt production enterprises. Jingshen Shares could also obtain high profits from the circulation segment, which directly boosted its 2017 profits.

For those salt companies whose "territories" were eroded by out-of-province salt companies and lacked the ability to expand outward, they had to accept the harsh reality of declining profits. Even if cross-provincial operations increased sales volume, the result was increased revenue but not increased profit. How are salt companies responding to this situation? Are they really helpless?

3 | How to Break the Deadlock | Salt Companies Cooperate and Huddle Together for Warmth

To resist "foreign invaders," different enterprises have different defensive strategies.

Jingshen Shares spent a huge amount to acquire the salt-related business of its controlling shareholder, Suyan Group, to independently engage in the production and sales of edible salt and gain greater profit margins.

Yunnan Energy Investment was not idle either. Shortly after the "Salt Industry System Reform Plan" was issued, Yunnan Energy Investment announced the establishment of a joint venture with Guizhou Salt Industry and Guangxi Salt Industry for strategic cooperation. Regarding the purpose of this cooperation, Yunnan Energy Investment clearly stated in its announcement that it is "conducive to fully leveraging the advantages of all parties, achieving complementary advantages and win-win cooperation, and has important and positive significance for enhancing the company's resource integration capability and comprehensive competitiveness, and realizing the company's development strategy." The real intention is to unite multiple parties, achieve cross-regional cooperation, form an oligopoly, and expand market share.

However, this salt reform dealt a fatal blow to Guiyang, a pure sales area. Previously, Guiyan Group mainly purchased salt from Hunan, Hubei, Yunnan, and Sichuan each year. Now these salt companies can directly enter Guizhou for sales, greatly compressing Guiyan's profit space. To survive, it had to cooperate with salt companies planning to enter Guizhou at the business level (production and sales cooperation), market level (regional cooperation), and strategic level (equity cooperation). The name of Guizhou Salt Industry appears prominently on the shareholder list of Hunan Salt Industry, and in exchange, Hunan Salt Industry can sell salt in Guizhou.

▲ Shareholding situation of Hunan Salt Industry shareholders

Currently, salt companies in various provinces are both cooperative and competitive. Strategic cooperation and mutual shareholding among salt companies are common. A new monopoly pattern is gradually taking shape.

Source: Condiment Business Circle (ID: twpsq0909) -END-