---
title: "From a Small Vinegar Factory Twenty Years Ago to an Annual Output of 100,000 Tons: This Aged Vinegar is Now Aiming for an A-Share Listing"
description: "Shanxi Zilin Vinegar Industry Co., Ltd. (Zilin Vinegar), a vinegar producer, is preparing for an A-share IPO. The company, located in Qingxu County, Shanxi Province, known as the 'Capital of Vinegar in China,' is a high-tech enterprise in the brewing industry with microbial fermentation as its core technology. Its products include brewed vinegar, health vinegar, fruit vinegar, vinegar drinks, compound fruit juice drinks, and brewed cooking wine. It is a national key leading enterprise in agricultural industrialization with brewed vinegar as its main industry, and a standing director unit of the China Condiment Association."
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published: "2018-01-24"
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# From a Small Vinegar Factory Twenty Years Ago to an Annual Output of 100,000 Tons: This Aged Vinegar is Now Aiming for an A-Share Listing

> Shanxi Zilin Vinegar Industry Co., Ltd. (Zilin Vinegar), a vinegar producer, is preparing for an A-share IPO. The company, located in Qingxu County, Shanxi Province, known as the 'Capital of Vinegar in China,' is a high-tech enterprise in the brewing industry with microbial fermentation as its core technology. Its products include brewed vinegar, health vinegar, fruit vinegar, vinegar drinks, compound fruit juice drinks, and brewed cooking wine. It is a national key leading enterprise in agricultural industrialization with brewed vinegar as its main industry, and a standing director unit of the China Condiment Association.

Recently, Shanxi Zilin Vinegar Industry Co., Ltd. (Zilin Vinegar), a company producing vinegar, is preparing for an A-share IPO.
Shanxi Zilin Vinegar Industry Co., Ltd. (hereinafter referred to as 'Zilin Vinegar') is located in Qingxu County, Shanxi Province, known as the 'Capital of Vinegar in China.' It is a high-tech enterprise in the brewing industry with microbial fermentation as its core technology. Its main products include brewed vinegar, health vinegar, fruit vinegar, vinegar drinks, compound fruit juice drinks, and brewed cooking wine. It is a national key leading enterprise in agricultural industrialization with brewed vinegar as its leading industry, and a standing director unit of the China Condiment Association.
Among China's four famous vinegars—Shanxi Aged Vinegar, Zhenjiang Aromatic Vinegar, Fujian Yongchun Red Vinegar, and Sichuan Baoning Vinegar—Shanxi Aged Vinegar ranks first.
Vinegar was anciently called 'xi' (醯) or 'cu' (酢). The Rites of Zhou records 'xi people manage vinegar items,' indicating that brewed vinegar existed as early as the Western Zhou Dynasty. Jinyang (now Taiyuan) is the birthplace of vinegar in China.
Historically, vinegar workshops existed in Jinyang as early as the 8th century BC, and by the Spring and Autumn Period, they were widespread in cities and rural areas. By the Northern Wei Dynasty, Qi Min Yao Shu documented 22 methods of making vinegar. At that time, making and consuming vinegar had become a major topic in the lives of Shanxi people.
Today, Shanxi Aged Vinegar is ubiquitous in markets across the country, with common brands including Shuita, Zilin, Donghu, Yiyuanqing, Laifu, and Ninghuafu.
Zilin Vinegar is currently queuing for an IPO and is expected to be reviewed soon.
Its actual controller, Luo Jianchun, entered a vinegar factory at age 18 without finishing high school, and at 34 was sent to a small vinegar factory with only 20 employees to serve as its director.
Starting his entrepreneurial journey at 34, twenty years later, he developed this small factory into a vinegar giant with an annual output of 100,000 tons. Here are its performance figures:
From 2014 to the first half of 2017: revenue was 286 million, 331 million, 409 million, and 225 million yuan; non-GAAP net profit was 15.2589 million, 46.3629 million, 60.2322 million, and 35.6267 million yuan; net cash flow from operating activities was 74.7234 million, 96.2805 million, 101 million, and 32.4425 million yuan.
Looking solely at the condiment industry:
In China, there is Haitian Flavoring & Food, with a market value of 147.1 billion yuan. There is also the divine chili sauce, Laoganma, with annual sales exceeding 4.5 billion yuan, but unfortunately Laoganma is not listed.
In the US stock market, there is the divine ketchup Heinz, which merged with Kraft to become Kraft Heinz, with a market value of over 94 billion US dollars. Warren Buffett is quite optimistic about this sector, holding 616.17 million shares of Kraft Heinz, accounting for 50.6% of the float. Kraft Heinz also made a big move this year, attempting to acquire Unilever for 143 billion US dollars, but unfortunately failed.
Additionally, there is McCormick, a Western condiment giant and one of the world's largest spice suppliers, with a market value of 13.3 billion US dollars.
In Japan, there is the soy sauce giant Kikkoman, with a 360-year history, annual revenue exceeding 400 billion yen, and net profit reaching 20 billion yen.
Where there are people, there are condiments; this is an evergreen industry. Salt, soy sauce, vinegar, sauces, MSG, sugar (discussed separately), star anise, fennel, Sichuan pepper, mustard...
Today, we start with Zilin Vinegar to examine the business logic and financial characteristics of the entire condiment industry.
— 1 —
From a Small Vinegar Factory Worker to the Actual Controller of a 100,000-Ton Vinegar Enterprise
Jiuding is its Third Largest Shareholder
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Zilin Vinegar, established in 2000, is controlled by Luo Jianchun and his wife, holding 71.16% of the equity. PE giant Jiuding is its third largest shareholder, holding 8.67%.
Luo Jianchun (from Qingxu, Shanxi)
In 1964, Luo Jianchun was born in Qingxu County, a small county with the reputation of 'China's Vinegar Capital.'
In 1981, before graduating from high school, Luo Jianchun started working at the Qingxu County Vinegar Factory, where he stayed for 17 years.
In 1992, the national control over China's condiment industry began to gradually loosen, and the entire industry underwent intense reshuffling, with small condiment workshops gradually being cleared from the market.
In 1997, at age 34, Luo Jianchun got an opportunity: he was sent to Renyi Village to serve as the director of the Shanxi Aged Vinegar branch factory.
This small branch factory had only over 20 employees and 30,000 yuan in funds. Before him, eight directors had come and gone; the longest served two years, the shortest one month.
Someone joked to Luo Jianchun, 'Old Luo, you are the ninth president.' But this 'ninth president' managed to revitalize the small vinegar factory.
In 1999, the industry winter that had been particularly harsh for small condiment enterprises finally ended, and the industry began to recover. State-owned condiment enterprises underwent reform, being sold to management.
In 2000, Luo Jianchun converted this small factory into a private enterprise, which was the predecessor of Zilin Vinegar—Jinyuan Aged Vinegar.
In 2003, the condiment industry entered a period of rapid development.
In 2012, Jinyuan Aged Vinegar was renamed Zilin Vinegar.
Luo Jianchun started working in a vinegar factory at 18, and after 37 years, his 'Zilin Vinegar' was established the latest but can now keep pace with the time-honored brands of 'Shanxi Aged Vinegar.'
In 2016, Zilin Vinegar produced 147,400 tons of vinegar, becoming one of the three vinegar enterprises in China with an annual output exceeding 100,000 tons.
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— 2 —
One of the Financial Report Codes for Condiment Enterprises: Distribution Model, Upstream and Downstream Bargaining Power: Advance Receipts
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Let's directly look at Zilin Vinegar's performance: From 2014 to the first half of 2017, revenue was 286 million, 331 million, 409 million, and 225 million yuan; non-GAAP net profit was 15.2589 million, 46.3629 million, 60.2322 million, and 35.6267 million yuan; net cash flow from operating activities was 74.7234 million, 96.2805 million, 101 million, and 32.4425 million yuan.
▼
During the reporting period, revenue growth was quite fast, with a three-year compound growth rate of 12.66%, and the quality of earnings was also good, with operating cash flow in each period higher than net profit.
The condiment industry, in which Zilin Vinegar operates, generally adopts a distribution model, i.e., 'selling out' to distributors, with payment and goods settled, no outstanding accounts, and few accounts receivable. Therefore, from a financial data perspective, enterprises adopting this sales model have good earnings quality.
But from an investment institution's perspective, analyzing only revenue, profit, and cash flow is far from sufficient.
Taking Zilin Vinegar as an example, first look at the upstream: its upstream is agricultural product traders, with raw materials such as sorghum, rice, rice husks, and bran. These raw materials are highly available, so the enterprise does not need to stockpile raw materials in advance and can be relatively strong against the upstream.
Next, look at the downstream: its downstream is distributors. For distributors, Zilin Vinegar's aged vinegar has a relatively long production cycle, generally 2-6 months, and a shelf life of about 1 year, so it is generally not possible to buy spot goods.
But if distributors buy goods from other manufacturers, once consumers are not satisfied, they bear the risk of expiration themselves. Therefore, for products with strong market competitiveness and high demand, distributors are willing to prepay.
According to this business logic, the upstream-downstream relationship in this case can be seen through a financial account—advance receipts.
From 2014 to 2016, Zilin Vinegar's advance receipts were 25.3843 million, 31.826 million, and 35.1279 million yuan, accounting for 8.87%, 9.63%, and 8.59% of revenue, respectively. In the vinegar sector, the more advance receipts, the stronger the enterprise's bargaining power over the downstream.
Ranking the three vinegar-making enterprises on the A-share market by the proportion of advance receipts to revenue in 2016, Jiajia Food has the strongest bargaining power, and its market value is also the highest.
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(Data source: Company annual reports, Youshu Investment Research Team)
— 3 —
The Second Financial Report Code for Condiment Enterprises: On Growth and Expansion: Construction in Progress
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An interesting phenomenon in the vinegar industry: among the four famous vinegars, only Hengshun Vinegar, which makes Zhenjiang Aromatic Vinegar, is listed.
In terms of fame, Zhenjiang Aromatic Vinegar is slightly inferior to Shanxi Aged Vinegar; in terms of unique flavor, each of the four vinegars has its own merits, but only Hengshun Vinegar is listed and now the most widely spread.
A major reason lies in geography. Taking Zilin Vinegar as an example, the craft of Shanxi Aged Vinegar is a proprietary secret, and the production process and geographical environment are quite particular. If made in a different place, the vinegar may not taste the same. Moreover, its brand is deeply associated with Shanxi, which means it can only develop in its place of origin.
Imagine: if you buy Shanxi Aged Vinegar and see that the place of origin is Guangdong, wouldn't you immediately think it's not authentic? This situation means that if a vinegar enterprise wants to expand, it cannot rely heavily on external mergers and acquisitions; it can only expand capacity by building factories locally.
Among the four famous vinegars, Hengshun Vinegar, located in Zhenjiang, Jiangsu, clearly has an advantage in geographical environment.
Following this phenomenon, if you want to focus on Zilin Vinegar's future growth, then fixed assets and construction in progress on the balance sheet are a very important window. Through this window, you can see the second code of the vinegar industry's financial reports.
The impact of fixed asset depreciation on profit has been analyzed multiple times by the Youshu Investment Research Team, and this research report will not elaborate. For this case, a more important account is the preparatory item for fixed assets—construction in progress.
Due to the special attributes of the vinegar industry, construction in progress, in a sense, reflects the enterprise's growth space. Distributors rush to prepay for orders, but only when factories are built can capacity be increased. Otherwise, no matter how good the business is and how supportive the distributors are, if there are no goods to sell, performance still cannot improve.
In this case, during the reporting period, Zilin Vinegar's capacity utilization rate reached over 90%, but currently it only has 4.1224 million yuan in construction in progress, accounting for 0.7% of fixed assets. In this IPO, it plans to use 68.31% of the raised funds, 235 million yuan, to build factories and expand capacity.
Therefore, if you are interested in it, after its IPO, construction in progress is an accounting item you need to pay close attention to, because it is directly linked to its future performance. The cycle of construction in progress and when it is transferred to fixed assets are information you need to watch.
Using construction in progress as a window, looking at all listed condiment companies on the A-share market, Hengshun Vinegar, which makes vinegar, does not rank high.
The top three are Haitian Flavoring & Food, Zhongju Hi-Tech, and Jiajia Food. It is worth mentioning that these three all make soy sauce and are the three highest market value companies in the condiment industry.
This is understandable: in daily life, consumers use soy sauce in the most scenarios, so the industry ceiling for soy sauce is higher, and it is easier for large companies to emerge. In addition, when buying soy sauce, users generally do not have the habit of checking the place of origin, so soy sauce enterprises face fewer geographical restrictions when expanding.
— 4 —
After Looking at Vinegar Enterprises, Let's Think About the Entire Condiment Industry
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The history of Chinese people using condiments can be traced back at least 3,000 years. By the pre-Qin period, there were records such as 'Harmony is like a soup, with water, fire, vinegar, salt, and plums, to cook fish and meat.'
Condiments are a quite impressive good business. They are anti-cyclical (regardless of economic cycles, they must be consumed), have a high ceiling (where there are people, there are condiments), and have a wide moat (brand, scale advantages, and dependence on consumption habits).
In 2014, the output value of China's condiment industry was 264.9 billion yuan, with a five-year compound growth rate of 18.4%, the fastest among all sub-sectors of food and beverages.
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(Data source: WIND, Qilu Securities Research Institute)
First, let's divide the condiment industry into five sub-sectors:
Soy sauce (e.g., Haitian Flavoring & Food, Zhongju Hi-Tech);
Vinegar (e.g., Hengshun Vinegar, Zilin Vinegar);
Sauces (e.g., oyster sauce from Haitian Flavoring & Food, ketchup from Heinz, chili sauce from Laoganma);
Seasoning powders (e.g., Lotus Health, Jialong Shares, Anji Food);
Then, we look at these sub-sectors from four aspects: market ceiling, replicability and expansion, product shelf life, uniqueness of taste and flavor, and product pricing power.
Soy sauce industry—highest market ceiling (most usage scenarios in cooking), strong expandability (weak geographical attributes), high uniqueness of taste and flavor, high pricing power, shelf life of about 1 year. Representative A-share listed companies: Haitian Flavoring & Food, Zhongju Hi-Tech, Qianhe Flavoring & Food, Jiajia Food.
Vinegar industry—large market capacity (but fewer usage scenarios than soy sauce), weak expandability (due to strong brand geographical attributes), high uniqueness of taste and flavor, low pricing power, shelf life of about 1-2 years. Representative A-share listed company: Hengshun Vinegar.
Sauce industry—large market capacity (but related to regional consumption habits, e.g., in China it's Laoganma chili sauce, while overseas it's Heinz ketchup), strong expandability, high uniqueness of flavor, high pricing power, shelf life of about 1 year. Representative A-share listed companies: for oyster sauce, Haitian Flavoring & Food on A-shares; for ketchup, Kraft Heinz on US stocks.
Seasoning powder industry—large market capacity, strong expandability, long shelf life (generally 3 years), but low uniqueness of flavor, leading to low pricing power. Representative A-share listed companies: Lotus Health, Jialong Shares.
In summary, among these sub-sectors, soy sauce and sauces are the best businesses in the condiment industry.
(Note: The shelf life of soy sauce and oyster sauce is similar to vinegar, so we still use the ratio of advance receipts to revenue to look at companies in these two sub-sectors. Since seasoning powder products have a relatively long shelf life, the revenue share of advance receipts cannot be directly compared with soy sauce, vinegar, and oyster sauce companies.)
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(Chart: Youshu Investment Research Team)
In summary, Haitian Flavoring & Food is clearly the best target (you can also verify with basic financial indicators such as revenue, profit, ROE, etc.). In addition, Kraft Heinz and McCormick on US stocks are also worthy of attention.
Furthermore, due to the relatively long shelf life of seasoning powder products, the revenue share of advance receipts cannot be directly compared with soy sauce, vinegar, and oyster sauce companies.
As for the research subject of this case, Zilin Vinegar, it also has relatively strong bargaining power over the downstream, but constrained by capacity, its scale is still relatively small during the reporting period. In the future, attention should be paid to the 'construction in progress' account in financial reports. Moreover, this IPO faces many issues, and whether Zilin Vinegar can pass the review remains uncertain.
— 4 —
Several Major Issues in the IPO
Large Amount of Third-Party Payments
Not Only Not Cleaned Up, but the Proportion Is Increasing
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In this IPO, Zilin Vinegar has a quite serious problem—third-party payments.
From 2014 to the first half of 2017, Zilin Vinegar's third-party payment amounts were 174 million, 232 million, 306 million, and 160 million yuan; as a proportion of total payments, they were 57.82%, 61.42%, 66.69%, and 67.18%.
Note that the amount of third-party payments increased year by year, and the proportion also increased year by year. Such non-standard collection behavior is a major taboo in IPO review.
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Regarding the minefield of third-party payments, you must thoroughly understand the following data.
Reviewing the 482 IPO application cases reviewed by the 16th and 17th Issuance Examination Committees of the CSRC from January 1, 2017 to date, 17 companies were explicitly identified as having third-party payment behavior, of which 9 passed, 8 were rejected, with a rejection rate of 47.06%.
From the rejection cases, the data speaks for itself:
1) Under the distribution model, if companies with third-party payments do not disclose specific amounts and proportions, the probability of rejection soars.
2) Under the distribution model, for companies with third-party payments to pass, the proportion of third-party payments should ideally decline year by year. The only exception so far is Six Walnut, with a net profit of 2.7 billion yuan, but it had to attempt IPO four times and was once postponed due to this issue.
3) For companies adopting the distribution model and mainly selling overseas, once third-party payments exist, the probability of rejection soars.
4) Since the new Issuance Examination Committee took office, only Yangyuan has passed with third-party payments.
In this IPO, we will wait and see whether Zilin Vinegar can succeed.
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