--- title: "If JDB and Mengniu Had Different Outcomes, Who Would Be the Biggest Beneficiary in the COFCO System?" description: "COFCO Packaging's acquisition of a 30% stake in JDB's subsidiary signals COFCO's deeper entry into JDB, potentially leading to full control. Drawing parallels with Mengniu's experience, the article suggests that while COFCO Packaging benefits initially, China Foods (506.HK) might be the ultimate winner if JDB's trajectory differs from Mengniu's." author: "飞鼠溪" publisher: "New Distribution" email: "zhaobo258@gmail.com" telephone: "+8615854817671" published: "2017-08-28" language: "en" canonical: "https://xinjignxiao.com/en/articles/if-jdb-and-mengniu-had-different-outcomes-who-would-be-the-biggest-benef-c65cf696/" markdown: "https://xinjignxiao.com/en/articles/if-jdb-and-mengniu-had-different-outcomes-who-would-be-the-biggest-benef-c65cf696.md" original_source: "https://mp.weixin.qq.com/s/Iq4bVZ5eVbVGbH2-ij-28w" translation: "https://xinjignxiao.com/zh/articles/%E5%A6%82%E6%9E%9C%E5%8A%A0%E5%A4%9A%E5%AE%9D%E4%B8%8E%E8%92%99%E7%89%9B%E6%9C%89%E4%B8%8D%E4%B8%80%E6%A0%B7%E7%9A%84%E7%BB%93%E5%B1%80-%E4%B8%AD%E7%B2%AE%E7%B3%BB%E8%B0%81%E6%98%AF%E6%9C%80%E5%A4%A7%E7%9A%84%E5%8F%97%E7%9B%8A%E6%96%B9-c65cf696.md" attribution: "New Distribution — https://xinjignxiao.com/en/articles/if-jdb-and-mengniu-had-different-outcomes-who-would-be-the-biggest-benef-c65cf696/" usage_policy: "https://xinjignxiao.com/ai-policy.txt" --- # If JDB and Mengniu Had Different Outcomes, Who Would Be the Biggest Beneficiary in the COFCO System? > COFCO Packaging's acquisition of a 30% stake in JDB's subsidiary signals COFCO's deeper entry into JDB, potentially leading to full control. Drawing parallels with Mengniu's experience, the article suggests that while COFCO Packaging benefits initially, China Foods (506.HK) might be the ultimate winner if JDB's trajectory differs from Mengniu's. Click on the image for details **1** **Will COFCO Take Over JDB?** On August 10, 2017, COFCO Packaging (906.HK) issued an acquisition announcement, planning to invest in 30% of Qingyuan JDB Herbal Plant Technology Co., Ltd., a wholly-owned subsidiary of JDB Group. Less than a week later, the Supreme People's Court publicly ruled on the appeal case between JDB and Wanglaoji regarding packaging and decoration disputes, determining that both parties made significant contributions to the formation of the "Red Can Wanglaoji Herbal Tea" packaging and decoration rights, and jointly share the red can packaging. This overturned the Guangdong High Court's 2014 decision that had awarded the red can to Guangzhou Pharmaceutical. On August 16, 2017, JDB issued a thank-you announcement with strong party spirit. Outsiders see the drama: JDB has been in litigation with Guangzhou Pharmaceutical for years, but with COFCO's backing, the problem was quickly resolved. Baiyunshan (600332.SH; 874.HK) fell in the afternoon, blaming Guangzhou Pharmaceutical's lack of influence. **To insiders, the capital story in this script is far richer than the gossip.** Regarding COFCO Packaging's acquisition of JDB, some market voices suggest that JDB owes COFCO too much debt, and COFCO can only acquire JDB's best assets through debt-to-equity swaps. **But if you carefully read JDB's thank-you letter, the party spirit reveals that the relationship between COFCO and JDB is not a forced debt-to-equity swap, and the tone subtly reflects COFCO's influence.** A guess: COFCO Packaging's acquisition of 30% of Qingyuan JDB is just the beginning of COFCO Group naturally entering JDB through business relevance. In the future, COFCO will likely take over JDB Group. Why would JDB be willing to sell to COFCO? In five words: **increase political capital.** For JDB, due to the original sin in the licensing process, the long-running lawsuits have been suppressed by Guangzhou Pharmaceutical. In Chinese society, a key reason is insufficient political capital. The prolonged litigation, mostly unfavorable to JDB, has significantly impacted JDB's performance. JDB is not listed, so detailed data is unavailable. According to JDB's published data, sales exceeded 20 billion yuan in 2012, with expected annual growth of 20-30%. However, according to the China Food Industry Association, 2016 sales were estimated at around 26 billion yuan, with a compound annual growth rate far below the company's expectations. For JDB's founder, Chen Hongdao, living abroad might be comfortable, but regaining freedom is more important; no one wants to live under the shadow of being a "fugitive." In November last year, 21st Century Business Herald reported, citing a source close to JDB's senior management, that JDB, under founder Chen Hongdao's direction, allied with Beijing Enterprises Group to prepare for a Hong Kong listing. This news was not confirmed, but such rumors indicate JDB is trying to increase its political capital. In terms of political capital, COFCO is clearly a better choice than Beijing Enterprises. When discussing leveraging COFCO to increase political capital, one must mention another national brand that was once in crisis: Mengniu Dairy. **2** **Mengniu's Increase in Political Capital** Mengniu and JDB share similarities: strong marketing capabilities, impressive growth curves... Mengniu was founded in 1999. Founder Niu Gensheng was formerly a vice president of Yili Group. Due to strategic differences with Yili's chairman, the 41-year-old Niu resigned and started his own business. From scratch, Niu Gensheng entered the top three dairy companies in just four years. Mengniu's sales were only 40 million yuan in 1999, but by 2007 they reached 21.3 billion yuan, surpassing Yili for the first time. Behind this was the industry factor: the explosion of China's liquid milk market. According to Bloomberg data, per capita annual liquid milk consumption in China was less than 6 kg in 1998, reaching 28 kg by 2007, a 3.7-fold increase. But more importantly, Mengniu was astute to the market. On October 15, 2003, when China's first astronaut Yang Liwei went to space, Mengniu became the sole milk sponsor, becoming the "Chinese astronauts' designated milk," a label that persists today. From 2004 to 2005, Super Girl became a phenomenon in Chinese television. Mengniu seized this marketing opportunity, greatly expanding brand influence. With successful marketing and the explosive growth of liquid milk, by 2007, 90% of Mengniu's revenue came from liquid milk, and it had been the market leader in liquid milk since 2003. According to Nielsen data, by 2007, Mengniu's liquid milk market share reached 40.7%, while the other two competitors combined only had 28.1%. Mengniu listed in 2004. From 2004 to 2007, the pursuer Mengniu brought investors returns far exceeding Yili. 2008 was a turning point. On September 11, 2008, the melamine incident erupted, plunging the entire Chinese dairy industry into crisis. Mengniu's stock price plummeted. Since Niu Gensheng had mortgaged 4.5% of Mengniu Dairy shares held by Laoniu Fund to Morgan Stanley, the shrinking market value put the mortgaged shares at risk of a margin call. If these mortgaged shares were sold by Morgan Stanley or transferred to hostile acquirers, they could become a key piece in determining control of Mengniu during this special period. The rapidly rising national brand Mengniu was thus in danger of being acquired by foreign capital. On October 18, Niu Gensheng, in tears, wrote a "10,000-word letter" of thanks, describing how Laoniu Fund obtained similar mortgage loans from institutions like Legend Holdings to release the mortgage with Morgan Stanley, resolving the pledge crisis. However, due to the milk powder incident, Mengniu lost 924 million yuan in 2008, while Yili lost 1.7 billion yuan the same year. This is odd: since 2007, Mengniu's sales scale exceeded Yili's. Why did Mengniu lose much less than Yili under the same industry catastrophe? There is a post on Zhihu that might explain the loss difference and subsequent development. But that might not be the whole story. For marketing-savvy Mengniu and Niu Gensheng, they knew the importance of channels. Not absorbing all losses could be another possibility: not unwilling, but unable. Mengniu had experienced a series of crises. As a private enterprise, it lacked the unlimited support of a "father" behind it. No one knew how long the winter would last. It was possible that after bearing some responsibility, cash reserves would be insufficient and the company would be dragged down. Between surviving and bearing the burden, many private owners would make the same decision. In February 2009, Mengniu's Telunsu OMP incident caused its stock price to fall over 12% in Hong Kong. On July 6, 2009, COFCO Group announced it would join with Hopu Fund to form a new company (COFCO holding 70%) to acquire 20% of Mengniu's shares for HK$6.1 billion, becoming the largest shareholder. In June 2011, Niu Gensheng officially resigned as chairman, and the founding team left the operational frontline. From the milk powder incident in September 2008 to COFCO's entry in July 2009, less than a year passed. Although Niu Gensheng said Mengniu did not cooperate with COFCO due to financial issues, the changes that year clearly made Mengniu realize the importance of increasing political capital. However, disappointingly, Mengniu, with increased political capital, did not retain its top position. After 2009, Yili's performance recovered quickly and surpassed Mengniu in 2012, reclaiming the top spot. In terms of profitability, Yili's gross margin has been higher than Mengniu's, especially since 2013, and its net margin has also been much higher since 2013. This is due to Yili's product structure upgrades from new product launches, with a higher proportion of high-end products. Notably, during this period, Yili was very astute in marketing, capitalizing on popular TV shows to boost brand influence, such as Ambrosial sponsoring "Running Man," QQ Star sponsoring "Dad, Where Are You Going?," and Yili Golden Song sponsoring "I Am a Singer 4." **After increasing political capital, Mengniu seemed less astute in marketing, and for mass consumer brands, marketing is a vital lifeline.** As a result, Yili's market value is currently 139 billion yuan, while Mengniu's is only 67 billion, less than half of Yili's. **3** **Will JDB Be Different?** From Mengniu's story, it seems JDB, with increased political capital, might not be worth much attention. But will people fall into the same trap twice? JDB's marketing team's strength is evident. COFCO is unlikely to make the same mistake and disrupt its marketing team, especially since Mengniu's market value, half of Yili's, is a constant reminder. After COFCO's new leadership took office, Mengniu underwent a new round of personnel changes, most notably the appearance of founder Niu Gensheng on the list of Mengniu's Strategy and Development Committee. Although not back on the frontline, this change shows the new COFCO leadership's emphasis on the team. **Therefore, COFCO is highly likely not only to avoid disrupting JDB's team but also to provide unexpected support.** The greatest support would be allowing Chen Hongdao to return and take the helm. A guess: Chen Hongdao offered the core asset Qingyuan JDB (producing concentrate) as a gesture of sincerity. What does he want? What does Chen Hongdao desire most? If JDB enters the COFCO system and its outcome differs from Mengniu's, then for investors, among COFCO's many shells, who would be the biggest beneficiary? At first glance, COFCO Packaging is an obvious beneficiary. "Water not flowing to outsiders' fields" – currently, about 40% of JDB's two-piece cans are produced by COFCO Packaging, and this could increase to 70% in the future. If JDB revives with the red can, COFCO Packaging's business will grow. COFCO Packaging has already completed mixed-ownership reform, with a balanced shareholding among COFCO Group, employees, and ORG, leaving limited room for further capital operations. But that's just business. From a capital integration perspective, especially during COFCO Group's reform period, if there were no larger exchange, why would COFCO settle the lawsuit and protect JDB's legitimacy? A concentrate company alone is too small a bargaining chip. **Therefore, COFCO Group must have deeper cooperation with JDB in the future to justify COFCO's intervention. The equity stake in the concentrate company and lawsuit settlement are just early events; more significant cooperation will follow.** Looking ahead, China Foods (506.HK) might be the bigger beneficiary. **COFCO Group's reform pilot plan announced in July 2016 can be summarized as merging similar items and professional operation. From China Foods' current asset transfer path, it is clearly heading in this direction.** China Foods originally had four main businesses: Coca-Cola bottling, Great Wall wine, Fortune Rice, and Le Conte chocolate. Among these, Coca-Cola contributed the most profit. In 2016, China Foods completed the divestiture of Le Conte chocolate. In 2017, it announced the divestiture of Fortune Rice, expected to be completed by year-end. From the perspective of merging similar items and professional operation, Great Wall will eventually be divested and merged with Jiugui Liquor into a liquor business. Thus, China Foods would be left with only a clean Coca-Cola beverage business. However, there is a political incorrectness: a company called "China Foods" would only have an American-flavored Coca-Cola business. Injecting a herbal tea brand or national brand like JDB would make the name "China Foods" more appropriate. **Look back at JDB's statement after the lawsuit settlement: "Actively respond to the national 'Belt and Road' initiative, strengthen and expand the herbal tea industry, and promote Chinese herbal tea culture worldwide." Do you understand this party-spirited statement?** State-owned enterprises have always been at the forefront of the Belt and Road. As a consumer goods company, COFCO Group politically needs a good case. If it truly acquires JDB, using China Foods (506.HK) as the operating entity for external capacity output, with Coca-Cola on one hand and JDB on the other, it would be unstoppable. By this point, most people can draw the only conclusion. Recently, Unicom's brilliant mixed-ownership reform plan amazed the market. Could COFCO Group, China Foods, JDB, and Coca-Cola also stage a stunning mixed-ownership reform? Currently, China Foods' equity is mainly held by COFCO, with clean business and clear equity, leaving ample room for mixed-ownership reform. Will there be such a surprise in the future? **4** **Conclusion** JDB can put on its red attire again. The gossip is rich, but the capital story behind it may be even more exciting. Whether from JDB's own performance or the needs of its owner Chen Hongdao, increasing JDB's political capital is the best choice. COFCO Packaging's stake in JDB through business relevance is just the first step for COFCO to enter JDB. In the future, COFCO will likely take over the entire JDB Group. Mengniu's lesson is as striking as the market value gap. If JDB gets a similar start as Mengniu, the outcome will likely be different. For investors, based on current clues, COFCO Packaging (906.HK) is a beneficiary; but from a longer-term capital action perspective, China Foods (506.HK) is more likely to be the final and biggest winner. Click on the image for details **The 3rd (CFIC) China FMCG + Internet Conference** will be held in Chongqing in October 2017. At this conference, New Distribution has invited **1,000+ distributors, 500+ brand owners, 200+ B2B platform founders, and 100+ investment institutions** to participate. The conference theme: **New Forces, New Ecosystem**. We will invite well-known B2B industry experts, mentors, and B2B platform founders to discuss the following topics: > **********How can the FMCG industry leverage B2B to achieve new growth opportunities** > > > > > **********How to build the new supply chain behind new retail** > > > > > **********How can intra-city logistics help B2B achieve leapfrog development** **Highlights of this conference:** > **The industry's first "2017 China FMCG B2B Industry Competitiveness White Paper"** > > > > > **B2B and investor project closed-door matchmaking meeting** > > > > > **********Conference venue + exhibition center, dual internet technology exhibition** > > > > > **********Leaders from Alibaba, Eternal Asia, Best Store Plus, Global Logistics, Unilever, Hd, Yunmei, and other well-known companies will deliver speeches with pioneering views.** October 17-18, 2017 Chongqing International Expo Center Registration is now open. Long press the QR code below or click "Read Original" to register. Early bird tickets before September 15 enjoy a 30% discount! Add friend with note "Conference Registration" Click the links below to review the highlights of the first and second FMCG + Internet conferences: 2016 "FMCG + Internet" Summit Forum 2017 (2nd) China FMCG + Internet Conference Click the links below to review the highlights of the first and second FMCG + Internet conferences: [2016 "FMCG + Internet" Summit Forum]() -END- --- ## Copyright and AI use This article is sourced from New Distribution. Search, quotation, summarization, and model training are permitted, but every use must credit New Distribution and retain the canonical source URL. Contact: zhaobo258@gmail.com · +86 158 5481 7671