--- title: "If You Spent HK$7.3 Billion to Acquire Huiyuan Juice, What Would You Get?" description: "Huiyuan Juice's market value is HK$7.3 billion with a price-to-book ratio of only 0.61, despite holding a 56.5% share of China's 100% juice market and 42.7% of the medium-concentration juice market, ranking first for nine consecutive years. Acquiring it could yield a monopoly FMCG company with annual after-tax profits exceeding RMB 300 million and potential asset sale proceeds of RMB 2.8 billion, making it a compelling investment." author: "New Distribution" publisher: "New Distribution" email: "zhaobo258@gmail.com" telephone: "+8615854817671" published: "2016-10-10" categories: "Capital, Earnings & M&A" language: "en" canonical: "https://xinjignxiao.com/en/articles/if-you-spent-hk-7-3-billion-to-acquire-huiyuan-juice-what-would-you-get-cd5b1ac2/" markdown: "https://xinjignxiao.com/en/articles/if-you-spent-hk-7-3-billion-to-acquire-huiyuan-juice-what-would-you-get-cd5b1ac2.md" original_source: "https://mp.weixin.qq.com/s/32_rsyHkS1_OYAJTAPVoWg" translation: "https://xinjignxiao.com/zh/articles/%E5%A6%82%E6%9E%9C%E8%8A%B173%E4%BA%BF%E6%94%B6%E4%BA%86%E6%B1%87%E6%BA%90%E6%9E%9C%E6%B1%81-%E5%B0%86%E5%BE%97%E5%88%B0%E4%BB%80%E4%B9%88-cd5b1ac2.md" attribution: "New Distribution — https://xinjignxiao.com/en/articles/if-you-spent-hk-7-3-billion-to-acquire-huiyuan-juice-what-would-you-get-cd5b1ac2/" citation: "New Distribution. “If You Spent HK$7.3 Billion to Acquire Huiyuan Juice, What Would You Get?.” New Distribution, 2016-10-10. https://xinjignxiao.com/en/articles/if-you-spent-hk-7-3-billion-to-acquire-huiyuan-juice-what-would-you-get-cd5b1ac2/" usage_policy: "https://xinjignxiao.com/ai-policy.txt" --- # If You Spent HK$7.3 Billion to Acquire Huiyuan Juice, What Would You Get? > Huiyuan Juice's market value is HK$7.3 billion with a price-to-book ratio of only 0.61, despite holding a 56.5% share of China's 100% juice market and 42.7% of the medium-concentration juice market, ranking first for nine consecutive years. Acquiring it could yield a monopoly FMCG company with annual after-tax profits exceeding RMB 300 million and potential asset sale proceeds of RMB 2.8 billion, making it a compelling investment. **Epigraph: For some companies, I want to buy them all. I don't want to leave a single share for anyone else. — Warren Buffett** I have always felt that Huiyuan Juice's market position is extremely mismatched with its industry standing. According to Nielsen statistics, **Huiyuan holds a 56.5% market share in China's 100% juice segment and a 42.7% share in medium-concentration juice, ranking first in the industry for nine consecutive years.** Yet Huiyuan Juice's current market value is HK$7.3 billion, with a **price-to-book ratio of only 0.61.** Compare that to other well-known FMCG companies' P/B ratios: Uni-President at 1.69, Tingyi (Master Kong) at 2.39, and Dali at 3.96. They all dwarf Huiyuan in an instant. But feelings are just feelings; data speaks. If you think the valuation is low, consider this from another angle: **If you were to acquire Huiyuan Juice outright for HK$7.3 billion, what would you get? Would it be a good deal?** **Huiyuan's Unimpressive Surface Performance** Huiyuan Juice listed in 2007 and grew steadily from listing to 2015, with accelerated growth in 2015 due to the acquisition of Suntory, achieving an annualized growth rate of about 10%. **Its growth capability is not outstanding and is highly volatile (see Figure 1).** When factoring in Huiyuan's marketing expenses, the revenue growth appears even more incongruous—revenue growth lags far behind the increase in marketing spending. This indicates that **increased marketing expenses have not translated into revenue improvement.** One reason is that historically, incentives for marketing personnel were minimal, but in 2015, nearly half of the RMB 1.8 billion marketing expenses went to personnel incentives, showing that **Huiyuan has begun to emphasize marketing staff motivation.** In the first half of 2016, marketing expenses declined by 7%, yet revenue still grew by 3% **(see Figure 2)**. **Compared to the consistently growing revenue and rising gross margins, Huiyuan's net profit levels are almost appalling (see Figure 3):** From 2011 onward, Huiyuan's profits have been largely propped up by government subsidies. In 2014, government subsidies fell from RMB 225 million in 2013 to RMB 62.63 million, and profits immediately turned negative at RMB -127 million. In 2015, financing-related exchange losses reached RMB 235 million, widening the net loss to RMB 228 million. If not for higher government subsidies compared to 2014, the figures would have been even worse. Although the first half of 2016 showed a return to profitability, a closer look reveals that government subsidies still exceeded net profit. **The Two Mountains on Xi'er's Back** Revenue keeps growing, but net profit remains in the red. The surface reason is that marketing expenses haven't improved revenue, but the real story is **the two mountains that have weighed on Huiyuan for years: depreciation and interest expenses.** **Fixed asset depreciation expenses have been rising since 2008 and only began to decline in 2015. Interest expenses have been climbing since 2011 and remain at elevated levels (see Figure 4).** To understand why, we must revisit **the "monopoly injustice" case from eight years ago when Coca-Cola attempted to acquire Huiyuan—a deal that once shook China but nearly destroyed Huiyuan.** **On September 3, 2008, Coca-Cola announced it would acquire Huiyuan for US$2.4 billion, equivalent to HK$18.6 billion.** Chairman Zhu Xinli believed the acquisition was a done deal and had already prepared to focus solely on upstream operations as a juice raw material supplier, leaving downstream sales to Coca-Cola. To that end, he took two actions: First, at Coca-Cola's request, he **significantly cut marketing channels.** Anyone in marketing knows that building distribution channels takes time; cutting them is easy, but rebuilding is extremely difficult. **Later, the Ministry of Commerce blocked the acquisition on monopoly grounds, but Huiyuan's marketing channels were severely damaged** and had to be rebuilt from scratch. This is likely one reason why marketing expenses have failed to effectively boost revenue growth. It also led to weak channel control, as evidenced by its accounts receivable turnover days. In the first half of 2016, accounts receivable turnover reached 138 days—over four months—compared to just 9-10 days for Uni-President and Tingyi. As a result, **a significant amount of Huiyuan's capital is tied up in channels** (see Figure 5). **Second, in 2008, Huiyuan invested over RMB 2 billion to build new factories,** preparing to transform into an upstream pure juice raw material supplier. The consequence was that after the Coca-Cola acquisition fell through, Huiyuan faced severe overcapacity for years. In communications with investors, the company admitted that **its capacity utilization rate was below 30%.** **Prolonged overcapacity means, on one hand, mandatory depreciation charges,** and on the other, it ties up capital. With declining profitability unable to provide sufficient funds, Huiyuan had to borrow to sustain operations, leading to **another unavoidable chain reaction: rising financial expenses and interest costs.** Spending HK$7.3 billion would essentially buy something like this. To summarize: **If You Were to Get a Facelift, Would You Hire a Korean Doctor?** Before restoring Huiyuan's true appearance, let's briefly summarize its current state: > 1. Revenue growth is slow and mismatched with marketing expenses; economies of scale are not being realized. > 2. Channels are still under construction with poor control; accounts receivable turnover is alarmingly long, tying up substantial capital. > 3. Severe overcapacity ties up idle funds, and depreciation costs remain high. > 4. Capital is heavily tied up, profitability cannot provide sufficient funds, debt ratios are high, and financial expenses are rising. Now, let's hypothesize: **If you spent HK$7.3 billion to acquire Huiyuan Juice (assuming Chairman Zhu Xinli is willing to sell), would restoring its true potential be complicated?** From the summary, item 3 can and should be addressed immediately: sell off some excess capacity (or use sale-leaseback arrangements). Selling excess capacity would free up cash flow, reducing Huiyuan's need for external funds, which would immediately improve the financial expense issue in item 4, or even resolve it entirely. How much would it improve? Let's simulate. Since the overcapacity issue began with the 2008-2009 Coca-Cola acquisition, if Huiyuan were to dispose of excess capacity to bring its depreciation and interest expense ratios back to 2008 levels, **its true net profit over the past few years would look like this (see Figure 6):** **Pretty impressive, isn't it?** Especially given the overall consumer downturn in recent years, these figures are excellent. **It should be noted that the lower net profit in 2015 in the chart is mainly due to exchange losses from RMB depreciation,** which are non-recurring and should be excluded from valuation. Excluding that, Huiyuan's after-tax net profit in 2015 was over RMB 300 million, equivalent to more than HK$370 million. Against the current market value of HK$7.3 billion, the P/E ratio would be below 20 times. Currently, Uni-President's P/E is 22.4 times, Tingyi's is 51.6 times, and similar companies on the A-share market are valued even higher. The above calculations do not even account for proceeds from selling excess capacity. In 2008, Huiyuan invested heavily to expand capacity, and after the Coca-Cola deal fell through, it was left with a heavy burden. But there was a silver lining: **the land for the new factories was acquired at extremely low prices.** **Huiyuan has 28 juice production plants, 15 fruit processing bases, and 19 agricultural industrialization parks across the country.** Currently, Huiyuan's price-to-book ratio is only 0.61. Considering the appreciation of the land acquired in 2008, the real value of its assets far exceeds the depreciated book value (in my estimation, depreciation on much of the land may have been fully written off). Looking at the three subsidiaries previously disposed of, the final net profit from disposal was far greater than the book asset value—Shanghai and Chengdu both achieved over 5 times. Therefore, **Huiyuan's actual P/B ratio is certainly lower than the displayed 0.61, possibly much lower.** Unless the company plans to sell assets, the potential value of a low P/B cannot be realized. So, how much fixed assets would Huiyuan need to dispose of to restore its true potential? Rough calculation: First-half 2016 revenue was RMB 2.7 billion. If the depreciation expense ratio returns to the 2008 level of 6.1%, the depreciable assets for the first half of 2016 would be RMB 164.7 million. Over the past five years, Huiyuan's average fixed asset depreciation rate was 6.5%, implying fixed assets of around RMB 5 billion for 2016. As of the first half of 2016, Huiyuan's fixed assets (factories, etc.) were RMB 6.4 billion, meaning Huiyuan would need to dispose of RMB 1.4 billion in fixed assets. How much revenue would this generate? Referring back to the three disposed subsidiaries, **in areas with higher property price increases, the appreciation of factory premises is greater.** Shanghai and Chengdu were disposed of in 2013 with appreciation exceeding 5 times; Huanggang was disposed of in 2014. Given the real estate surge across the country in 2015 and the first half of 2016, the value of Huiyuan's remaining assets would only be higher. Conservatively assuming a 2x appreciation (I couldn't find the exact locations of all Huiyuan factories, so a more precise estimate isn't possible), disposing of these RMB 1.4 billion in fixed assets would yield nearly RMB 2.8 billion in gross profit. Thus, after spending HK$7.3 billion to acquire Huiyuan, with the simplest restructuring, you would **get a monopoly FMCG company with annual after-tax net profits exceeding RMB 300 million, plus RMB 2.8 billion in net proceeds from asset sales.** Even without considering asset sale proceeds, Huiyuan's P/E would be below 20 times, far lower than other FMCG companies like Uni-President and Tingyi. After disposing of excess capacity, management's energy would be freed up to focus on channel improvement and new product development, driving revenue and margin growth and enhancing Huiyuan's value. Is the above reasoning purely my own fantasy? Let's look at Huiyuan's stock price trend: Huiyuan's historical low was RMB 1.95 five years ago. Every time it falls to around RMB 2.7, it stages a strong rebound, **with each rebound multiplying the stock price several times, and the reason for the rebound has never been a turnaround in fundamentals.** In fact, since 2011, the company's net profit has been deteriorating. What does this indicate? **It shows that everyone is well aware of Huiyuan's true value: as a monopolist in the FMCG sector, as long as Mr. Zhu doesn't treat every old jar and pot in the house as treasure and throws a few out, Huiyuan's natural beauty will shine through.** That's the conclusion: **Spending HK$7.3 billion to buy it is like buying a compressed biscuit that's as dry as can be, and with a little processing** (for example, even just selling and leasing back, like Lenovo did with its Lenovo Research Institute building), **you can enjoy substantial profits and sit back collecting money.** Mr. Zhu has, intentionally or not, smeared a lot of coal ash on Huiyuan's beautiful face. **To give Huiyuan a facelift, it's as simple as bringing a basin of water and washing its face.** **Conclusion** Investors have a special fondness for food and beverage FMCG companies, based on **two classic "charms of FMCG":** > 1. Every FMCG brand with relative monopoly status today has crawled out of a pile of corpses. So, any FMCG brand that has achieved relative monopoly is essentially a long-term money tree. > 2. For FMCG products with low absolute value, consumers are not sensitive to price elasticity. Once relative monopoly is achieved, even slight price increases through various means (like launching new products, e.g., NFC, which is also a form of price increase) can significantly boost overall gross margins. Huiyuan fully fits these characteristics. **Eight years ago (September 3, 2008), Coca-Cola announced it would acquire Huiyuan for US$2.4 billion, equivalent to HK$18.6 billion, but the Ministry of Commerce blocked the deal.** After eight years of painful rebuilding and the real estate surge, I don't know what Coca-Cola's attitude would be if the HK$18.6 billion price tag were still on the table today. **But for me, my stance is clear: with Huiyuan's current market value of HK$7.3 billion, if I had the means, I would buy every single share—not leaving a single one for anyone else.** As Buffett said: **For some companies, I want to buy them all. I don't want to leave a single share for anyone else.** -END- China's best learning platform for FMCG distributors Dedicated to providing professional, practical, and actionable training for companies and distributors Committed to helping Chinese FMCG distributors grow rapidly **The most professional and practical knowledge base in the FMCG industry** Reply with the red number below to get corresponding content Reply with number 1 to view the complete knowledge base | **001** Featured Articles | **002** Distributor Market Operations | **003** Terminal Visit Management | **004** Sales Supervisor Skills | **005** Sales Boost Techniques | **006** Channel Expansion | **007** Distributor Management | **008** Distributor Development | **009** Distributor Internal Operations Management | **010** Team Management | **011** Efficient Distribution Techniques | **012** Sales Manager's 18 Skills | **013** KA Operations Strategies | **014** First Lesson for New Salespeople | **015** Internet, Brands | **016** Distributor B2B Transformation | [Long press QR code to follow] --- ## Citation metadata - Publisher: New Distribution - Author: New Distribution - Published: 2016-10-10 - Canonical: https://xinjignxiao.com/en/articles/if-you-spent-hk-7-3-billion-to-acquire-huiyuan-juice-what-would-you-get-cd5b1ac2/ - Original source: https://mp.weixin.qq.com/s/32_rsyHkS1_OYAJTAPVoWg ## Copyright and AI use This article is sourced from New Distribution. 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