Source: Sina Finance The vinegar business is not doing well, and Hengshun Vinegar Industry has set its sights on compound seasonings. On November 11, Hengshun Vinegar Industry announced that it plans to raise no more than 2 billion yuan through a private placement to invest in expansion and supporting projects for its vinegar, cooking wine, soy sauce, compound seasonings, and other businesses, as well as to supplement working capital. Regarding the purpose of this private placement, Hengshun Vinegar Industry stated that in recent years, as the market share of its products has further expanded, orders on hand have increased, and the need to form a product matrix through category expansion has become increasingly urgent. The contradiction between existing production capacity and market demand has gradually become prominent. Through this issuance, the company will effectively alleviate the existing capacity bottleneck, achieve multi-variety layout, seize more market share, and realize the leap from a leading vinegar enterprise to a leading seasoning enterprise. In the context of the seasoning industry gradually moving towards cross-category competition, diversification seems to be an inevitable choice, but the effectiveness of diversification is also more difficult to predict. The vinegar business is not doing well According to data, Hengshun Vinegar Industry is located in "China's Vinegar Capital"—Zhenjiang, Jiangsu Province. It is currently the only A-share listed vinegar company in China, mainly engaged in the research, development, production, and sales of vinegar, cooking wine, soy sauce, compound seasonings, and other series of products. Currently, Hengshun's vinegar product sales account for about 80% of total revenue, making it the company's main source of income; cooking wine product sales account for about 17% of total revenue, while soy sauce and compound seasonings businesses have not yet formed a large scale. It is worth mentioning that in addition to expanding production to enrich categories and seize market share, Hengshun's product prices will also be further increased. On November 2 this year, the company announced that due to significant increases in raw materials, transportation, and other costs, it decided to adjust prices for some products starting from the 20th, with adjustments ranging from 5% to 15%. According to the third-quarter report, Hengshun Vinegar Industry's vinegar sales revenue in the third quarter decreased by 48.66% year-on-year, and the first three quarters' sales revenue decreased by 8.95% compared with the same period last year. For a seasoning company where vinegar accounts for more than 60% of revenue, the performance of its largest category largely determines the company's overall performance. Due to the decline in cooking wine revenue as well, Hengshun Vinegar Industry's Q3 operating revenue decreased by 34.97% year-on-year, and net profit attributable to the parent company plummeted by 91.19%, while non-recurring net profit turned negative at -2.36 million yuan. The company's net profit of 7.2069 million yuan was entirely contributed by non-recurring gains, mainly including: 4.395 million yuan from disposal of non-current assets, 2.4809 million yuan in government subsidies, and 5.7299 million yuan in investment income. Regarding the significant decrease in operating revenue, the company stated that it was mainly affected by the epidemic. However, even before the epidemic, Hengshun Vinegar Industry's revenue growth was not high. The company's revenue growth rates from 2016 to 2019 were only 10.87%, 6.52%, 9.87%, and 7.51%, respectively. Among them, the year-on-year growth rates of vinegar revenue from 2017 to 2019 were 5.14%, 12.49%, and 6.01%, respectively, generally lower than the overall revenue growth rate. According to statistics from the China Condiment Industry Association (Top 100 Enterprises), 37 vinegar enterprises participated in the 2020 statistics of the top 100 famous brand enterprises in China's condiment industry, with a total vinegar production of 1.6 million tons, and the top enterprises accounted for 21% of production. Hengshun's "Zhenjiang Aromatic Vinegar" as the leader in the vinegar industry has a market share of only about 10%. From this perspective, the vinegar industry has huge room for consolidation, and it faces greater market competition. For future development, Hengshun Vinegar Industry still faces the following obstacles on its way to becoming a true industry leader: First, the regional characteristics of China's vinegar industry are very obvious. The four traditional vinegar brands each dominate a region. Although Hengshun Vinegar Industry has occupied more than 75% of the Zhenjiang vinegar market share, expansion to peripheral areas is still difficult. The company's nearly half of its revenue in the first three quarters came from the East China region. With a single mainstream product and a single customer region, blindly laying out other categories may accelerate the erosion of the company's profits. Data source: Wind, Sina Finance compilation Second, in recent years, companies that started with soy sauce, such as Haitian Flavoring and Qianhe Flavoring, have successively acquired and entered the vinegar industry. Haitian Flavoring acquired 70% equity of Zhenjiang Danhe Vinegar Industry for 40.27 million yuan in cash in 2017; Qianhe Flavoring acquired 100% equity of Zhenjiang Hengkang Sauce and Vinegar Co., Ltd. for 150 million yuan in cash in 2019. The advantage of soy sauce companies entering the vinegar market is that the consumption frequency of soy sauce is higher than that of vinegar, and companies can use high-frequency consumption products to drive sales of low-frequency products. Although Haitian Flavoring does not separately disclose vinegar sales data, according to vinegar production rankings, Haitian Flavoring has ranked third in the industry in the past two years. Finally, due to the low market entry barriers in the vinegar industry, large enterprises find it difficult to completely squeeze small enterprises out of the market, and the imagined path to increased market concentration is not smooth. Currently, there are enterprises of various sizes in the vinegar industry, leading to vicious competition with overcapacity and continuous price wars. Therefore, the path for leading enterprises to break through is still long. Affected by the price increase news, Hengshun's stock price rose for three consecutive days from November 2 to 4. However, on the day the private placement news was released, Hengshun's stock price was not satisfactory. As of the close on the 11th, the company's stock price was 16.31 yuan per share, a drop of 39% compared with the highest intraday price of 26.84 yuan per share in January this year. Regarding Hengshun's strategic layout of price increases and capacity expansion, Bai Wenxi, chief economist at IPG China, said in an interview with Securities Daily: "Raising prices and expanding production are important ways for strong brands to increase profits and seize market share. Hengshun Aromatic Vinegar's market influence has the characteristics of a strong brand. However, the difficulty in getting rid of the profit decline dilemma lies in whether price increases and capacity expansion will lead to a decrease in market share and poor sales." Whether end consumers will accept the price increases, and how to digest the capacity after expanding into multiple seasoning categories, have become challenges for Hengshun. Bai Wenxi said that Hengshun's future path still lies in strengthening quality, enhancing brand, and strengthening marketing. Aiming at Compound Seasonings In recent years, China's seasoning market has achieved breakthrough development, with the market scale continuously expanding. The number of brands in each category is increasing, and competition is becoming increasingly fierce. Competition among brands is no longer limited to one or two categories; the era of cross-category competition has arrived. Small and medium-sized enterprises will see their living space squeezed under the pressure of declining market share and profit margins in industry differentiation. It is reported that in this private placement, Hengshun will increase investment in the following projects: the second phase of the aromatic vinegar expansion project, a 30,000-ton brewed vinegar expansion project, a 100,000-ton yellow wine and cooking wine expansion project, a subsidiary's 45,000-ton original brewed soy sauce and vinegar intelligent production line project, a 100,000-ton intelligent seasoning production project, a 100,000-ton compound seasoning construction project, an intelligent three-dimensional warehouse construction project, and supplementary working capital. Compound seasonings are the field that Hengshun Vinegar Industry plans to focus on. Currently, Hengshun Vinegar Industry does not have a compound seasoning business, but this segment, considered by the market to have the most development potential, has obviously attracted Hengshun. The private placement plan points out that the compound seasoning market is fragmented, and a leading enterprise has not yet emerged. In 2019, the CR3 of compound seasonings (excluding chicken essence) was only 12.57%, compared with Japan's CR2 of 57%, indicating significant room for improvement. Compound seasonings are undoubtedly the hottest seasoning segment in the past two years, and Hengshun Vinegar Industry naturally wants a piece of the pie. Compared with the soy sauce industry where leading enterprises have obvious advantages, vigorously entering the compound seasoning track is indeed wiser. The plan shows that the "100,000-ton intelligent seasoning production project" is to be implemented by Hengshun's Chongqing Yunyang subsidiary, producing Sichuan-style seasonings such as bean paste and hot pot base, matching the consumption needs of consumers in the Sichuan-Chongqing region; the "100,000-ton compound seasoning construction project" is for the development of products such as oil and vinegar dressing, tomato sauce, sesame oil, and crayfish seasoning. Hengshun Vinegar Industry stated, "Through the layout planning and capacity expansion of different product lines in the two locations, the company can timely seize market opportunities in compound seasonings, conform to the development trend of the seasoning industry, and effectively consolidate its market position." The plan is beautiful, but what will the future results be? It is worth noting that compound seasonings, represented by hot pot base, have already shown signs of increasing production without increasing revenue. According to data from the China Condiment Industry Association, in 2020, the total production of 14 hot pot seasoning enterprises among the top 100 condiment enterprises increased by 22.7% year-on-year, but the unit production revenue of hot pot seasonings decreased from 19,075 yuan per ton in 2019 to 16,588 yuan per ton, a year-on-year decrease of 13%. Source: China Condiment Industry Association In 2020, the ex-factory price of hot pot seasonings was even lower than in 2018. The reason for this situation is that the number of players entering the compound seasoning market has increased significantly in the past two years. According to Qichacha data, from 2018 to 2020, the number of newly established enterprises engaged in compound seasonings each year began to increase rapidly. Currently, there are about 2,400 enterprises nationwide with business scope including compound seasonings. Data source: Qichacha, Sina Finance compilation Due to the significant increase in supply in the entire market, the performance of the leading companies in the compound seasoning industry, Yihai International and Tianwei Food, has also declined to varying degrees this year. Yihai International's revenue growth in the first half of the year was basically driven by sales to Haidilao, and its revenue from third-party distributors did not grow. Tianwei Food's operating revenue in the first three quarters decreased by 8.35% year-on-year, and net profit decreased by 75% year-on-year. One of the main reasons is that due to intensified market competition, the company increased promotional efforts. Facing such a competitive landscape, how much of a share can Hengshun Vinegar Industry gain by entering compound seasonings? How much will this diversification attempt boost the company's performance? Without deeply consolidating its main business, this kind of cross-category expansion at this time is hard to be optimistic about! Disclaimer: The content and images in this article are reproduced from Sina Finance. The copyright belongs to the original author. The article only represents the author's views. If there are copyright issues, please contact us and we will delete it as soon as possible. Are you "watching" me?