Mengniu Reports First Loss in 8 Years as Yashili Drags Down Performance

A brief announcement has once again stirred the dairy industry. This morning, Mengniu and its controlled subsidiary Yashili suddenly issued a profit warning, expecting a significant loss for Yashili this year. Affected by Yashili, Mengniu's 2016 performance will show a loss, but the announcement did not disclose specific loss figures. It is understood that this pre-loss marks Mengniu's first performance loss in 8 years since the 2008 melamine incident.

Song Liang, a well-known dairy industry expert, said that the fundamental reason for Mengniu's profit warning is that against the backdrop of slowing overall profit growth, Yashili's losses have dragged down Mengniu's overall performance. This year, Mengniu's liquid milk business has seen good growth, with an expected year-on-year increase of 5-8%, but profit growth has slowed, with an expected year-on-year increase falling to single digits, making it difficult to absorb the losses from Yashili. We expect Yashili's performance to continue to decline, with full-year sales not exceeding 2 billion yuan. This will lead to a decline in both net profit and goodwill.

Yashili comprehensively drags down Mengniu's performance

The loss warned by Mengniu is clearly not due to its own business losses. Financial reports show that in the first half of this year, Mengniu achieved sales revenue of 27.257 billion yuan and net profit of 1.0773 billion yuan. An anonymous dairy industry analyst pointed out that in 2016, Mengniu underwent a series of internal adjustments, and in terms of Mengniu's own performance alone, its results were quite good. "Mengniu's overall performance in the second half of the year is expected to grow faster than in the first half, with full-year growth expected to achieve high single-digit growth, significantly exceeding the industry average growth rate."

However, Yashili, which Mengniu acquired at a huge cost three years ago, has dragged the second-largest dairy company in China into an "abyss" of performance. The announcement shows that Yashili is expected to incur a huge loss in 2016, which will not only reduce Mengniu's operating profit. Moreover, after prudently considering Yashili's operating conditions and financial performance in recent years, Mengniu will make a one-time goodwill impairment provision for its investment in Yashili, so profits are expected to show a loss.

The announcement mentioned "goodwill" once. What is goodwill? It is understood that goodwill is the excess of the purchase price over the net assets of the acquired company when one company acquires another, i.e., the premium portion. In simple terms, if Company A acquires 50% of Company B's equity, and Company B's net assets are 100 million yuan, 50% would be 50 million yuan, but Company A pays 80 million yuan, the extra 30 million yuan is goodwill. This means Company A believes the acquired subsidiary is worth more than its book value, so it is willing to pay more, because it believes the excess goodwill will bring future economic benefits to Company A.

It is reported that Mengniu's acquisition of Yashili was once sensational. In June 2013, Sun Yiping, who had just been parachuted into Mengniu a year earlier, led her first mega-deal: Mengniu announced the acquisition of Yashili at a premium of over 12 billion Hong Kong dollars. Based on data at the time, this acquisition brought Mengniu goodwill of 4.948 billion yuan, boosting Mengniu's total goodwill to 5.695 billion yuan. In the first half of this year, a few months before Sun Yiping left Mengniu, she led another acquisition: Mengniu announced that its subsidiary Yashili completed the acquisition of Dumex China. Although Dumex had been loss-making for years, Mengniu's goodwill rose sharply again to 6.569 billion yuan through this acquisition.

Although the two acquisitions significantly boosted Mengniu's performance, in terms of performance alone, both companies' results were far from ideal. Data shows that in 2013, the year of acquisition, Yashili's annual revenue reached 3.890 billion yuan (including Yashili brand 2.660 billion yuan, Shengyuan 660 million yuan, nutrition products 546 million yuan, and others 22.6 million yuan). However, within less than three years, Yashili experienced a cliff-like decline. Its 2015 performance showed revenue falling to 2.761 billion yuan, a year-on-year decline of 22.3%; net profit was 118.3 million yuan, a sharp decline of 64.4%. Entering this year, Yashili's performance has not improved: in the first half of the year, revenue was 1.147 billion yuan, down 21.7% year-on-year; net profit was 15.1 million yuan, down 86.2% from 109.3 million yuan in the same period last year.

In addition, the acquisition of Dumex China, completed in the first half of this year at a cost of 1.23 billion Hong Kong dollars, has become "another straw" weighing down Mengniu. Data shows that due to the 2013 Fonterra botulism scare, Dumex China's sales fell from 5.683 billion yuan in 2012 to 3.57 billion yuan in 2013; net profit also plummeted from 792 million yuan in 2012 to a huge loss of 648 million yuan in 2013. In 2014, Dumex's loss expanded significantly to 829.7 million yuan, and in 2015, Dumex China's loss climbed to 838.6 million yuan. Data shows that in the three years since Mengniu acquired Dumex, Dumex China's cumulative losses have exceeded 2.5 billion yuan.

Yashili announces two new personnel appointments

On September 14 this year, Mengniu's former president Sun Yiping announced her "dismissal," and her successor was Yashili's president Lu Minfang. While announcing the annual performance loss, Mengniu also announced two latest personnel appointments for Yashili: "Appointing Zhang Ping as Executive Director and President of Yashili. At the same time, the current Executive Director, Vice President in charge of marketing, 40-year-old Hua Li, will be promoted to Chief Operating Officer."

The announcement shows that Zhang Ping has been engaged in production and supply chain management for over 30 years, with rich management experience in the food industry, especially in the infant formula industry. He has extensive experience in internal resource and supply chain integration and outstanding team leadership capabilities. "The Yashili board believes that Mr. Zhang Ping is the best person to coordinate internal and external resources. Internally, he will form a strong synergy with the marketing team led by Mr. Hua Li, supporting front-end sales through integration; externally, he can effectively connect with partners including Danone and Arla Foods."

As for Hua Li, according to information, he has been appointed as Executive Director and Authorized Representative of Yashili since August 25, 2016. Previously, from September 2002 to August 2004, he served as Marketing Manager of New Hope Dairy Holdings Co., Ltd. From January 1, 2016, he served as General Manager of Yashili's Sales Division, concurrently as General Manager of Oushi Mengniu and Shengyuan Sales Division. Since August 24, 2016, he has served as Vice President in charge of marketing at Yashili.

Regarding Yashili's future development, a Mengniu spokesperson pointed out that in 2017, Yashili will increase sales revenue by increasing marketing team investment and model improvement in maternal and infant and e-commerce channels; promote the growth of brands such as Arla, Dumex, and Ruibuen in high-end and first-tier cities; streamline the group and improve supply chain operational efficiency and capacity integration; and further strengthen and deepen cooperation with partners such as Danone and Arla Foods.

Song Liang said that for Yashili's future, on the one hand, with the implementation of the new policy, it should quickly reduce burdens and eliminate the baggage formed in the past market in one go. Since it is reporting a loss, it should make the loss thorough. On the other hand, it should accelerate team building and create a strong and motivated marketing team. Third, it should leverage its advantages under the new policy to develop multi-category construction, quickly integrate Mengniu, Dumex, and Yashili, and launch organic, goat milk, and special formula product lines.

Lu Minfang "takes the knife" to Mengniu, comprehensively adjusting organizational structure

Lu Minfang, who succeeded Sun Yiping as Mengniu's president in September this year, has been in office for several months. Recently, it was learned from within Mengniu that Mengniu has recently adjusted its organizational structure, dividing the original core business segments into independent business units for normal temperature and low temperature, ice cream, and milk powder. A Mengniu spokesperson pointed out that the new business unit system will help Mengniu form a consumer- and market-oriented organizational model. Through centralized procurement and unified milk source management, overall operational efficiency will be greatly improved, and each business unit will be more focused and balanced in development.

It is understood that compared with the three major category management systems under Sun Yiping's era (normal temperature dairy products, ice cream and dairy beverages, and low temperature dairy products), this structural adjustment moved dairy beverages, which were originally in the same category as ice cream, under normal temperature dairy products. At the same time, other milk powder businesses such as Dumex, which were previously unified under the Yashili platform, were separated together with Yashili to form a new independent business unit.

It is reported that in September this year, when Lu Minfang first attended an investor meeting after taking office, he said that finding the reasons for the gap with competitors would be the focus of his next strategy. Mengniu's goals are product innovation, improving operational efficiency, continuously improving channel models, and enhancing profitability. It seems that Lu Minfang has begun to move towards these goals. Lu Minfang recently publicly stated: "Entering 2017, the company's work focus is to further strengthen the channel and marketing system, focus on brand advantages and resources, comprehensively improve operational efficiency and profitability, and at the same time strengthen industrial layout, better integrate upstream and downstream resources, and lay a solid foundation for achieving the company's long-term strategic goals."

Source: NetEase Finance

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