Click image for details Click image for details Due to huge losses at its subsidiaries Yashili and Modern Farming, Mengniu Dairy, listed on the main board of the Hong Kong Stock Exchange, recorded a massive book loss of 750 million yuan last year. In the first half of this year, Mengniu's performance recovered, with profit up 4.7% year-on-year. The capital market reacted positively; the day after the results were announced, the stock opened higher and closed up 5.42%.
But profit growth cannot hide chronic problems: Modern Farming and Yashili, in which Mengniu has invested heavily, are still suffering huge losses. More seriously, Mengniu's revenue has been significantly surpassed by Yili, and its current profit is only about one-third of Yili's, with market value equivalent to only about 40% of Yili's.
The duopoly of Mengniu and Yili in China's dairy market has persisted for over a decade, but eight years after COFCO took control of Mengniu, from the perspective of market value and profit, the duopoly seems to be evolving into a single dominant player.
In fact, listed companies under COFCO are becoming traps for many investors. In the first half of this year, all four COFCO companies listed on the A-share market saw their stock prices decline. Among the seven COFCO companies listed in Hong Kong, except for Joy City, all underperformed the market.
Will Mengniu, under COFCO's control, really fall behind?
Duopoly to Single Oligopoly? Mengniu's Profit Only One-Third of Yili's
Mengniu's results report shows: in the first half of this year, revenue was 29.465 billion yuan, up 8.1% year-on-year; net profit was 1.128 billion yuan, up 4.7% year-on-year. The performance looks decent, but compared with Yili in the same period, the gap is quite obvious. In the first half of this year, Yili's net profit was 3.364 billion yuan, and Mengniu's net profit was only 33.53% of Yili's.
The duopoly of Yili and Mengniu has been the basic competitive pattern in China's dairy market for over a decade. Mengniu was founded in 1999, and its founder Niu Gensheng was originally a vice president of Yili Group. In 1999, Yili's total revenue was as high as 355 million yuan, while Mengniu's revenue was only 40 million yuan, less than a fraction of Yili's.
But by 2007, Mengniu's revenue had surpassed Yili, and it became the first Chinese dairy company to exceed 20 billion yuan in revenue. That year, Mengniu's revenue reached 21.3 billion yuan, while Yili's was only 19.3 billion yuan.
At that time, Mengniu's advantage in liquid milk was even more obvious. According to Nielsen data, Mengniu's liquid milk market share reached 40.7%, while the other two competitors combined only accounted for 28.1%.
However, the subsequent melamine incident dealt a fatal blow to the entire Chinese dairy market. Mengniu, due to performance betting agreements, faced the risk of being controlled by foreign capital.
In July 2009, COFCO increased its stake in Mengniu by 11.13% at a cost of HK$3.058 billion. After the increase, COFCO's shareholding reached 20.3%, making it the largest shareholder of Mengniu. In terms of equity structure, Mengniu actually became a listed company with state-owned enterprise characteristics, but Niu Gensheng still served as chairman.
In 2011, Niu Gensheng resigned as chairman of Mengniu's board, marking the official entry of Mengniu into the COFCO-led phase. It was also in this year that Mengniu's total revenue was surpassed by Yili again, and the gap has been widening.
The following chart, based on financial reports, shows the revenue trends of Mengniu and Yili:
Not only revenue, but also some of Mengniu's advantageous products have been overtaken by Yili in market share. Take the white milk market as an example; it is the largest dairy segment in China. According to a research report from Industrial Securities, Yili's white milk market share has been the largest since surpassing Mengniu in 2012; in the basic white milk market, Yili's market share reached 37% in 2016, while Mengniu's was only 28%.
Many market analysts believe that the shift between Mengniu and Yili is closely related to changes in their equity structures. Mengniu, originally labeled as a private dairy giant, has become a typical professional manager governance structure in the post-Niu Gensheng era.
Since COFCO took over, the top five shareholders of Mengniu are all institutional holders, with a combined stake exceeding 50% as of the end of 2016; but the senior management team collectively holds only about 0.5%, showing obvious professional manager governance characteristics.
In contrast, Yili's largest shareholder holds less than 10%, the top ten shareholders hold only about 30%, and Yili's senior management holds nearly 8%, with their interests highly aligned with the company.
Mengniu's Investment Failures: Heavy Investment in Yashili and Modern Farming Continues to Bleed
In recent years, Mengniu has entered the upstream dairy farming and milk powder business through acquisitions and equity participation, investing in Modern Farming and Yashili. The revenue increase from consolidation partially masked the widening gap in revenue of main products between Mengniu and Yili.
But these two invested companies are mired in huge losses. In the first half of this year, Mengniu's share of losses from associates was 354 million yuan, an increase of 29.51% compared with the same period last year.
Yashili, in which Mengniu holds a 51% stake, had revenue of 1.005 billion yuan in the first half of this year, down 15.7% year-on-year, with a loss of 122 million yuan. In 2016, Yashili had a huge loss of 320 million yuan.
In June 2013, Mengniu made a general offer to acquire Yashili for about HK$11.4 billion, but Yashili's performance began to decline sharply thereafter. In 2016, Yashili's revenue was only 60% of that in 2013. The following chart, based on financial reports, shows Yashili's total revenue and net profit:
More notably, Yashili's 2016 revenue partially included businesses acquired from Dumex. In 2016, Yashili acquired Dumex for 1.027 billion yuan. This acquisition generated 718 million yuan in goodwill. If Dumex's performance continues to be sluggish in the coming years, Yashili may face goodwill impairment pressure, which will undoubtedly affect Mengniu.
Modern Farming, mainly engaged in dairy farming, is also not optimistic. In the first half of this year, total revenue was 2.353 billion yuan, up 5.17% year-on-year; but the loss was as high as 666 million yuan, with the loss expanding by 17.78%.
In January this year, Mengniu announced that it would increase its stake in Modern Farming by 15.7% at a price of HK$1.94 per share, costing about HK$1.9 billion. After the transaction, it held 37.7% of Modern Farming's issued shares, triggering a conditional mandatory cash offer. As of the end of March this year, after the offer was completed, Mengniu held 61.3% of Modern Farming's shares.
However, on August 6 this year, Mengniu announced that it planned to sell 0.49% of Modern Farming's shares at HK$1.38 per share, totaling HK$41.4 million, and intended to use the proceeds to repay some existing debts. Just over half a year later, Mengniu sold Modern Farming shares at a 30% discount.
COFCO System Becomes a Trap for Investors: Buying Mengniu Cannot Exit Within Three Years
After Mengniu announced its first-half results, its stock price rose. But since the beginning of this year, Mengniu's stock price has actually underperformed the market. Year-to-date, the Hang Seng Index has risen more than 27%, while Mengniu has risen about 23%.
As of the end of August this year, Mengniu's total market value was HK$71.8 billion, equivalent to about RMB 60.5 billion, while Yili's total market value was RMB 141.8 billion; Yili's total market value is equivalent to 2.34 times that of Mengniu.
In contrast, at the end of August 2007, before the melamine incident, Yili's total market value was 17.5 billion yuan, and Mengniu's was 35.3 billion yuan, with Mengniu's market value almost double that of Yili.
After the melamine incident, both Mengniu and Yili's stock prices fell sharply. But ten years later, Yili's market value has increased 7.1 times compared with before the incident, while Mengniu has only increased 0.71 times. Considering that during this period, Mengniu underwent share placements and exercise of rights, leading to an expansion of share capital, in fact, Mengniu's adjusted stock price increase during this period was only 33%, while Yili surged 4.61 times.
No comparison, no harm. Directly looking at the stock price trends of Mengniu and Yili over the past decade, one can imagine the psychological shadow area of Hong Kong investors who hoped to stay with Mengniu for the long term (the former is Mengniu Dairy, the latter is Yili):
Not only Mengniu, but also the listed companies under COFCO, except Joy City, which performed well in the first half of this year, have seen sluggish stock price trends.
COFCO Meat, listed in Hong Kong in early November last year, even fell below its issue price. The IPO price was HK$2, and the closing price on August 31 was only HK$1.57.
Currently, the Hang Seng Index is hovering around 28,000 points, only a step away from the high before the 2015 stock market crash, almost fully recovered, but the stock prices of COFCO companies are still at the bottom. The following chart shows the stock price performance of COFCO companies on April 30, 2015 (one month before the crash) and August 31 this year.
In fact, not only in Hong Kong, but also in the A-share market, COFCO has four listed companies (COFCO Sugar, COFCO Biochemical, COFCO Property, and Jiugui Liquor). Since the beginning of this year, except for Jiugui Liquor, all have declined significantly; among them, COFCO Sugar has fallen more than 18%.
Will Mengniu, which was not hit by the melamine incident, really lose its position as a dairy duopoly under COFCO's control and the management of "professional managers"?
Source: Bread Finance (ID: mianbaocaijing)
Click 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 over 1,000 distributors, 500 brand owners, founders of 200+ B2B platforms, and 100+ investment and financing institutions to participate.
The theme of this conference: New Forces, New Ecosystem. We will invite well-known domestic B2B industry experts, mentors, and B2B platform founders to discuss the following topics:
Core topics of this conference:
How can the FMCG industry achieve new growth opportunities through B2B?
How to build a 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"
Case sharing of excellent distributors in transformation and upgrading
Upgraded conference + exhibition, with the 6th Hall Internet Technology Exhibition strengthening connections
Leaders from well-known companies in various fields, including Alibaba Retail Link, GL Capital, EASIA Supply Chain, Best Store Plus, Yijiupi, Unilever, Haiding Technology, and Yunmei, will deliver speeches and share 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 1st and 2nd FMCG + Internet conferences:
2016 "FMCG + Internet" Summit Forum 2017 (2nd) China FMCG + Internet Conference
Click the links below to review the highlights of the 1st and 2nd FMCG + Internet conferences: 2016 "FMCG + Internet" Summit Forum
-END-