As the peak season approaches, the bottled water market is gearing up for intense competition. Everyone should not only focus on the Hong Kong-listed FMCG leader Nongfu Spring; in fact, the A-share mineral water stock Quanyangquan is also worth pondering.

Jilin Forest Industry, China's first listed forestry company, based on its foothold in the Changbai Mountain water source area, cultivated the mineral water brand Quanyangquan. In 2017, the company completed a restructuring and became the first A-share mineral water stock.

In 2023, Quanyangquan's mineral water sales exceeded 1 million tons, with revenue of 800 million yuan and net profit exceeding 100 million yuan, once again showcasing the strength of water sellers.

However, due to the drag from its other two business segments and goodwill impairment, Quanyangquan recorded an overall loss of 457 million yuan in 2023, and continued to lose money in Q1 2024.

How can the drag from other businesses on Quanyangquan be eliminated? In the seemingly attractive bottled water market, with giants everywhere and intense competition, can Quanyangquan leverage capital to break into the top tier? Whether it can overcome these challenges will determine the heights this company can reach.

Transformation

Investors in both primary and secondary markets are full of PTSD about the Northeast market, hence the long-standing saying: "Investment does not cross Shanhaiguan."

The consumer market is even more so. In the vast Chinese market, across various sub-sectors, there are countless consumer blue chips, but almost none in the Northeast.

Therefore, the market naturally holds Quanyangquan (600189.SH), a mineral water company from Jilin, in higher regard.

This company was originally not named Quanyangquan but Jilin Forest Industry. According to data, Jilin Forest Industry Group, with state-owned background, is one of China's four major forest industry groups, a top 500 manufacturer in the country, and one of the top ten enterprises in Jilin Province, with its jurisdiction located in the Changbai Mountain forest area.

In October 1998, Jilin Forest Industry was listed, becoming the first forestry stock in China. At that time, the company's products included timber, particleboard, etc. Around the time of listing, its operating revenue was 300-400 million yuan, with net profit close to 100 million yuan.

However, within a few years, the company fell into a predicament of sharply declining revenue scale and losses in non-recurring net profit, relying on non-recurring gains and losses to maintain its listing status for a long time.

With poor performance, lack of imagination in business, and a long-term depressed market value, the company remained marginalized in the capital market for a long time.

This situation underwent a substantive change in 2016. In December of that year, Jilin Forest Industry announced plans to issue shares to acquire a majority stake in Quanyangquan Beverage from Forest Industry Group, Ruide Jiaxin, and Quanyang Forestry Bureau, with the target company valued at 1.172 billion yuan.

It turned out that five water sources, including Quanyangquan, Xiaguquan, and Xianrenquan, were discovered in Changbai Mountain. The Forest Industry Group, being close to the water source, took the lead and established Quanyangquan Beverage in 2001, launching mineral water products. This laid the foundation for Jilin Forest Industry's transformation.

Confidence

In 1989, C'estbon launched China's first bottled water in Shenzhen. Its founder, Zhou Jingliang, is hailed as the "Father of Packaged Water in China."

Six years later, Wahaha simultaneously launched mineral water and purified water products. In 1996, it signed Jing Gangshan as spokesperson, singing "My Eyes Only Have You," and later invited Wang Leehom for a 20-year endorsement, popularizing "Loving You Equals Loving Myself" across China.

Zhong Shanshan, a former Wahaha agent, founded Nongfu Spring in 1996. With the slogan "Nongfu Spring is a bit sweet," the brand gradually rose to the top of the bottled water market.

In 2023, the scale of China's packaged drinking water market steadily grew to 200 billion yuan, making it the largest sub-category in China's soft drink industry. Nongfu Spring, C'estbon, and Jingtian (founded later by Zhou Jingliang) firmly hold the top three positions in the industry.

With the continuous expansion of market scale, consumption upgrades in bottled water, the rise of new channels, and consumer fatigue with traditional brands, new forces in the industry have entered the market.

After years of development, China's bottled water market has formed a clear positioning pattern: natural mineral water > natural water > purified water and other drinking water.

Thus, water sources have become the core of competition among major brands. Nongfu Spring has been using water sources for business upgrades; more brands, such as Evergrande Ice Spring, Kunlun Mountain, and 5100, all have water sources first, then bottled water.

In this regard, Quanyangquan has unique advantages. Quanyangquan's water is sourced from five high-quality mineral water springs in the hinterland of Changbai Mountain, with all 241 indicators across 21 categories meeting EU and German mineral water standards.

At the same time, Quanyangquan has deep cooperation with Sinopec Easy Joy, locking in a vast sales channel.

Quanyangquan's holding subsidiary responsible for mineral water sales, Changbai Tianquan (Beijing) Marketing Co., Ltd., is owned 60% by Quanyangquan, 20% by Sinopec Easy Joy, and 20% by Sinopec Sales. Another participating sales company, Jilin Linhai Xueyuan Beverage Co., Ltd., is owned 40% by Quanyangquan, 35% by Sinopec Easy Joy, and 25% by Sinopec Sales.

As of July 2023, Sinopec Easy Joy had over 28,000 stores nationwide, making it the direct-operated convenience store chain brand with the most stores in China, serving over 250 million member customers.

In 2023, Quanyangquan sold over 180 million yuan of mineral water through Sinopec Easy Joy and Linhai Xueyuan Beverage. Therefore, many consumers outside the Northeast come into contact with Quanyangquan through Sinopec Easy Joy's channels.

Another huge advantage of Quanyangquan is its status as a listed company. It is one of the few beverage companies on the A-share market and the only listed company with bottled water as its main business.

In early 2018, the company raised 422 million yuan through a private placement, planned for the Changbai Mountain Tianquan 200,000-ton sparkling mineral water project, the Jingyu Haiyuan 400,000-ton mineral water project, and sales channel construction projects.

Challenges

After the injection of the mineral water business, Jilin Forest Industry was renamed, with the abbreviation "Quanyangquan."

In 2017, Quanyangquan's mineral water sales were 600,000 tons. After hovering for several years, it finally saw steady growth, exceeding 1 million tons in 2023.

The acceleration in sales growth in recent years is the result of Quanyangquan joining the bottled water competition. Promotions such as free mineral water with fuel refills and 20% off for two items on e-commerce platforms have gradually opened up new channels for the company.

In recent years, the price war in the bottled water market triggered by extreme competition has dragged almost everyone into the fray. Except for a few giants who can stabilize their price systems, the rest, whether high-end brands or new industry forces, have joined the promotion ranks.

Therefore, in 2023, Quanyangquan's mineral water sales increased by 66.95% compared to 2017, but operating revenue only increased by 47.78%, directly impacting profitability. In 2017, the gross margin of the mineral water business was 46.83%, which dropped to 39.47% in 2023.

In 2017, Quanyangquan's mineral water business had a net profit of 90.1244 million yuan, contributing 46.5945 million yuan to the listed company's net profit; by 2023, this subsidiary's net profit reached 139 million yuan, contributing 111 million yuan to the listed company's net profit, which can be considered initially gaining a foothold in the Chinese bottled water market dominated by giants.

However, due to the significant decline in both the company's original core business, doors, and the garden landscaping business acquired in the 2017 restructuring, which triggered a goodwill impairment of 369 million yuan, Quanyangquan's operating revenue in 2023 decreased by 11.58% year-on-year to 1.122 billion yuan, and net profit attributable to the parent company was -457 million yuan, a year-on-year decrease of 891.93%.

The Q1 2024 report disclosed on April 15 showed that Quanyangquan's operating revenue increased by 5.97% year-on-year to 233 million yuan, with net profit attributable to the parent company at -5.6625 million yuan.

Therefore, Quanyangquan can only, on the basis of "lightening the auxiliary businesses," adopt a market development strategy of "stabilizing Jilin, flying with two wings, and radiating nationwide," while continuing to focus on key accounts and e-commerce channels to promote the development of the mineral water business.

These strategies have helped Quanyangquan complete the journey from 0 to 1. Next, can it tear open a gap in the bottled water market controlled by brands like Nongfu Spring and continue from 1 to 10?

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