Recently, Yangyuan Drinks disclosed its 2019 semi-annual report, with both revenue and net profit declining year-on-year. The company explained that the decline was mainly due to increasingly personalized consumer demands, diversified choices, and proactive inventory adjustments across channels. For consumers in large cities, "Six Walnuts" seems to appear only in TV commercials. However, it is precisely through the "rural areas surround cities" strategy that the parent company Yangyuan Drinks has achieved annual revenue exceeding 8 billion yuan. The extremely high dividend payout ratio has also delighted Yangyuan Drinks' investors. In 2018, Yangyuan Drinks reported a net profit of 2.678 billion yuan, but generously distributed 2.26 billion yuan to shareholders as dividends. However, entering 2019, Yangyuan Drinks' performance declined. On the evening of August 25, Yangyuan Drinks disclosed its 2019 semi-annual report, showing operating revenue of 3.457 billion yuan for the first half, down 16.98% year-on-year; net profit of 1.268 billion yuan, down 3.04%. On the morning of August 26, Yangyuan Drinks' stock price once hit the daily limit down, and by midday close, market value evaporated by 3.5 billion yuan. Are small-town and rural consumers also not drinking Six Walnuts? Since its predecessor was established in September 1997, Yangyuan Drinks has been committed to the R&D, production, and sales of plant-based protein beverages primarily made from walnut kernels. The company's main products are walnut milk, a plant-based protein beverage labeled with both the "Yangyuan" trademark and the "Six Walnuts" trademark, with specific varieties including Yangyuan Premium Six Walnuts Walnut Milk, Yangyuan Zhihui Health Six Walnuts Walnut Milk, and Yangyuan Jingyan Six Walnuts Walnut Milk. In addition to walnut milk, the product portfolio also includes plant-based protein beverages such as walnut peanut milk and walnut almond milk. Yangyuan Drinks released its 2019 semi-annual report on the afternoon of August 25: during the reporting period, the company achieved operating revenue of 3.456 billion yuan, down 16.98% year-on-year; net profit attributable to shareholders of the listed company was 1.268 billion yuan, down 3.04%; non-GAAP net profit was 1.026 billion yuan, down 9.10%. By region, sales revenue from all seven major regions in the first half declined by double digits, with the Northwest and Northeast regions falling by over 30%, and the Southwest region seeing the smallest decline at 11.70%. By sales channel type, distribution channel sales revenue in the first half was 3.339 billion yuan, down 17.48% year-on-year, while direct sales revenue was 117 million yuan, up 0.70%. Looking at quarterly revenue over the past few years better reflects Yangyuan Drinks' performance changes in the first half of this year. From historical revenue, Yangyuan Drinks' performance has clear off-peak and peak seasons, with Q2 revenue significantly lower than other quarters. However, in Q2 of this year, Yangyuan Drinks' revenue declined 61.45% quarter-on-quarter, lower than Q2 2017 and 2018, and declined 26.64% year-on-year, compared to positive growth in Q2 2018. Furthermore, even in Q1 2019, which includes the Spring Festival, revenue declined year-on-year. In the interim report, Yangyuan Drinks also explained: "The main reasons for the decline in revenue are the increasingly personalized consumer demands and diversified choices, as well as the company's proactive inventory adjustments across channels, leading to a decline in revenue." In response, China Securities Co., Ltd. research report believes this data was below expectations, mainly due to the impact of competing products such as milk during the Spring Festival gift-giving peak season, which affected sales to a certain extent; at the same time, increased promotional efforts during the Spring Festival led to higher sales expenses. Tianfeng Securities research report stated that reviewing Yangyuan Drinks' performance in recent years, the business structure remains a "big single product" layout centered on walnut milk, with relatively stable profitability. From 2016 to 2018, the compound growth rate of walnut milk sales was -4.44%, accounts receivable turnover days showed a clear upward trend, and performance growth weakness was prominent. Tianfeng Securities believes that Yangyuan Drinks follows a "rural areas surround cities" market expansion strategy. On one hand, its presence in first- and second-tier cities is short, brand awareness is low, so marketing costs are relatively higher, and sales volume improvement takes time; on the other hand, dairy giant Yili and others are accelerating channel sinking, with high overlap in target consumer groups. The company will engage in comprehensive brand and product competition with Yili and others in third- and fourth-tier markets in the future. In the interim report, Yangyuan Drinks stated that it further segmented markets and consumer groups, launching three new products to meet the consumption requirements of different markets and groups for walnut milk: Jingdian Six Walnuts, Jingpin (270) Six Walnuts, and Yizhi Youxuan Six Walnuts, occupying more market segments and meeting the consumption needs of more consumer groups. Additionally, for specific groups such as middle-aged and elderly people, students, and children, Yangyuan Drinks has also upgraded existing products. In terms of R&D, Yangyuan Drinks continues to increase the intensity and depth of walnut milk beverage R&D. While leading the walnut beverage industry to become bigger and stronger, it actively cultivates the growth of the plant-based protein milk industry and market, focusing on developing more nutritious, functional, and delicious plant-based protein beverages to meet the needs of "vegetarians" and people's demand for plant-based protein nutrition. Last year's "lavish" dividend of 2.26 billion yuan; this year, directors, supervisors, and senior management continue to increase holdings For Yangyuan Drinks' investors, the company's lavish dividends are one reason to hold the stock. In 2018, Yangyuan Drinks achieved a net profit of 2.678 billion yuan, yet distributed 3 yuan per 10 shares plus a bonus share conversion of 4 shares per 10, with a corresponding dividend amount of 2.26 billion yuan, accounting for 84.40% of last year's net profit. In recent years, Yangyuan Drinks has consistently paid dividends. From 2016 to 2018, Yangyuan Drinks distributed 990 million yuan, 1.4 billion yuan, and 2.26 billion yuan, respectively, accounting for 36.12%, 60.56%, and 84.40% of net profit. However, behind the significant increase in dividend payouts, the company's net profit growth rate has not matched. From 2016 to 2018, net profit growth rates were 4.61%, -15.72%, and 15.92%, respectively. The high dividends also benefit the company's actual controller Yao Kuizhang and senior executives. In 2018, Yao Kuizhang and his concerted action persons received 891 million yuan in dividends; General Manager Fan Zhaolin and Vice Chairman Li Hongbing each received 223 million yuan; Director Deng Lifeng received 42.61 million yuan; Supervisory Board Chairman Zhu Zhanbo, Director Li Zhibin, and Director Xing Shulan each received 42.007 million yuan. It should be noted that the annual salaries of Yangyuan Drinks' directors, supervisors, and senior management are very low. For example, in 2018, Chairman Yao Kuizhang's annual salary was only 172,500 yuan, Vice Chairman Li Hongbing's salary was 102,200 yuan, and only General Manager Fan Zhaolin's salary was relatively high at 1.2 million yuan. Notably, in the first half of this year, the company's directors, supervisors, and senior management significantly increased their shareholdings. Yangyuan Drinks mentioned in its prospectus: When cash dividend conditions are met, the profit distributed in cash each year should not be less than 20% of the distributable profit realized that year. If the company is in a mature stage of development and has no major capital expenditure arrangements, the proportion of cash dividends in profit distribution should be at least 80%. Source: National Business Daily Tips will be paid 400-2000 yuan once adopted. 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