After retiring from teaching at age 60, he started a bread business. Twenty years later, the former teacher became the 'King of Bread in Northeast China,' and wealth followed. This person is Wu Zhigang, founder of Toly Bread. On the 2020 Forbes China Rich List, ranked by residence, Wu Zhigang's family wealth reached 30.1 billion yuan, firmly holding the title of Shenyang's richest person. Starting from Dandong, a border city by the Yalu River, to establishing a foothold in Shenyang, the provincial capital, and then dominating the Northeast market, Wu Zhigang aims to replicate Toly Bread nationwide using a 'central factory + wholesale' model. However, the expansion path has not been smooth. In the past two years, Toly Bread's performance growth has slowed, with both revenue and net profit growth falling to single digits. The Q1 2021 performance report released on the evening of April 11 showed revenue of 1.327 billion yuan, up only 0.31%; net profit attributable to shareholders was 163 million yuan, a year-on-year decrease of 16.27%, marking the worst Q1 growth record since Toly Bread's listing. Moreover, the Wu Zhigang family, as actual controllers, has continuously reduced their holdings and cashed out on a large scale after the lock-up period expired, drawing a series of questions. -01-

The Richest Family Cashes Out Over 3.6 Billion Yuan

Toly Bread is a typical family business, with extensive family connections running through the company's equity and management. Wu Zhigang was born in 1935 and spent his life before age 60 in Dandong. In this border town, he worked as a telegraph operator for Dandong Telecom Bureau and as a teacher, from the school affiliated with Dandong No.1 Silk Factory to Dandong Silk Industry School. In 1995, Wu Zhigang retired after a hard-working life. The conventional move would be to enjoy retirement and grandchildren. However, inspired by the reform and opening-up, Wu decided to start a business. He and his second son, Wu Xuequn, set up a bread workshop locally. Perhaps due to his teaching background, he named the bakery 'Toly' (Peach and Plum), likely hoping that Toly Bread would be sold everywhere. Exactly 20 years later, in 2015, Wu Zhigang and his sons listed Toly Bread on the A-share market, making it China's 'First Bread Stock.' At the time of listing, among Toly Bread's natural person shareholders, there were about 20 members of Wu Zhigang's family. After the lock-up period expired, Wu Zhigang and his family members began a continuous reduction of holdings. As of the end of 2018, the top eight shareholders of Toly Bread were all from Wu Zhigang's family. Among them, the top five shareholders—Wu Xuequn, Wu Xueliang, Wu Zhigang, Sheng Yali, and Wu Xuedong—were the actual controllers, holding a total of 74.46% of Toly Bread's shares. Wu Zhigang and Sheng Yali are husband and wife, and Wu Xuedong, Wu Xuequn, and Wu Xueliang are their eldest, second, and third sons, respectively. The other three shareholders were Sheng Yali's younger brother and sisters: Sheng Long, Sheng Yaping, and Sheng Li. Together, these three held 8.34% of Toly Bread's shares. At the same time, Wu Zhigang was chairman of Toly Bread, Wu Xuequn was director, general manager, and executive general manager, Wu Xueliang was vice chairman and executive general manager, and Wu Xuedong and Sheng Long were both directors. In addition, Wu Zhigang's younger brother Wu Zhidao, Wu Xueliang's wife Xiao Shuyan, Sheng Long's wife Fei Zhihui, Sheng Long's brother-in-law Lü Chang'en, and other close relatives and family members of the actual controllers all held shares in the company. In 2018, Toly Bread's directors, supervisors, and senior management reduced their holdings. At the end of December of the same year, Toly Bread's listing reached three years, triggering a large-scale unlock of IPO restricted shares. Just five days later, the Wu Zhigang family announced a reduction plan. From then on, the family began reducing their holdings. The reduction began in January 2019, and as of February 20, 2021, Wu Zhigang and his family members had disclosed seven reduction plans and results announcements. During these two years, the Wu Zhigang family cashed out a total of 3.633 billion yuan through share reductions. In 2020 alone, the family cashed out 1.754 billion yuan. By April 5, 2021, they had cashed out an additional 436 million yuan. Furthermore, in September 2019, Toly Bread publicly issued 10 million convertible bonds (1 billion yuan), with Wu Xuequn, Wu Xueliang, Sheng Yali, and Wu Xuedong subscribing to 55.27%. On the first day of trading, Sheng Yali sold all her bonds. As of February 20, 2020, less than six months after listing, the four family members had reduced their holdings to only 5.41%. According to the reduction result announcement released on February 20, 2021, as of that date, Wu Xuequn, Wu Zhigang, Wu Xueliang, Sheng Yali, and Wu Xuedong still held 61.54% of Toly Bread's shares, while Sheng Long, Xiao Shuyan, Sheng Li, Sheng Jie, Sheng Yaping, Sheng Ling, Fei Zhihui, Lü Chang'en, and Wu Zhidao still held 6.37%. The Wu Zhigang family collectively held 67.91%. Does the continuous reduction and cashing out by the actual controlling family indicate a lack of confidence in the company's prospects? -02-

After the Handover, Growth Slows

After retiring from teaching, Wu Zhigang used his retirement years to create a second career, not only selling bread out of Northeast China but also gaining fame. More importantly, the wealth he created over these two decades was unimaginable during his teaching days. Wu Zhigang was once the oldest chairman of an A-share company. In April 2019, at the age of 84, Wu Zhigang retired from the chairmanship of Toly Bread, finally handing over the 'everywhere' business to his sons. At that time, his sons were already not young. After Wu Zhigang stepped back, his third son, Wu Xueliang, aged 48, took over as chairman and executive general manager; his second son, Wu Xuequn, aged 53, became director, general manager, and executive general manager; his eldest son, Wu Xuedong, aged 56, became a director and executive director and general manager of subsidiary Jinan Toly; Wu Zhigang's wife, Sheng Yali, aged 78, remained a director, and Sheng Long also remained a director. In the two years after Wu Zhigang retired, i.e., the two years after his sons officially took over, Toly Bread's performance experienced significant fluctuations. First, in 2019, Toly Bread's revenue grew 16.77% year-on-year, but net profit only increased 6.42%, marking the first time since listing that growth fell to single digits. Toly Bread explained that to effectively respond to market competition and increase market development efforts, the company increased promotional activities, leading to a higher sales expense ratio. Then in 2020, Toly Bread achieved revenue of 5.963 billion yuan, up 5.66% year-on-year; net profit was 883 million yuan, up 29.19%. This was the first time since listing that revenue growth fell to single digits. Regarding the reason for net profit growth far exceeding revenue growth, Toly Bread stated that sales revenue growth promoted the expansion of production scale, enhancing overall economies of scale; at the same time, affected by the national phased social insurance reduction policy, the company's costs and expenses also decreased. In 2020, Toly Bread's gross margin was the lowest since listing, but at the same time, its net margin was the highest since listing. Among these, the most significant impact was on sales expenses. In contrast to 2019, sales expenses in 2020 saw negative growth. In 2020, Toly Bread's sales expenses were 524 million yuan, a significant decrease of 57.31% compared to 2019. The company explained that this was mainly due to the implementation of the new revenue standard in 2020, which adjusted product delivery service fees to operating costs. Since listing, Toly Bread's sales expense ratio had been rising, from 14.04% in 2015 to 21.76% in 2019, showing an increasing trend year by year. In 2020, it suddenly reversed, dropping to 8.79%. As a leading enterprise in the short-shelf-life bread industry, Toly Bread's main business and products did not undergo major changes in 2020. By product, the company's core product is Toly brand bread and pastries, accounting for 97.89% of revenue in 2020, making it absolutely crucial; the two holiday products developed for traditional festivals—mooncakes and zongzi—have always been marginal products, accounting for 1.97% and 0.13% of revenue in 2020, with negligible impact on performance. Therefore, how bread and pastries sell directly affects Toly Bread's performance. In 2020, bread and pastry products achieved revenue of 5.837 billion yuan, an increase of only 5.60% year-on-year. Although the company stated that mature star products continued to grow steadily, and new products like waffle pastries and soft mountain-shaped toast bread showed relatively high growth, overall, Toly Bread's bread and pastry business last year was not as good as in previous years. This is closely related to the obstruction of Toly Bread's national expansion. -03-

Stumbling in Shanghai, Retreating from Shenzhen

The Wu Zhigang family has always wanted to sell Toly Bread 'everywhere,' which is also Toly Bread's strategy: focus on fewer but better products, not pursuing variety, but the scale of production and sales of single products, while reducing costs. Currently, China's bread industry has two main types of production and operation models: one is to set up central factories in sales areas, radiating to the region through wholesale, which improves production efficiency and enhances economies of scale; the other is to set up chain bakery stores, which maximizes consumer satisfaction in terms of product quality, taste, and freshness. Toly Bread's small insulated delivery vehicles Bread products can be roughly divided into short-shelf-life, medium-shelf-life, and long-shelf-life based on shelf life. Of course, different products have different characteristics, and manufacturers' business models also differ. Most of Toly Bread's products are short-shelf-life. Short-shelf-life bread has a very short shelf life, generally 7-9 days in winter and only 3-7 days in summer. Therefore, Toly Bread mainly adopts a 'production based on sales' model, formulating production plans based on market demand, then producing uniformly in central factories, and finally wholesaling to supermarkets and distributors in a certain area. This is the model that Toly Bread summarized from its early practice in the Northeast market, namely the 'central factory + wholesale' model. This model is conducive to standardized production and reduces production costs through scale. More importantly, it is easier to replicate during expansion and can be called an 'accelerator' on Toly Bread's expansion path. Before listing in 2015, Toly Bread, which dominated the Northeast market, had also established a foothold in North China. Therefore, after listing, it began to move south and east in force, building central factories and seeking cooperation with supermarkets. As of the end of 2020, Toly Bread had established production bases in 19 regions nationwide. In its annual report, Toly Bread stated that in 2020, the company continued to increase efforts to expand new markets such as East China and South China, continuously increasing investment in key customers and improving single-store quality; at the same time, in mature markets such as Northeast and North China, it continued to accelerate the refinement and sinking of sales networks, tap market potential, and consolidate and expand the company's product market share. By region, Toly Bread's performance still relies on the 'home base' Northeast market. In 2020, revenue from the Northeast market still accounted for nearly half of the company's revenue; the second largest market was North China, the third was East China; followed by Southwest, South China, and Northwest; Central China had the smallest revenue scale. In fact, many subsidiary companies in East China, South China, and Central China are still loss-making. Toly Bread listed 37 major holding and participating companies in its annual report, of which 17 were loss-making—mainly distributed in these three markets. In 2020, the most severe losses were Shenzhen Toly and Jiangsu Toly, with losses of 13.86 million yuan and 9.73 million yuan, respectively; followed by Shanghai Toly, Nanchang Toly, Xiamen Toly, Hainan Toly, and Fuzhou Toly, each with losses exceeding 5 million yuan; then Guangxi Toly, Hefei Toly, etc. In 2019, 20 major holding and participating companies of Toly Bread were loss-making, with total losses of 73.57 million yuan. In 2020, 17 major holding and participating companies were loss-making, with total losses of 71.92 million yuan. 2020 was basically the same as 2019, with the most severe losses still in East China and South China. In the East China market, Shanghai Toly, Jiangsu Toly, Nanchang Toly, Zhejiang Toly, and Hefei Toly have been loss-making for a long time. For example, Shanghai Toly, established in September 2000, began losing money in 2018, with a loss of 1.2394 million yuan that year, expanding to 12.6882 million yuan in 2019, and losing 6.5362 million yuan in 2020. In the South China market, Toly Bread also finds it difficult to integrate. For example, Shenzhen Toly, established in 2015, lost 6.6412 million yuan in 2018, and the loss doubled by 2020. In November 2020, Toly Bread announced that based on the company's current actual operating conditions and subsequent business development plans, to optimize resource allocation and asset structure, reduce management costs, and improve operational management efficiency, it planned to cancel its wholly-owned subsidiaries Nanchang Toly and Jinan Toly. In January 2021, after an announcement, Shenzhen Toly was also cancelled. South China and East China have always been important regions for the baking industry, from well-known domestic and international brands to local brands of all sizes. Well-known ones include Daliyuan, Bimbo, Mankattan, Yamazaki, Paris Baguette, Ganso, Christine, Bread Talk, Holiland, Wedome, and 85°C, with many more unknown. Whether it's bread, cakes, or pastries, competition is increasingly fierce. There are also new-style tea brands like Nayuki that make bread, and many brands are doing well online. This will also have a significant impact on Toly Bread, which mainly focuses on channels like supermarkets, convenience stores, and small shops. The baking industry has low barriers to entry, severe homogenization, and a fragmented competitive landscape. In 2019, the total market share of the top five brands was less than 11%, and Toly Bread's market share was only 3%. Zhongyuan Securities analysis suggests that scale and single-product focus help companies maximize benefits in early development, but later, companies may face problems with insufficient market response. For Toly Bread, there is also a lack of production flexibility. Toly Bread stated that in the future, the company will further strengthen and expand its core baking products centered on bread and pastries, steadily develop traditional holiday products like mooncakes, and further enrich the company's product line. However, the pressure is foreseeable. Currently, Toly Bread's situation is not optimistic. Subsidiaries in East China and South China have been unable to achieve profitability for a long time, and the listed company's performance growth has also encountered problems. It is not easy for the sons to realize Wu Zhigang's dream of 'everywhere.' Tips will be paid 400-2000 yuan once adopted.