Click to read the original article for details. Relying on blanket advertising, Yangyuan Beverages created the household name 'Six Walnuts'. After a period of rapid growth, the company's performance has stagnated in recent years, and long-hidden problems have surfaced one after another. In the year of its listing, Yangyuan Beverages, suffering from 'Six Walnuts dependency', experienced a roller-coaster ride. From the 'most expensive new stock' to the 'most bearish new stock', Yangyuan Beverages took only 19 trading days; by February this year, before the lock-up period expired, the stock price had fallen to a trough, and the market value had halved from its peak at the time of listing. In 2018, the spokesperson for Six Walnuts was changed to the popular young star Wang Yuan, but the performance still showed no big surprise: revenue was 8.144 billion yuan, far below the 9.117 billion yuan level of 2015. The weakness in growth continues. In the first quarter of 2019, during the most important sales season for Six Walnuts, Yangyuan Beverages' revenue fell by 12.53%, and net profit also declined by 8.56%. Before 2015, Yangyuan Beverages adopted a market development strategy of 'surrounding cities from rural areas', experiencing a decade of rapid growth. Since 2015, as the company shifted its market focus to first- and second-tier cities, it encountered consumption upgrades, which exposed its long-hidden problems one by one. Excessive 'Dependency' You may not have drunk Six Walnuts, but you must have been bombarded by the slogan 'Use your brain often, drink more Six Walnuts'. This has also become a problem for Yangyuan Beverages. Relying on the single product of walnut milk and blanket advertising created the household name Six Walnuts, with revenue once approaching 10 billion yuan; at the same time, Yangyuan Beverages is overly dependent on walnut milk, and after the explosive growth period faded, the single-product nature directly affected the company's performance growth. Since its inception, the walnut milk market has been dominated by Yangyuan Beverages. According to data from the Prospective Industry Research Institute, in the entire plant protein beverage industry, the top five players hold a 53% market share. Among them, Yangyuan Beverages has the largest market share at 25%; behind it, Coconut Palm, Vitasoy, Yinlu, Lulu, and Daliyuan are leading enterprises in their respective segments, but in the plant protein beverage industry, none has a market share exceeding 8%. Yangyuan Beverages can be described as uniquely outstanding. From a segment perspective, Yangyuan Beverages holds an 88% share of the walnut milk market, with no absolute competitor. This led to rapid performance growth, peaking in 2015. In 2015, Yangyuan Beverages' revenue reached 9.117 billion yuan, with net profit of 2.62 billion yuan. That year, Six Walnuts almost created the first 10-billion-yuan single product in the plant protein beverage industry. This sense of superiority at the top seems to have made Yangyuan Beverages overconfident, increasingly dependent on the walnut milk business. In 2014, sales revenue from walnut milk accounted for 94.90% of the company's main business revenue; by 2016, this figure had become 97.01%; by 2018, it had risen to 98.48%. Walnut milk has almost become the sole source of revenue for Yangyuan Beverages. While over-relying on the walnut milk business, Yangyuan Beverages has not actively innovated or researched, maintaining its consistent style of emphasizing marketing over R&D. Whether in building elevators or various TV programs, you can always see Six Walnuts advertisements, such as 'The Brain', 'Challenge Impossible', 'Saturday Night Live', 'Genius Wants It', 'Study Hard', 'I Am Mr. Teacher', and a series of brand documentaries... From CCTV to local TV stations, from Chen Luyu to Wang Yuan, you have to admire Yangyuan Beverages' powerful marketing and promotion efforts. In this regard, Yangyuan Beverages is willing to spend money; in 2016, sales expenses exceeded 1 billion yuan. Yangyuan Beverages' sales expenses as a proportion of operating revenue have long remained above 10%. From 2014 to 2016, sales expenses increased from 857 million yuan to 1.073 billion yuan, and in 2017 it was also 1.073 billion yuan; in 2018 it decreased slightly but was still as high as 1.032 billion yuan. During the same period, the sales expense ratio rose from 10.38% in 2014 to 13.86% in 2017. In contrast, Yangyuan Beverages' investment in R&D is very meager, only reaching the tens of millions level in 2017. Yangyuan Beverages' R&D expenses as a proportion of operating revenue have long remained below 0.1%. From 2014 to 2016, R&D expenses were between 2 million and 8 million yuan, with an R&D expense ratio of less than 0.09%. In 2017, the company increased R&D, with investment exceeding 10 million yuan for the first time, reaching 11.1 million yuan, accounting for 0.14% of revenue. During the same period, Yili's R&D expense ratio was 0.3%. Amid consumption upgrades and slowing industry growth, Yangyuan Beverages' operating performance has stagnated. After the glory of 2015, revenue and net profit began to decline. Although there was growth in 2018, it somewhat showed the difficulty of growth. In the first quarter of 2019, both declined again. Change is imminent. In 2018, Yangyuan Beverages' R&D expenses increased by over 93%, and new products were launched, but it still has not escaped its dependence on Six Walnuts; the 'dependency' has even worsened. The board secretary of Yangyuan Beverages replied to Shijie that in the future, the company will, on the basis of expanding R&D investment, continuously achieve product upgrades through diversified innovation. Really Not Short of Money Is the insufficient R&D investment due to a lack of money? No, Yangyuan Beverages is not short of money. In the 2018 A-share executive compensation ranking, Yili Chairman Pan Gang ranked at the top with an annual salary of over 17 million yuan. In contrast, Yangyuan Beverages Chairman Yao Kuizhang's annual salary of 172,500 yuan is negligible. However, Yao Kuizhang's 'red envelope' is not small. In 2018, Yangyuan Beverages' profit distribution plan was to transfer 4 shares for every 10 shares and pay a cash dividend of 30 yuan, corresponding to a cash dividend of 2.26 billion yuan, which is about 80% of the annual net profit. This also continued the previous high-dividend policy. According to Yangyuan Beverages' shareholding model, Yao Kuizhang and a group of executives also 'grabbed' a considerable 'red envelope'. This story starts from the early development of Yangyuan Beverages. Unlike its Hebei compatriot Chengde Lulu, which has a noble origin, Yangyuan Beverages has a humble background. The predecessor of Yangyuan Beverages was Hebei Yuanyuan Health Beverage Co., Ltd., which was on the verge of bankruptcy in 1999 and was transferred to Hengshui Laobaigan, but Hengshui Laobaigan failed to reverse its decline. It was not until a state-owned enterprise reform that it finally saw a turning point; a group of employees changed the fate of the company, and looking back now, these employees' fates were also changed by the company. In 2005, 58 employees, represented by Yao Kuizhang, raised 3.0949 million yuan to acquire the 'burden' of Hengshui Laobaigan, which is today's Yangyuan Beverages. The company changed from a wholly-owned subsidiary of Laobaigan Group to a private enterprise actually controlled by Yao Kuizhang, owned by 58 employees including directors, supervisors, senior managers, middle-level managers, and ordinary grassroots employees. The investment amounts of these 58 people ranged from 286 yuan to 300,000 yuan, so a 'fancy' natural person shareholder structure table appeared in the prospectus. Those who actually invested more than 2% were basically middle-level and above managers, including the general manager, office director, supply department manager, and production workshop director, totaling 12 people; those who invested less than 2% were more numerous, including financial accountants, warehouse keepers, general office clerks, salespeople, as well as drivers, kitchen chefs, gardeners, workshop workers, and boiler workers, all becoming shareholders. As of the end of 2018, the largest shareholder and actual controller Yao Kuizhang and his concerted action party Yazhi Shun Investment Co., Ltd. (hereinafter referred to as 'Yazhi Shun Investment') held a combined 39.50% of Yangyuan Beverages. Behind him are also the old employees from that time. General Manager Li Hongbing and Vice Chairman Fan Zhaolin each hold 9.87%, Gao Senlin holds 3.06%, and another 8 employees each hold 1.86%, including the former marketing manager, supply manager, production workshop director, etc., who are now almost all middle and senior managers of Yangyuan Beverages. Yangyuan Beverages' high dividend of 2.26 billion yuan in 2018 allowed Yao Kuizhang and a group of executives and other 'insiders' to fatten their wallets first. In addition, the company also has huge bank wealth management products. In recent years, the company's asset scale has grown year by year. By the end of 2018, Yangyuan Beverages' monetary funds were 3.878 billion yuan, bank wealth management products were 8.344 billion yuan, and cash assets of 12.222 billion yuan accounted for nearly 80% of total assets. At the same period end, Yangyuan Beverages' asset-liability ratio was 21.72%, mainly consisting of advance receipts, accounting for 15.86%, and there was no interest-bearing debt. A small company acquired for 3.0949 million yuan, from near bankruptcy to today's market value of over 35 billion yuan, how magical is this can of walnut milk? The Iron Can Is More Expensive Than the Milk Does Six Walnuts actually contain six walnuts? Yangyuan Beverages replied to Shijie that 'Six Walnuts' is one of the company's trademark names, where 'walnut' represents the main raw material of the product, and 'six' carries the beautiful meaning of good luck. In other words, just as a wife cake does not contain a wife, Six Walnuts does not contain six walnuts. This can also be seen from the cost of raw materials per unit product. The largest proportion of raw material cost for Six Walnuts is not walnut milk, but the aluminum can. The prospectus shows that from January to June 2017, the total raw material cost per unit of Six Walnuts was 1 yuan, of which the aluminum can was 0.57 yuan, walnut kernel was 0.25 yuan, white sugar was 0.05 yuan, and other raw materials were 0.13 yuan. That is to say, the raw material cost of a can of Six Walnuts is 1 yuan, of which the cost of the aluminum can is 2.3 times that of the walnut kernel. This is not the most magical part; even more magical is that Yangyuan Beverages also sent its aluminum can supplier on the road to IPO. After Yangyuan Beverages succeeded in its IPO after seven years and four attempts, Jiamei Food Packaging (Chuzhou) Co., Ltd. (hereinafter referred to as 'Jiamei Packaging'), which has been deeply cooperating with Yangyuan Beverages for more than ten years, also began its IPO journey. Jiamei Packaging's major customers are well-known food and beverage companies, such as Yangyuan Beverages, Wanglaoji, Yinlu Group, Dali Group, Xiduoduo, etc. Jiamei Packaging earns profits by selling various food and beverage packaging cans or providing filling services to them. However, the closest relationship is still with Yangyuan Beverages. Yangyuan Beverages is Jiamei Packaging's largest customer. From 2015 to 2017, Yangyuan Beverages contributed revenues of 1.777 billion yuan, 1.684 billion yuan, and 1.506 billion yuan to Jiamei Packaging, respectively. Although the trend is downward, it still contributed more than half of its revenue. Fortune and misfortune are always intertwined. This unusual close relationship has also become a stumbling block on Jiamei Packaging's listing path. The feedback from the CSRC's issuance examination committee pointed to the relationship between the two: Is there a significant dependence on Yangyuan Beverages? Is there a related-party relationship with Yangyuan Beverages? The prospectus disclosed by Jiamei Packaging shows that Yao Kuizhang indirectly holds a 7.06% interest in Jiamei Packaging through his controlled Yazhi Shun Investment. Yazhi Shun Investment is the second largest shareholder of Yangyuan Beverages and has a concerted action relationship with Yao Kuizhang. As of 2018, the former held 18.35% of Yangyuan Beverages' equity, and Yao Kuizhang directly held 21.15% of Yangyuan Beverages' equity. The iron can is worth more than what it contains, which made Yangyuan Beverages go to great lengths to deeply bind Jiamei Packaging. The Mystery of Capacity Expansion Yangyuan Beverages' production and sales are both declining, but the company is still vigorously expanding capacity, which is a mystery. In 2016, Yangyuan Beverages' total product output was about 990,000 tons, and total sales were about 980,000 tons. By 2017, total output fell to 840,000 tons, and total sales fell to nearly 850,000 tons, with capacity far from fully utilized. Yangyuan Beverages replied to Shijie that its production model has two types: self-production and contract processing. The company already has 5 factories nationwide, of which Hebei Hengshui, Anhui Chuzhou, and Jiangxi Yingtan are self-owned factories with a capacity of 1.36 million tons; there are contract processing bases in Henan Linying and Sichuan Jianyang with a capacity of 650,000 tons. As of the end of 2017, actual capacity had reached 2.01 million tons. Calculated based on actual conditions, Yangyuan Beverages' capacity utilization rate in 2017 was only 41.79%. Currently, the annual production of 240,000 tons of plant protein beverage construction project is nearly complete, but from 2017 to 2018, the project progress has remained at 99%. With weak performance growth and low capacity utilization, Yangyuan Beverages has attracted doubts of blind expansion. However, Yangyuan Beverages still insists on itself, and amid doubts, new production lines have already started construction. Yangyuan Beverages listed in February 2018 and actually raised net proceeds of 3.286 billion yuan. The use of funds listed two projects: 'Marketing Network Construction and Market Development' and 'Hengshui Headquarters Annual Production of 200,000 Tons of Nutritional Plant Protein Beverage'. With self-owned capacity already at 1.36 million tons, why add another 200,000 tons? Yangyuan Beverages explained that the Hengshui headquarters project with an annual output of 200,000 tons of nutritional plant protein beverages will eliminate 4 old aluminum can filling production lines and add 4 high-standard aluminum can filling production lines to improve production efficiency. But even with replacement, Yangyuan Beverages' capacity is not fully utilized. Industry analysis suggests that Yangyuan Beverages could achieve capacity expansion by improving capacity utilization, and its blind expansion approach is questionable. Overcapacity will also bring a series of risks, such as forming ineffective capacity that cannot bring expected economic benefits to the company. In addition, a significant increase in depreciation and management expenses will further drag down the company's performance. In fact, the industry's growth space is still considerable. The Prospective Industry Research Institute provided a set of data. From 2007 to 2016, the compound growth rate of plant protein beverages reached 24.51%, ranking first among beverage categories, far higher than the industry average growth rate of 16.02%. It is predicted that by 2020, the average annual growth rate of plant protein beverages will be 20.7%. For Yangyuan Beverages, there is not no opportunity. However, consumption is upgrading. If there is no major innovation and it still relies on a single product, consumers' attention will naturally shift. Six Walnuts, which claims to boost brainpower for college entrance exam takers nationwide, had better first boost the brainpower of its own company. Source: Shijie (ID: ishijie2018)