From 2014 to the first half of this year, the parent company of 'Six Walnuts,' Yangyuan Drinks, has invested nearly 2 billion yuan in advertising and marketing. Plagued by negative news and lawsuits, can 'Six Walnuts,' which lacks sustainable development capability, win favor from capital?

With annual profits of 2.7 billion yuan and a strong desire to go public, the fourth IPO attempt of its parent company, Hebei Yangyuan ZhiHui Beverage Co., Ltd. (hereinafter 'Yangyuan Drinks'), was met with a 'deferred vote'.

A review of its prospectus by EO reveals that despite four IPO attempts over seven years, Yangyuan Drinks is actually 'not short of money.' In the first half of 2017, it purchased wealth management products worth approximately 4.7 billion yuan from banks. During the reporting period, cash dividends totaled 4.509 billion yuan, and undistributed profits at the end of the period were 5.2 billion yuan, while the IPO itself aims to raise only 3.2 billion yuan. Why is Yangyuan Drinks, which 'doesn't lack money,' so persistent in going public?

Industry insiders analyze that with the slowdown in growth of plant protein beverages and intensifying industry competition, Yangyuan Drinks, founded in the same year as Chengde Lulu, hopes to expand its market share through listing. Ironically, of the 3.2 billion yuan to be raised, 1.895 billion yuan will be used for 'marketing network construction and market development projects.' This means that nearly 60% of the raised funds will be invested in advertising and marketing. The importance 'Six Walnuts' places on advertising is evident.

Is advertising marketing truly a panacea for performance? Industry experts told EO that while advertising can indeed improve product awareness and sales performance to a certain extent, over-reliance on marketing while neglecting product innovation and development poses significant risks in the long run. At the same time, due to suspected false advertising and breach of contract, Yangyuan Drinks, which is entangled in lawsuits, will face a difficult road to listing.

Repeatedly Hinting at 'Brain-Boosting' Effects, Yet Suspected of False Advertising

'Use your brain often, drink more Six Walnuts.' With this familiar slogan, Six Walnuts quickly spread across the national market. In 2010, Yangyuan Drinks spent 60 million yuan to invite Chen Luyu as spokesperson and placed ads during the prime time slot after CCTV's 'News Broadcast.' It can be said that Six Walnuts' positioning is very precise, targeting students, white-collar workers, and other mental laborers, perfectly catering to the gift market for this demographic.

The clever positioning has also brought substantial profits to Six Walnuts. Its prospectus shows that as of June 30, 2017, Yangyuan Drinks had total assets of approximately 9.778 billion yuan and net assets of 5.984 billion yuan. Since 2013, the company's operating revenue has exceeded 7 billion yuan and has been increasing by hundreds of millions each year. In 2016, net profit approached 2.4 billion yuan, far exceeding that of comparable listed company Chengde Lulu.

Six Walnuts' advertising has sparked controversy.

However, since 'walnuts boost the brain' lacks scientific basis, the China Food and Drug Administration has also issued announcements stating that it has never approved health foods with functions such as brain-boosting or IQ enhancement. Meanwhile, industry insiders analyzing the ingredient list of 'Six Walnuts' found that the actual walnut content is only 1-2 walnuts, far less than the 'six walnuts' implied by the brand name. Yangyuan Drinks' slogan 'Use your brain often, drink more Six Walnuts' has been frequently questioned for suspected false advertising, and since 2015, it has faced nearly 10 lawsuits.

In 2016, an international contract dispute also plunged Yangyuan Drinks into a 'credibility' crisis. According to the prospectus, due to unilateral breach of a walnut purchase agreement, U.S.-based Golden State Foods sued Yangyuan and its actual controller, Hong Kong-based Bingo International Trading Company, in a U.S. court, seeking $10.29 million in compensation.

Although Yangyuan Drinks responded publicly that 'the brand, including the slogan, has been approved by national authorities, and there is absolutely no legal problem; the company has never signed any purchase contract with Golden State Foods, so there is no breach of contract,' the company, entangled in lawsuits, will have to expend significant energy dealing with them, which may adversely affect its normal operations.

Heavy on Marketing, Light on R&D, Subsequent Growth Lacks Momentum

From 2014 to the first half of this year, the company has invested nearly 2 billion yuan in advertising and marketing. Compared with the huge advertising expenses, Yangyuan Drinks' spending on product R&D appears 'stingy,' with cumulative investment of only 0.19 billion yuan in disclosed data. Over-reliance on a single product has become the biggest constraint on its development over the years, but the prospectus does not show any determination by Yangyuan Drinks to change.

Yangyuan Drinks' recent performance.

However, Yangyuan Drinks is far from being able to neglect R&D. It acknowledges in the prospectus the 'risk of a single product category.' Although it has products such as walnut milk, walnut peanut milk, and walnut almond milk, all are based on walnut kernels. Since 2014, sales revenue from walnut milk has accounted for over 90% of the company's main business revenue, reaching as high as 97.3% in 2016.

The over-reliance on 'Six Walnuts' also poses risks for Yangyuan Drinks' future development. In fact, its revenue began to decline in 2016, and based on the first-half 2017 performance forecast, it faces a similar decline this year. It is also worth noting that the gradual increase in marketing costs has not brought proportional market results, indicating that the effect of marketing is gradually weakening.

However, Six Walnuts, which repeatedly skirts the edge, has not stopped its 'brain-boosting' marketing path. In 2016, Yangyuan Drinks invested 158 million yuan to sponsor the Jiangsu TV variety show 'The Brain.' From CCTV's 'Challenge Impossible' to Hunan TV's 'Study Well,' and Shandong TV's 'I Am a Teacher,' Six Walnuts is a presence behind many popular brain-training shows. The information revealed in this prospectus shows that Yangyuan Drinks intends to continue its 'advertising blitz' model to the end.

Shen Yong, chairman of Jiangjia Enterprise Management Consulting Co., Ltd. and a practical marketing planning expert, told EO that products are the core of successful marketing, and prioritizing marketing over R&D goes against objective laws. In an era of market transformation and consumption upgrading, it is difficult to maintain a long-term advantage. Huge advertising investments also place a significant burden on the company. Yangyuan Drinks should increase the proportion of investment in product R&D, develop diversified products, return to the essence of products, and enhance consumer experience. At the same time, it should no longer be limited to traditional advertising models but leverage new media such as the internet for personalized marketing.

Another IPO Attempt: What Does the 'Cash-Rich' Six Walnuts Want?

Yangyuan Drinks was established in 1977 and was initially owned by Hengshui Laobaigan Group. Due to low efficiency and near bankruptcy, Laobaigan Group decided to sell it publicly. Ultimately, 58 old employees, led by Yao Kuizhang, took over Yangyuan Drinks for 3.0949 million yuan, after which it quickly embarked on a market-oriented path.

From 1977 to 2011, plant protein beverages rose, and companies such as Chengde Lulu, Coconut Palm Group, and VV Food & Beverage emerged one after another. After years of market competition, leading enterprises and major brands have emerged in the mainstream product categories of this industry, and the market structure has basically formed. The earliest entrants also reaped the first wave of dividends in the plant protein beverage market.

Competitive landscape of plant protein beverages.

With the slowdown in macroeconomic development, the growth rate of the beverage industry has declined. According to data from the National Bureau of Statistics, the main business revenue of enterprises in the milk-containing beverage and plant protein beverage industries grew at an average monthly year-on-year rate of 24% in 2013, which fell to 17% in 2014 and continued to decline to 6% in 2015. In the results announced by Chengde Lulu, revenue and net profit in 2017 were 2.5 billion yuan and 450 million yuan, respectively, down approximately 6.9% and 2.8% year-on-year.

While the overall environment is not optimistic, Yangyuan Drinks' walnut milk territory is also facing threats from more and more listed companies. Its prospectus mentions that walnut milk, a plant protein beverage, has gradually become the preference of more consumers due to its nutritional and health characteristics, and more and more manufacturers are entering the industry. Currently, well-known brands such as Chengde Lulu, Yili, Mengniu, Wahaha, and Panpan have all entered the walnut milk industry, and the company faces the risk of intensified competition.

At the same time, as a local Hebei enterprise, Yangyuan Drinks' sales revenue from Henan, Hebei, Shandong, and Sichuan accounts for more than 50% of its total, and other regions still face significant challenges.

Unlike Chengde Lulu, which was listed on the Shenzhen Stock Exchange as early as 1997, Yangyuan Drinks' road to listing has been quite bumpy. Nowadays, enhancing brand value, diversifying operations, and accelerating the expansion of the national market are key tasks that Yangyuan Drinks must undertake, which may also be one of the reasons for its persistent pursuit of listing over the past seven years. But this time, Yangyuan Drinks has still chosen the 'marketing-first' money-burning strategy. Can 'Six Walnuts,' plagued by negative news, lawsuits, and a single product, win favor from capital? For now, its road to listing remains shrouded in mist.

Source: EO (ID: i-yiou) -END-