Click 'Read Original' for details. Lotus MSG was once reduced to a tool for capital players, with its main business continuously struggling, performance in a slump, and market share being eroded. Text by Lei Yanpeng Xiangcheng, Henan, is a county-level city little known to outsiders. If one were to use a person as its label, it might be Yuan Shikai; if an enterprise as its business card, it would naturally be Lotus MSG. Lotus Health Industry Group Co., Ltd. (formerly Henan Lotus MSG Co., Ltd., hereinafter "Lotus MSG") was once the pillar enterprise of this small city and the largest MSG production and export base in the country. At its peak, Lotus MSG supported over a thousand local families; if one person worked in the factory, the whole family's livelihood was assured. However, the former "King of MSG" has now reached the brink of bankruptcy, and the people of Xiangcheng no longer take pride in it. On January 30, Lotus MSG (600186, stock abbreviation "Lotus Health") announced that it expected a loss of 310 million to 370 million yuan in 2018, with net assets attributable to shareholders of the listed company also negative, and the company's stock may be subject to delisting risk warning. 01 A "Golden Rice Bowl" Hard to Come By "For the people of Xiangcheng, Lotus MSG was a golden rice bowl," Dong Mingming told Shijie. However, this is now a thing of the past. Now when returning home for the New Year, when people occasionally mention it, there is only regret. Dong Mingming's mother worked in the Lotus MSG factory for nearly 20 years and experienced the rise and fall of Lotus MSG. In the early 1990s, Lotus MSG opened recruitment quotas, costing over 10,000 yuan each. To get into the factory and secure a "golden rice bowl," in 1992, Dong Mingming's family sold pigs and sheep to pool money to buy a quota for his mother. At that time, Lotus MSG was at its zenith. Dong Mingming's mother worked in the fermentation workshop year-round, with two shifts, day and night. In 1997, Lotus MSG's output reached 120,000 tons, and its production value increased from 9.45 million yuan at its founding in 1983 to 223 million yuan, processing 350,000 tons of corn annually. Its single-factory MSG output ranked first in the world, with a domestic market share of 43.4%. The following year, Lotus MSG was listed on the Shanghai Stock Exchange. In that era, Lotus MSG workers could earn several hundred yuan a month, and the staff canteen issued 60 meal tickets monthly. After school, Dong Mingming could use one ticket to eat various meat dishes at the staff canteen. Since his mother started working at the factory, their family would cut a whole pig leg for the New Year, and within a few years, they spent over 2,000 yuan on a large color TV, becoming the first in the neighborhood to have one. However, after 2000, the prosperity of the Lotus MSG factory began to change. Dong Mingming's mother's wages began to be delayed or unpaid, sometimes for months on end. What most frightened the workers was that the workshop director would occasionally threaten layoffs. So, workers in the fermentation workshop began to give "gifts" to the director. ▵ Lotus MSG One evening in 2001, Dong Mingming's mother bought a lot of ham sausages and Jianlibao, plus two bottles of high-end liquor, and then rode a tricycle to the director's home to "give gifts." Dong Mingming recalled that his mother spent over 400 yuan on this, almost half a month's wages. "The gifts were sent, but the layoff talk was just a false alarm. His mother and her workshop colleagues were not laid off, but wages still could not be paid," Dong Mingming said. However, layoffs did come a few years later. Lotus MSG implemented "early retirement" for some workers, with retirees given certain subsidies: male workers over 55 received 400 yuan per month; female workers over 50 received 260 yuan per month. In 2010, when Dong Mingming's mother turned 50, the "golden rice bowl" was taken back, leaving only 260 yuan per month in subsidies. In the decade before early retirement, his mother's wages had barely changed. "About 900 yuan per month, it stayed that way," Dong Mingming told Shijie. 02 The "Lotus" Withers In 2010, the year Dong Mingming's mother was laid off, Lotus MSG's performance also took a major turn. The annual report showed that Lotus MSG's net profit in 2010 fell by 90.78%, and the current non-recurring net profit loss was as high as 238 million yuan. It was also from this year that Lotus MSG's non-recurring net profit continued to lose money until now, with cumulative losses reaching 2.334 billion yuan by 2017. In 2018, non-recurring net profit is expected to lose 300 million to 360 million yuan. In fact, Lotus MSG's performance fluctuations began as early as 2002. In 2002, the company's net profit fell by 86.74%, and by 2003 it began to lose money, with a net loss of 145 million yuan and non-recurring net loss of 152 million yuan. After that, net profit improved slightly, but non-recurring net profit only improved after four consecutive years of losses. Revenue peaked in 2011 and then began to decline all the way. Interestingly, Lotus MSG's net profit, starting from 2010, showed a regular fluctuation pattern—interspersed with losses, or rather, interspersed with profits. More regularly, profits were generally between 20 and 30 million yuan, while losses were often as high as 300 to 500 million yuan. Reviewing the annual reports, it can be found that in the years when Lotus MSG turned profitable, large government subsidies and debt restructuring gains played a decisive role. Taking 2014 as an example, the current net profit was 23.8695 million yuan, but behind it were government subsidies of 166 million yuan, debt restructuring gains of 47.5074 million yuan, and gains from disposal of non-current assets of 35.1226 million yuan. During this period, Lotus MSG's largest shareholder was Henan Agricultural Comprehensive Development Company (hereinafter "Henan Nongkai"), holding 11.90% of shares, and it was the actual controller of the listed company. Henan Nongkai is a provincial state-owned sole proprietorship policy investment institution authorized by the Henan Provincial People's Government. Since becoming the largest shareholder in December 2009, Henan Nongkai did not bring operational improvements to Lotus MSG, but it did put considerable effort into the shell protection battle. Lotus MSG was an enterprise with long-term state-owned capital control, but in 2014, the company's actual controller changed, state capital faded out, and "capital players" took the stage. In December of that year, Ruikang Investment and its concerted action persons became the company's largest shareholder, Henan Nongkai stated it had "no intention to increase holdings to gain control," and Xia Jiantong officially became the actual controller of Lotus Health. After that, Henan Nongkai reduced its holdings and exited the ranks of shareholders holding more than 5%. Xia Jiantong, who became a Harvard University design PhD at the age of 24, is also a "super player" in the capital market. In just two years, Xia Jiantong took control of two listed companies, Lotus MSG and Ruikang Co., Ltd., and also served as chairman of the listed company Tianxia Zhihui. In 2016, Xia Jiantong cashed out 4.1 billion yuan from Tianxia Zhihui, becoming the youngest cash-out tycoon that year. ▵ May 19, 2016, Beijing, Xia Jiantong, president of United Ruikang Group, interviewed in his office After taking over Lotus MSG, Xia Jiantong successively pledged Ruikang Investment's shares in Lotus MSG, and by February 2018, 100% had been pledged to Anhui Guohou, accounting for 11.78% of total shares. During this period, the private placement plan that Xia Jiantong had high hopes for ended in failure, and Lotus MSG became a lawsuit-ridden company burdened with debt. In July 2018, Xia Jiantong resigned from all positions at Lotus MSG, including chairman and director, and the new chairman was Wang Weifa, who held a position at Anhui Guohou. Currently, Xia Jiantong is still the actual controller of Lotus Health, but due to failure to repay loans on time, the 11.78% he holds has been applied for sequential freezing by the pledgee Anhui Guohou. Lotus MSG was reduced to a tool for capital players. All the shuffling did not improve the company's operations; the main business continued to struggle, performance was in a slump, and market share was continuously eroded. Since the beginning of the new century, the supply and demand in the MSG market has changed. Starting from 2003, after three rounds of industry consolidation, the number of production enterprises has been reduced from over 200 to fewer than 10 today. In this process, the MSG industry formed a tripartite pattern, with the top three being Fufeng Group, Meihua Bio, and Yipin Bio, and the former "King of MSG" Lotus MSG was nowhere to be seen. As of 2017, the production capacities of Fufeng Group, Meihua Bio, and Yipin Bio reached 1.3 million tons, 700,000 tons, and 420,000 tons respectively. The combined market share of these three enterprises exceeded 80%, and in the future, it will further concentrate. Recently, Lotus MSG has not disclosed its production capacity, only stating in its annual report that all MSG production enterprises with a capacity of less than 50,000 tons have been eliminated, forming a highly concentrated industrial pattern. Data shows that Lotus MSG's market share has fallen to less than 9%. 03 Blind Diversification From a local star enterprise to today's state of muddling along, what exactly happened to Lotus MSG? Pacific Securities analyst Huang Fusheng summarized to Shijie: "Poor management, old state-owned enterprise, heavy burdens." Overcapacity is a long-standing problem in the MSG industry. Data shows that in 2016, China's MSG output was 2.3 million tons, but domestic consumption was only about 1.49 million tons, and this was after several rounds of industry consolidation. Qianzhan Industry Research Institute predicts that the MSG industry's growth rate will be around 2% in the next five years, with limited growth space. Currently, Fufeng Group is the world's largest MSG producer. It originally mainly provided glutamic acid, the semi-finished product of MSG, to other MSG manufacturers, and began launching its own MSG brand in 2009. Fufeng Group, moving from behind the scenes to the forefront, deeply cultivated the entire industry chain, occupied the core competitiveness of cost advantage, and directly broke the old pattern of the MSG industry. When Lotus MSG attributed its performance decline to rising costs of production raw materials such as corn, Fufeng Group Chairman Li Xuechun confidently told investors: "The rise in corn prices has nothing to do with our operating performance. Please remember this sentence." Although MSG has always been Lotus MSG's core product, in the brutal industry competition, Lotus MSG also tried diversification early on, but blind diversification not only failed to contribute profits to the listed company but also dragged down the development of its main business. From around 2000, Lotus MSG successively invested in seasonings, non-staple foods, health products, mineral water, thermal power, leather and products, feed, machinery and equipment, flour, compound fertilizer, sugar industry, logistics, and other fields, basically all ending in failure, and some even led to lawsuits. ▵ Some other products of Lotus MSG In recent years, the main business has been basically stable in MSG, chicken essence, flour, and compound fertilizer, but none has core competitiveness; there are 6 holding and participating companies, but in 2017, all were in a loss state, with the worst losing 178 million yuan. Lotus MSG was not short of money at the beginning. In 1998, the initial public offering raised net funds of 680 million yuan, and in 2001, it raised another 730 million yuan through a new share issuance. However, this spending spree not only failed to generate returns but also neglected the main business. In its reply to the inquiry letter in 2017, Lotus MSG also summarized the reasons for the years of losses in its main business: "From 2002 to 2004, due to large-scale technical transformation, heavy investment in environmental protection treatment, and failure of external investments, the capital chain broke, causing all bank loans to be overdue, and some overdue loans were still unable to be repaid, making it impossible to raise funds through normal channels." In 2017, Lotus MSG's debt ratio was as high as 105.86%. 04 Transformation to Big Health Zhu Danpeng, a Chinese food industry analyst, told Shijie that Lotus MSG's current situation was completely expected. "Over the years, with changes in the entire industry, consumers' consumption thinking has long changed, and MSG has gradually been abandoned by households." Data shows that household packaging consumption of MSG accounts for only 10%, while industrial packaging and catering packaging account for 70% and 20%, respectively. It seems that in these years of increasing health awareness and emerging substitutes, MSG is no longer a must-have seasoning for housewives, and voices rejecting MSG are increasing, such as "MSG causes cancer when heated," "chemical products are unhealthy," and "chicken essence is healthier than MSG." But is this really the case? The main component of MSG is monosodium glutamate, with purity generally greater than or equal to 99%, usually fermented from corn, and its main function is to enhance the umami taste of food. In the words of Sun Baoguo, an expert in spices and food additives, "You can eat corn, so why be afraid of MSG?" Chicken essence is a compound seasoning made from MSG plus other ingredients, so there is no basis for saying it is 'healthier.' Regarding the rumor that "MSG causes cancer when heated," it is widely circulated, but Yun Wuxin, a science writer focused on food engineering, denied this claim to Shijie. The fact is that MSG does produce pyroglutamic acid sodium when heated, but the conversion rate is minimal. More importantly, "pyroglutamic acid sodium is not harmful; it just no longer has the umami taste of MSG," Yun Wuxin said. Rumors not only affect consumer thinking but also create public opinion that affects enterprises. In 2012, Lotus MSG pointed out in its annual report that it accelerated the promotion of new products such as domestic chicken essence and export chicken essence. In 2015, Lotus MSG changed its name to Lotus Health, confirming its future transformation strategy to enter the fields of smart agriculture and big health. In its annual report, it stated that based on the mission of "solving human health, land health, and animal and plant health," it would build a smart agriculture industry chain and big health industry ecosystem centered on the "Seven Lotuses" of "healthy product sources, food safety and nutrition testing management systems, land and plant nutrition, comprehensive smart agriculture, innovative finance, modern C2B, and health service solutions." It seemed eager to reform, but the high debt only allowed Lotus MSG to dust itself off and ride on the concept of big health, with no substantive changes. The main business remained MSG, flour, and chicken essence, plus a compound fertilizer. Today's Lotus Health, if it really wants to save itself, is only a case of having the will but not the means. When the times abandon you, they don't even say goodbye. If you panic, you will fall even faster. Source: Shijie (ID: ishijie2018) New Distribution will hold the 2019 (5th) FMCG + Internet Conference during the Chengdu Spring Sugar and Wine Fair from March 15 to March 18. This conference will focus on the topic of "Breaking the Game" , with in-depth discussions with many brand owners, supply chain service providers, distributors, retailers, and others. Compared to previous conferences, this summit will be fully upgraded. In addition to the original topics of channel innovation, city distribution logistics, and distributor transformation , it will add multiple parallel forums on new marketing cases, IP + FMCG empowerment, community group buying, and innovative retail . Through three days of ten high-density, high-quality expert sharing and exchanges, we believe every brand owner and distributor can learn the latest business models, expert opinions, and practical methods, finding new tools and methods for breaking the game in 2019 and returning to the track of rapid growth. 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