Behind the massive dividends lies a serious imbalance in corporate governance at Yangyuan Drinks, a listed company. Like a severely unbalanced ship, the future of Yangyuan Drinks, China's largest walnut milk beverage manufacturer, looks bleak. Yangyuan Drinks was founded in 1997, and its production of the star product 'Six Walnuts' began at the start of this century. This listed company, which often hires celebrities to endorse its walnut milk products, has just experienced four years of performance turmoil. Since 2016, performance growth has fluctuated, with the average growth rate of net profit attributable to shareholders over four years below 2%. Market value has repeatedly hit new lows, making it one of the worst-performing new stocks since 2018. Yangyuan Drinks' core product is 'Six Walnuts,' a plant-based protein beverage made from walnuts, with the well-known slogan 'Use your brain often, drink more Six Walnuts.' After being endorsed by famous TV host Lu Yu, Six Walnuts entered thousands of households. Public financial data shows that in 2010, Yangyuan Drinks' revenue growth exceeded 100%. After many twists and turns, and three attempts at IPO, Yangyuan Drinks finally entered the capital market in 2018. Its issue price of 78.73 yuan made it a high-priced stock among A-share listed companies. However, from a valuation perspective, the issue price-to-earnings ratio (PE) was only 17.7 times, far below the 50 times PE of the food and beverage industry at that time. This led many investors to harbor dreams of wealth, as Yangyuan Drinks was seen as both 'brain-boosting' and 'money-making.' Unfortunately, Yangyuan Drinks 'turned its face' upon listing. This listed company, formed by a group of 'old-timers' who still control the helm after listing—in fact, management-controlled—has lost its past passion, making the company's management inefficient and lacking vitality. Performance growth fell rapidly from high levels, and the stock price entered a long downward channel upon listing, with a decline of nearly 30% to date. This does not prevent Yangyuan Drinks from distributing generous dividends. After a large dividend of 10 shares with 30 yuan cash and 4 bonus shares per 10 shares in fiscal year 2018, the company introduced another dividend plan of 10 shares with 20 yuan cash and 2 bonus shares per 10 shares in fiscal year 2019, with a dividend payout ratio of 78%. -01- Who Took Yangyuan Drinks' Dividends On April 17, while releasing its 2019 annual report, Yangyuan Drinks also announced its dividend plan. According to the announcement, Yangyuan Drinks plans to distribute 20 yuan cash per 10 shares and increase share capital by 2 shares per 10 shares, with a cash dividend ratio of 78.25%, and an actual dividend of 2.1 billion yuan this time. Most of the dividends will go to Yao Kuizhang, Li Hongbing, Fan Zhaolin, and other company management. Publicly disclosed information shows that Yao Kuizhang is the company's chairman and a representative of the Hebei Provincial People's Congress; Li Hongbing is the vice chairman and deputy general manager; Fan Zhaolin is the company's director and general manager, and Fan is also a member of the Hengshui CPPCC Standing Committee; other major shareholders include Deng Lifeng, who serves as a director and deputy general manager, Xing Shulan, a director and financial officer, Zhu Zhanbo, a director and chairman of the supervisory board, and former director Li Zhibin. The largest shareholders are Yao Kuizhang, Fan Zhaolin, and Li Hongbing, who together directly and indirectly hold 53% of Yangyuan Drinks' shares. This means that of the above 2.1 billion yuan in massive dividends, 1.12 billion yuan flowed into the pockets of management shareholders such as Yao Kuizhang, Fan Zhaolin, and Li Hongbing. According to 2018 financial data, Yangyuan Drinks made a large cash dividend of 2.26 billion yuan that year. The above three individuals also held approximately 53% directly and indirectly, meaning over 1.2 billion yuan in cash dividends went to Yao Kuizhang, Li Hongbing, and Fan Zhaolin. Over the past two years, management representatives Yao Kuizhang, Li Hongbing, and Fan Zhaolin have received a cumulative cash dividend of over 2.3 billion yuan from the listed company. This far exceeds the compensation levels management received from the listed company. Financial data shows that in 2019, the management of Yangyuan Drinks with publicly disclosed information (including Yao Kuizhang, Li Hongbing, Fan Zhaolin, Xing Shulan, etc.) received a total compensation of only 3.8975 million yuan from the listed company, and only 7.31 million yuan over two years. Among them, Yao Kuizhang's compensation was 180,000 yuan, Fan Zhaolin's was 1.25 million yuan, and Li Hongbing's was only 100,000 yuan. The contrast between management compensation and massive dividends is stark. Unfortunately, behind the large dividends is the company's sluggish performance. -02- The 'Mysterious' Low Performance In 2019, Yangyuan Drinks achieved revenue of 7.5 billion yuan, returning to the level of 2013 overnight. Before its listing in 2018, Yangyuan Drinks had faced much skepticism, having gone through three IPO attempts. The most criticized aspects were weak growth, questionable long-term profitability, product singularity, and lawsuits over 'false advertising.' From the above chart, it is also easy to see that Yangyuan Drinks' revenue was less than 1.1 billion yuan in 2010, but rapidly grew to 7.4 billion yuan by 2013. The company did not disclose revenue for 2011-2012, but based on the above data, simple calculations show that its compound growth rate during 2011-2013 was as high as 89%. However, as we have seen, the company's revenue growth then suddenly declined, from 89% to around 10%, and now to negative growth. The mysterious revenue data is behind the sluggish product sales. The star product 'Six Walnuts' sold approximately 940,000 tons in 2016, which quickly fell to 770,000 tons in 2019, a decline of nearly 20%. In stark contrast is the company's overwhelming advertising and marketing efforts. Since 2016, Yangyuan Drinks' selling expenses have remained stable at over 1 billion yuan, with more than half going to advertising and marketing. Despite the high selling expenses, the company's revenue has not grown. Data shows that selling expenses as a percentage of revenue increased from 10.1% in 2015 to 14.4% in 2019, up 4 percentage points. During the same period, sales revenue fell from 9.1 billion yuan in 2015 to 7.5 billion yuan in 2019, a decline of 18%. The awkward data reflects a reality: either the products lack innovation and consumers are resistant, or the advertising and marketing strategies are inappropriate, leading to low operational efficiency. Yangyuan Drinks' products are overly singular, with walnut milk (Six Walnuts) contributing nearly 100% of the company's revenue, which affects long-term performance. According to the company's official website, its brand products are all walnut milk, with changes mainly in 'packaging' or names. This is not surprising, as R&D does not hold a significant position at Yangyuan Drinks. In 2019, Yangyuan Drinks' R&D expenses doubled, but were only 57 million yuan, just over 5% of its total selling expenses in 2019, and less than 1% of revenue. All these signs ultimately led to the company's volatile performance over the past four years, rising and falling, with shareholder returns declining year by year. Let's look at the company's volatile performance over the past four years in terms of revenue and net profit attributable to shareholders, which makes it difficult for investors to find a benchmark for future performance. Return on net assets has declined year by year. In 2013, it was as high as 102%, but by 2019, it was only 22%. The bleak market prospects and unstable product sales growth have increased pressure on the company's marketing and other expenses, which in turn further erodes its profitability and casts a shadow over its long-term growth prospects. Institutions are pessimistic about the company's 2020 performance prospects. According to Wind consensus forecasts, Yangyuan Drinks' revenue will further decline by 16% in 2020, leading to a 13% decrease in net profit attributable to the parent company. According to the company's latest first-quarter financial report, Yangyuan Drinks' net profit attributable to shareholders fell sharply by 38%, of course, affected by the COVID-19 pandemic. A leading consumer goods company in a niche sector with such poor performance gives investors ample reason to question whether the company's corporate governance is reasonable. -03- Inefficient and Lacking Vitality in Corporate Governance As mentioned earlier, despite the sluggish revenue and net profit growth and declining shareholder returns, ChinaVenture found that since its listing in 2018, no board member has ever questioned the company's performance at any board meeting. A very important reason is that the board of directors and management are highly aligned. There are 9 board members: 6 company directors and 3 independent directors. The 6 company directors—Yao Kuizhang, Fan Zhaolin, Li Hongbing, Xing Shulan, Deng Lifeng, and Xia Junxia—all hold different positions in the company, from general manager to financial officer, covering operations, finance, and internal audit. Yao Kuizhang, Fan Zhaolin, and Li Hongbing completely control the company's operations and direction. Yao Kuizhang, although not ostensibly in the management layer, actually controls the company's operations and is the actual controller, directly and indirectly owning 28%. Since the board members and management are highly aligned, the agency system, which is the cornerstone of corporate governance for joint-stock companies, loses its practical significance. Any questioning of management would imply a self-denial by the board. Looking at the three independent directors of Yangyuan Drinks, Huo Junsheng and Ma Aijin are food experts, and Yu Li has a background in finance. The past experiences of the three independent directors are not sufficient to show that they can bring significant improvements to the listed company's operations and governance. Over the past two years, the three independent directors have never questioned the company's performance at board meetings. This is in stark contrast to the criticism from external shareholders and the media regarding Yangyuan Drinks' sluggish growth, high marketing expenses, and declining shareholder profitability. From the perspective of dividends, the high cash dividend ratio, although helpful in rewarding shareholders, shows that the vast majority of cash dividends flow to management shareholders of Yangyuan Drinks. In contrast to the large cash dividend ratio is the company's extremely sluggish performance. The stark contrast in data reflects significant governance issues, with management lacking sufficient motivation to improve performance or show greater ambition in product layout and R&D. Another fact that must be acknowledged is that the shareholdings of shareholders represented by Yao Kuizhang, Fan Zhaolin, and Li Hongbing were mainly formed before the listing. ChinaVenture statistics show that, apart from share changes due to increases or decreases after listing, Yao Kuizhang, Fan Zhaolin, Li Hongbing, and others were among the top ten shareholders at the time of listing, holding a total of 71.46%. This means that the wealth of core management members, measured by market value, is close to 20 billion yuan (not considering subsequent increases or decreases). If calculated based on shareholdings at the end of 2019, Yao Kuizhang, Fan Zhaolin, and Li Hongbing hold 27.54%, 12.9%, and 12.9% respectively. Based on the company's total market value of 28 billion yuan on the latest trading day, the total wealth of the three is 7.7 billion yuan, 3.6 billion yuan, and 3.6 billion yuan, respectively, totaling 14.9 billion yuan. With the huge wealth effect, coupled with the high dividends resulting from absolute control of the board, Yangyuan Drinks' management clearly has no motivation to move forward. On the latest trading day, Yangyuan Drinks' stock price closed at 26.57 yuan, up 0.34%, with a total market value of 28 billion yuan. Source: Ran Dian New Consumption (ID: xinxiaofei007) Tips will be paid 400-2000 yuan once the tip is adopted.