Recently, Yurun Food released its 2017 annual results, reporting revenue of approximately HK$12.057 billion, down 27.8% year-on-year, and a net loss of HK$1.915 billion, narrowing from the previous year's loss of HK$2.342 billion. Industry insiders point out that due to the sluggish pork market in 2017, the market for Yurun's processed meat products also declined. Furthermore, years of declining performance have left the company battered, and the fact that Yurun's chairman, Zhu Yicai, is under residential surveillance at a designated location have all impacted Yurun's development. Marketing expert Lu Shengzhen stated that Yurun's performance decline stems from the influence of its key leaders. As a listed company, instability in corporate leadership can lead to instability in the capital market, which in turn affects its financing and investment, and expands competitive investment against rivals. Moreover, compared with other competing brands, Yurun's brand investment has significantly decreased or been insufficient, which also affects end consumers' awareness of Yurun and dealers' enthusiasm for operating the Yurun brand. Persistent Low Performance Yurun is a Chinese producer of low-temperature meat products, with four major brands: "Yurun," "Wangrun," "Furun," and "Dazhong Roulian." On the evening of March 20, the company released its annual results for the year ended December 31. During the reporting period, the company's revenue decreased by 27.81% year-on-year to HK$12.057 billion (same below), gross profit increased by 2.12% to HK$723 million, and the annual loss narrowed by 18.23%, from a loss of HK$2.342 billion in 2016 to HK$1.915 billion in 2017. According to public data, Yurun Food's chilled fresh meat sales in 2017 were HK$9.275 billion, a decrease of 32.1% from the previous year, accounting for approximately 91% of upstream slaughtering business revenue; low-temperature meat products revenue was HK$1.914 billion, an increase of 1.5% from the previous year, accounting for approximately 90% of downstream deep-processed meat products revenue. Data shows that Yurun Food's slaughter volume in 2017 was approximately 5.46 million heads, a decrease of about 17.6% from the previous year. Overall upstream business sales revenue (before inter-segment elimination) decreased by 31.1% to HK$10.162 billion. In 2017, with hog prices on a downward trend, and Yurun aiming to maintain maximum profit, it made appropriate adjustments in slaughter volume growth, leading to a reduction in overall upstream business sales revenue. In deep-processed meat products, sales (before inter-segment elimination) were HK$2.134 billion, an increase of 1.4% from the previous year. Lu Shengzhen believes that other brands are increasing the supply of chilled fresh meat and stepping up R&D of high-end cooked food products. In particular, chilled fresh meat accounts for nearly half of meat product sales. Yurun lags behind competitors in this area, which also limits its market influence. Especially the lack of high-end products further restricts its profit improvement. At the same time, Yurun Food also stated that in the face of various market fluctuations and unstable factors, it will take all feasible measures and methods to reduce the group's capital expenditure, optimize the existing asset structure, strengthen brand image and market positioning, and expand sales channels and networks to maintain business stability. In 2017, Yurun spent HK$1.994 billion on operating expenses, a decrease of 25.7% from HK$2.682 billion the previous year, including impairment losses on certain assets of approximately HK$674 million. Yurun Food explained the reduction in operating expenses as follows: impairment losses on non-current assets decreased by approximately HK$582 million compared with the previous year, and Yurun further compressed some positions to save costs, resulting in a reduction in wages and related employee costs. Operating expenses after deducting impairment losses accounted for 10.9% of Yurun's revenue. In addition, Yurun's financial expenses also decreased relatively. In 2017, financial expenses were HK$264 million, compared with HK$404 million the previous year, a decrease of 34.7%. Yurun stated that this was mainly due to the appreciation of the RMB during the review year, which brought exchange gains to Yurun. Uncertainty in Going-Concern Ability It is worth noting that Yurun may have significant uncertainty regarding its ability to continue as a going concern. According to public data, in 2017, the group's gross profit was HK$723 million, with a net loss of HK$1.915 billion; net current liabilities were HK$7.912 billion; total bank and other loans and finance lease liabilities were HK$7.564 billion, of which HK$7.214 billion would mature within 12 months from December 31, 2017; and it failed to meet loan covenants for certain bank loans totaling HK$5.916 billion, of which HK$1.846 billion was due for repayment on or before December 31, 2017. At the same time, several of Yurun's subsidiaries are involved in various claims and lawsuits. In addition, as of December 31, 2017, impairment losses on property, plant and equipment and prepaid lease payments that were recognized as recoverable through sale rather than through continued use totaled HK$603 million. Furthermore, Yurun Food's auditor, Moore Stephens CPA Limited, stated that it was unable to obtain sufficient support from management for the going-concern assumption stated in the notes to the consolidated financial statements to confirm its reasonableness and supportability. Therefore, the firm was unable to assess the appropriateness or reasonableness of using the going-concern basis in preparing the consolidated financial statements. How Did It Come to This? As one of China's largest meat product manufacturers, Yurun once had the potential to compete with Shuanghui Development, but now Shuanghui Development's annual revenue exceeds 50 billion yuan, while Yurun is still hovering around 10 billion and is "shaky," which is lamentable. It must be said that a company's development is, to a certain extent, a reflection of its leaders' worldview and methodology. Yurun started with mergers and acquisitions, rapidly expanding through the acquisition of Nanjing Canned Food Factory, Jiangsu Donghai Meat Processing Plant, and Harbin Meat Processing Plant. The sweet taste of rapid expansion through M&A lingered in the leaders' minds like the taste of "opium." After listing on the capital market in 2005, Yurun, with a "bulging wallet," once again entered M&A mode, extending its acquisition fields even to real estate, tourism, and other industries. The result is predictable: after rapid expansion, the company failed to smoothly integrate with the market environment. The sluggish pork products market increased capital expenditure and borrowing costs, and operating pressure increased year after year, until it accumulated into the current state of "barely surviving." Now, Yurun Food has few options left. One is to "cut off an arm to survive": selling assets to exchange for cash flow to support company operations. As can be imagined, this is a difficult path. The second is to "seek strategic partners." At the company level, it wants to find potential strategic investors to improve cash flow. Considering the company's losses, debt, and market competitors, the risk is slightly higher for investors, but the company's core asset advantages are also relatively obvious. At the China Consumer Market Development Annual Meeting and Commodity Sales Statistics Press Conference in April 2017, the company's low-temperature meat products and chilled fresh meat were both domestic market champions. Whether it can meet a "bold" financial backer is hard to say. Lu Shengzhen believes that diversified development needs to consider changes in the macro environment. Yurun is involved in finance, real estate, logistics, and other industries, most of which are within the scope of macro adjustment. Moreover, problems and hidden dangers in these industries have existed for a long time. The corporate loan and financing environment is no longer as optimistic as before, especially when Yurun's own capital accumulation and capital regeneration capacity are reduced, making diversification very difficult. According to public data, Yurun has begun to sell its assets to recover funds. At a consideration of HK$14.954 million, it sold all equity in a wholly-owned subsidiary in the chilled fresh meat and frozen meat segment, with a loss on disposal of HK$842,000 recognized in the 2017 profit or loss; at a cash consideration of HK$66.713 million, it sold all equity in a wholly-owned subsidiary in the chilled fresh meat and frozen meat segment, with a gain on disposal of HK$62.89 million recognized in the 2016 profit or loss. Lu Shengzhen stated that selling assets is to make up for poor performance, a self-healing act of "selling blood for blood," and also to make up for the shortage in the capital chain. Source: Blue Whale Industry and Economics, Yang Zeshi -END-