As the Only Leading Dairy Company Present at the Fifth China Quality Conference, Guangming Dairy Has Not Delivered an Ideal “Report Card.”
Recently, Guangming Dairy released its third-quarter report for 2023. During the first three quarters, the company achieved revenue of 20.664 billion yuan, a year-on-year decrease of 3.37%; net profit was 323 million yuan, a year-on-year decrease of 12.67%; while net profit after deducting non-recurring gains and losses increased by 10.68% year-on-year to 312 million yuan.
Regarding the decline in net profit, Guangming Dairy explained that it was primarily due to a year-on-year decrease in domestic revenue during the reporting period and losses from its overseas subsidiaries. However, the company’s losses are not a recent phenomenon.
Slowing Performance Distributors Continue to Leave
It is well known that Guangming Dairy has three major business segments: dairy manufacturing, animal husbandry, and other industries, primarily producing and selling fresh milk, fresh yogurt, UHT milk, UHT yogurt, lactic acid beverages, ice cream, infant and elderly milk powder, cheese, and butter. However, the financial reports clearly show that the company’s dairy performance mainly comes from liquid milk.
Taking the most recent two complete fiscal years as examples, in 2021 and 2022, dairy revenue accounted for over 85% of Guangming Dairy’s total revenue, while animal husbandry and other industries contributed less than 20%. Within the dairy segment, liquid milk brought in revenue of 17.101 billion yuan and 16.091 billion yuan, accounting for 58.55% and 57.03% of total revenue, respectively. During the same periods, revenue from other dairy products was 8.48 billion yuan and 8 billion yuan, accounting for 29.03% and 28.35% of total revenue, respectively.
However, in the past two years, China’s dairy demand has fluctuated, leading to a “double whammy” of declining revenue and net profit for Guangming Dairy. The 2022 performance report showed that Guangming Dairy achieved revenue of 28.215 billion yuan, a year-on-year decrease of 3.39%; net profit attributable to shareholders of the listed company was 361 million yuan, a year-on-year decrease of 39.11%, marking the lowest level since 2019.
After excluding non-recurring gains and losses, Guangming Dairy’s net profit for 2022 decreased by over 60% year-on-year to just 169 million yuan. On a quarterly basis, the company’s net profit after deducting non-recurring items in the fourth quarter of 2022 recorded a loss of 113 million yuan, the largest single-quarter loss in nearly 10 years.
Notably, 2022 marked the first full fiscal year under Chairman Huang Liming, but it was also the year that Guangming Dairy began to “lose momentum.”
In 2021, Guangming Dairy had set a 2022 operating plan, aiming to achieve total revenue of 31.777 billion yuan and net profit attributable to the parent company of 670 million yuan. However, the company failed to meet its full-year targets, with revenue completion rate at 88.79% and net profit completion rate at 53.88%. Guangming Dairy explained in its annual report that the primary reasons were slowing growth in dairy consumption, intensified market competition, and a decline in revenue from liquid milk and other dairy products, which posed significant challenges to the company’s operational efficiency.
In the 2022 annual report, Guangming Dairy set new goals for 2023: striving for total revenue of 32.05 billion yuan, net profit attributable to shareholders of 680 million yuan, and a return on equity greater than 8%. The total fixed asset investment for the year was planned to be about 1.416 billion yuan.
To achieve these goals, Guangming Dairy stated that the company would raise funds through its own capital and external financing channels, expand low-cost financing options, accelerate capital turnover, and reduce the cost of capital utilization.
Perhaps due to the effectiveness of cost reduction and efficiency improvement measures, by the end of August 2023, Guangming Dairy delivered a profitable half-year report. During this period, the company achieved revenue of 14.139 billion yuan, a slight year-on-year decrease of 1.88%; net profit was 338 million yuan, an increase of 20.07% year-on-year; and net profit after deducting non-recurring items was 317 million yuan, a year-on-year increase of 31.03%.
However, after the third quarter of 2023, Guangming Dairy “swung from profit to loss,” with a revenue completion rate of 64.47% and a net profit completion rate of 47.5%. In other words, to meet its targets, Guangming Dairy would need to generate nearly 11.4 billion yuan in revenue and 357 million yuan in net profit in the last quarter.
As the pressure on performance remains unresolved, some distributors have begun to seek other opportunities. According to the 2022 financial report, sales revenue from Guangming Dairy’s distributors reached 20.528 billion yuan, a year-on-year decrease of 3.03%; operating costs were 17.687 billion yuan, a year-on-year decrease of 6.16%; and gross profit margin increased by 2.87 percentage points year-on-year to 13.84%. By the end of 2022, Guangming Dairy had 456 distributors in the Shanghai region, an increase of 54; the company had 3,603 distributors in other regions, a decrease of 199. Overall, Guangming Dairy’s number of distributors decreased by 145 in 2022 alone.
Amid declining performance of its main products and the continuous departure of distributors, Guangming Dairy has nevertheless decided to continue expanding.
Increasing Investment in Milk Sources While Struggling to Avoid Food Safety Issues
In March 2021, Guangming Dairy announced a non-public offering plan, intending to raise no more than 1.93 billion yuan from up to 35 specific investors.
Guangming Dairy stated that the raised funds would be used for constructing dairy farms and supplementing working capital. According to the plan, 1.355 billion yuan of the raised funds would be allocated to five sub-projects, including the construction of a 12,000-head dairy cow demonstration farm in Suixi, Huaibei; a 10,000-head dairy cow demonstration farm in Zhongwei; a 7,000-head dairy cow demonstration farm in Funan; a 2,000-head dairy cow demonstration farm in Hechuan (Phase II); and the expansion of a national core dairy cow breeding farm (Jinshan Dairy Farm).
On the day the private placement plan was announced, Guangming Dairy’s wholly-owned subsidiary Guangming Animal Husbandry Co., Ltd. acquired 100% equity of Shanghai Dingying Agriculture Co., Ltd. for 1.8845 million yuan from Shanghai Dingniu Feed Co., Ltd., and 100% equity of Dafeng Dingcheng Agriculture Co., Ltd. for 51.4318 million yuan.
In fact, increased investment in upstream operations and a fully integrated industry chain has become common in the dairy industry. Major dairy companies like Yili, Mengniu, Guangming, Junlebao, New Hope, and Sanyuan Foods have successively invested in expanding upstream dairy farm capacity.
However, as an “old player” in the pasteurized milk segment, Guangming Dairy originally had a distinct advantage. It is known that Guangming’s liquid milk sources were primarily located in internationally recognized temperate monsoon climate zones ideal for high-quality dairy farming, which determined the superior quality of Guangming Dairy’s milk. But the pasteurized milk business itself has high requirements for temperature and transportation, making it challenging to dominate the national market.
As demand for pasteurized milk has increased, leading dairy companies have also entered this field. In 2017, Mengniu Dairy established a fresh milk business unit and launched the “Daily Fresh” brand; in 2018, Yili Group created the Gold Label fresh milk brand, formally entering the low-temperature milk market. By 2023, Nestlé also introduced its first cold-chain fresh milk product.
Despite increasing investment in milk sources, Guangming Dairy has repeatedly faced food safety issues. According to Xinhua News Agency, in September of this year, Guangming Dairy issued a public apology on its official website, mentioning three food safety incidents that occurred in June and July.
Reportedly, on June 15, six people in Yingshang County, Anhui Province, experienced vomiting and other symptoms after consuming Guangming milk. On June 27, Guangming issued an apology letter for alkali water from cleaning solution seeping into “Youbei” milk. On July 20, the Guangzhou Municipal Administration for Industry and Commerce published the results of the second round of sampling inspections of dairy products in circulation during the second quarter of 2012, where Guangming Dairy products once again appeared on the “blacklist.”
On the consumer complaint platform “Black Cat Complaints,” many consumers have reported issues with Guangming Dairy’s products, such as milk spoilage, foreign objects, and failure to fulfill promises. As of November 3, there were 360 complaints related to Guangming Dairy, and nearly 400 complaints regarding Guangming’s “随心订” subscription service.
During an investor survey in September, Guangming Dairy did not even respond to questions about the sales performance of 30 new products launched in the first half of the year.
However, Guangming Dairy’s declining revenue and net profit have quickly reflected in the capital market. On the first trading day after the release of its third-quarter report (October 30), Guangming Dairy’s stock price fell by 5.94%. As of the close on November 2, its stock was trading at 9.39 yuan per share, a cumulative decline of 57.82% from its peak of 22.26 yuan per share in 2020, and its total market value has dropped to 12.94 billion yuan.
Given the pressures of declining performance, poor sales of main products, and intensified industry competition, whether Huang Liming can lead Guangming Dairy back to its peak remains to be seen.
Post time: Aug-17-2024