Shanghai's Expensive Liquor: Can It Recover After Founder's Arrest?

On September 11th, Shanghai GuiJiu Co., Ltd. (stock abbreviation: Rock Shares, 600696.SH) announced that, according to the police report, after verification, Haiyin Wealth Management Co., Ltd. is suspected of illegal fundraising and criminal investigation, and the actual controller of the company, Han Xiao, has been taken criminal coercive measures.

Han Xiao is temporarily unable to perform the duties of the company's chairman, general manager, and secretary of the board of directors, and is temporarily replaced by the vice chairman of the company, Chen Qi, to perform the duties of the chairman and secretary of the board of directors.

The data shows that although the company name has been changed to Shanghai GuiJiu, due to the "GuiJiu" trademark dispute with Guizhou GuiJiu under Yanghe Shares, the stock abbreviation is difficult to change to "Shanghai GuiJiu".

The following text will be referred to as "Shanghai GuiJiu".

In another announcement, Shanghai GuiJiu stated that the controlling shareholder Shanghai GuiJiu Enterprise Development Co., Ltd. and its concerted action people hold a total of 217 million shares of the company, which have all been judicially frozen, accounting for 64.80% of the company's total share capital.

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The judicial freezing of its shares is related to the criminal investigation of Haiyin Wealth Co., Ltd. for suspected illegal fundraising.

The company is actively communicating with relevant government departments to form a new governance structure.

During the transition period, the company formed an operations committee to ensure the normal operation of the company's production and business.

Financial report data shows that in the first half of this year, Shanghai GuiJiu's revenue was 191 million yuan, a year-on-year decrease of 77.32%, and the net profit turned from profit to loss, with a loss of 77.376 million yuan.

The actual controller was taken criminal coercive measures, and the white wine industry is increasingly involution, can Shanghai GuiJiu withstand the pressure?

01 The growth is fleeting?

The data shows that during 2015-2016, Han Hongwei and Han Xiao, father and son, obtained the controlling rights of the listed company PituPi through the secondary market increase and other forms, and changed its stock name to "Rock Shares".

Subsequently, Han Hongwei entrusted the voting rights to his son, and Han Xiao became the actual controller of Rock Shares.

In 2019, the company began to layout the white wine business, and the company's name was also changed to "Shanghai GuiJiu Co., Ltd.".

Shanghai GuiJiu's transformation road was completed by acquisition, and the assets of Zhanggong Wine, Changjiang Industrial, and Gao Sauce Wine were injected into the company.

In 2020, Shanghai GuiJiu's main business of white wine was completed.

Reflected in the financial report, from 2020 to 2023, Shanghai GuiJiu's wine sales business revenue was 58.79 million yuan, 584 million yuan, 1.087 billion yuan, and 1.625 billion yuan, respectively, with a year-on-year increase of 1035.28%, 893.24%, 86.08%, and 49.57%.

The proportion of white wine revenue also increased from 74% in 2020 to 99.74% in 2023.

In addition, in terms of net profit, Shanghai GuiJiu's performance is obviously not as good as the revenue.

From 2020 to 2023, Shanghai GuiJiu's net profit attributable to shareholders of the listed company was 8.0219 million yuan, 61.9282 million yuan, 37.244 million yuan, and 87.0704 million yuan.

The gap between revenue and net profit comes from the rapid increase in sales expenses.

From 2020 to 2023, Shanghai GuiJiu's sales expenses were 10.2822 million yuan, 141 million yuan, 454 million yuan, and 721 million yuan, which obviously eroded Shanghai GuiJiu's profit space.

However, the rapid increase in revenue also made Shanghai GuiJiu a dark horse in the white wine industry, and its ambition is very obvious.

In 2023, Shanghai GuiJiu stated that through multiple brands, multiple fragrances, and multiple models, it entered multiple sub-markets to form a diversified product matrix.

Focus on building major products such as Shanghai GuiJiu·Tianqing GuiNiang, Shanghai GuiJiu·Jun Dao Shanhe Wine, and Shanghai GuiJiu·Zui® Wine.

However, in the first half of this year, Shanghai GuiJiu's revenue was 191 million yuan, a year-on-year decrease of 77.32%, and the net profit turned from profit to loss, with a loss of 77.3766 million yuan, and the balance of cash and cash equivalents was only 1.8187 million yuan.

In the financial report, Shanghai GuiJiu clearly stated that since the end of 2023, due to financial pressure, the company was unable to pay the dealer's rebates, fees, and market activity expenses in time, and the dealer's relationship was damaged; at the same time, the company's tight financial situation during the reporting period was not effectively improved, and the brand investment and market activity and other advertising propaganda were greatly reduced, which had a greater impact on the introduction of merchants; superimposed on the company's negative media reports and regulatory inquiries in the first half of the year, the dealer's confidence in the company's future development is insufficient, and the attitude towards replenishment and stocking is more cautious and wait-and-see, resulting in a significant decrease in the company's business income compared to the same period last year.

In addition, its diversified product matrix has also been contracted.

In the first half of this year, due to macroeconomic pressure, external public opinion interference, and its own financial shortages, Shanghai GuiJiu chose to focus on soy sauce and ready-to-drink trendy drinks, with soy sauce brands concentrating resources on the Jun Dao GuiNiang brand, and ready-to-drink trendy drinks focusing on the bare-bottle white wine Zui Wine brand and the low-alcohol trendy drink Seventeen Light Years brand.

However, it has not established the corresponding recognition in the market, and the price is obviously upside down.

The data shows that the Jun Dao GuiNiang brand has products such as Jun Dao GuiNiang·Shanhe Wine, Jun Dao GuiNiang·Liu De Li Wine, and Jun Dao GuiNiang·Shao Hua Wine, with suggested retail prices of 1,819 yuan/bottle, 899 yuan/bottle, and 499 yuan/bottle, respectively.

According to the investigation of Jun Dao GuiNiang, in the online platform's liquor stores, the price of Jun Dao GuiNiang·Shanhe Wine in a box (6 bottles of 500ml) is as low as 1,560 yuan, the price of Jun Dao GuiNiang·Liu De Li Wine in a box is 532 yuan, and the price of Jun Dao GuiNiang·Shao Hua Wine in a box is 580 yuan.

02 Capacity expansion or "premature death"?

In September this year, Shanghai GuiJiu announced that in order to revitalize idle assets and alleviate financial pressure, the company plans to sell two office real estates located at Room 401 and Room 402, No.

1500 Century Avenue, Pudong New Area, Shanghai, held by its wholly-owned subsidiary Shanghai Guangnian Liquor Co., Ltd.

The assessed value of Room 401 is 38.7734 million yuan, and the property value of Room 402 is about 36.6234 million yuan.

Shanghai GuiJiu's financial status also inevitably makes people worry whether its capacity expansion project can be completed on time.

According to the 2023 annual report, Shanghai GuiJiu's designed production capacity is 1,500 tons/year, and the actual production capacity is 1,600 tons/year.

According to its production and sales situation, Shanghai GuiJiu produced 1,315.04 thousand liters of sauce-flavored liquor in 2023.

Shanghai GuiJiu said that its own factory mainly produces sauce-flavored liquor; strong fragrance, fruit wine, and other wines are all purchased through third-party OEM.

The data shows that Shanghai GuiJiu currently has a 3,000-ton and a 5,500-ton sauce-flavored liquor technology improvement and leveling project under construction.

After the release of the 2023 annual report, Shanghai GuiJiu received a regulatory work letter from the Shanghai Stock Exchange.

The annual report and previous announcements show that the balance of construction in progress at the end of the year was 802 million yuan, a year-on-year increase of 394.15%, accounting for 35.12% of the total assets at the end of the period, mainly due to the cumulative investment of 675 million yuan in the sauce-flavored liquor technology improvement and expansion project in 2023.

The Shanghai Stock Exchange requires Shanghai GuiJiu to disclose the details of the investment in the sauce-flavored liquor technology improvement and expansion project, the expected construction period, the expected additional product capacity, and the economic benefits, etc.

Shanghai GuiJiu replied that as of December 31, 2023, the company's "sauce-flavored liquor technology improvement and leveling" has a cumulative investment of 837 million yuan, of which the balance of construction in progress is 802 million yuan, and the amount of fixed assets transferred is 35.4777 million yuan.

The total plan investment of the project is 1.692 billion yuan, divided into two projects - a 3,000-ton capacity project and a 5,500-ton capacity project.

Among them, the 3,000-ton capacity project is expected to be completed in September 2025, and the 5,500-ton capacity project is expected to be completed in September 2028.

After the project is completed and put into operation and reaches production, it will add 8,500 tons of new base liquor capacity per year, and the total annual base liquor production capacity will reach more than 10,000 tons, and it is expected to achieve an annual sales revenue of 7 billion yuan.

Shanghai GuiJiu is not only facing its own pressure but also industry competition.

At present, the liquor industry is still in the inventory reduction cycle, and the trend of the industry concentrating on advantageous production areas, advantageous enterprises, and advantageous brands is obvious, and small and medium-sized brand liquor companies are increasingly squeezed.

The "2024 China Liquor Market Mid-term Research Report" shows that from January to June 2024, the top six brands in the liquor market sales were Moutai, Wuliangye, Yanghe, Fenjiu, Luzhou Laojiao, and Jiannanchun (in no particular order).

In contrast, the sales growth of non-T9 liquor (i.e., other listed liquor companies) is slightly flat, at 10%.

The sales volume of the 10th and 11th liquor companies (Niulanshan, Jinshiyuan) is about half of the 9th liquor company (Gujing Gongjiu), and the brand concentration is gradually increasing.

The market pattern dominated by T9 brands has basically formed.

Liquor companies with sales below 10 billion will face more severe competition in the future, and even need to deal with the shrinking competition brought by T9 brands expanding the market downward.

Shanghai GuiJiu, which has been arrested by the actual controller, has a sudden drop in performance, and the market price is obviously upside down, may not be able to get through this adjustment period of white wine.