Bruised fruit?

Huiyuan: lost its juice?

Zhu Xinli, Huiyuan Juice‘s chairman, once said that an entrepreneur “should breed a company like a son, but sell it like a pig”. But two years after failing to sell his son like a pig (Beijing famously rejected Coca-Cola’s $2.4 billion bid to takeover the company), Zhu discovered that his son has serious money problems.

In September, shares of Huiyuan Juice, China’s largest fruit and vegetable juice maker, were suspended on the Hong Kong Stock Exchange following reports it had breached some of the covenants in a $250 million three-year loan it took out in April. The company later convinced its lenders to grant a waiver on the covenants, which would enable the company to reclassify the loans as long-term liabilities, says Shanghai Securities News.

So what happened? As it turns out, Zhu has been borrowing and spending far more than he should have. In 2008 alone, Huiyuan’s capital expenditure reached Rmb1.2 billion ($179 million), exceeding the sum for the previous two years combined (Rmb800 million and Rmb300 million in 2007 and 2006 respectively). The company capex budget was Rmb200 million last year, but it ended up spending Rmb800 million.

And Huiyuan has bigger problems than just its debt load. Kim Eng Securities in Hong Kong has a “sell” rating on Huiyuan due to its “slow earnings visibility, its ongoing aggressive capacity expansion, and its low utilisation rate.”

Huiyuan has been aggressively expanding its production capacity in the last two years. In one year, Huiyuan added an annual capacity of 1 million tonnes – that’s a lot of juice. The increase in capacity, however, did not directly translate to sales. Over the same period, sales increased by only 500 million litres (roughly half as much).

Zhu has also been trying to move his business upstream by investing heavily in large fruit orchards around the country. The move has merits: it can help the company keep its costs low – but it also has a downside. Zhu admits that he is now stretched too thin, overseeing every part of the business from tree planting to branding.

Meanwhile, competition is heating up. In the pure fruit juice segment, which Huiyuan used to dominate, the mainland firm is losing out to none other than Coca-Cola. Since its bid for Huiyuan was blocked, the beverage giant stepped up its investment in the fruit juice market and has made tremendous headway. Last year, Coke raised its share of China’s fruit juice market to 13.8% from 13.1% in 2008, according to data from Euromonitor. Huiyuan, on the other hand, saw its share fall from 7.5% to 7.3%.

Worse still, its new products have not gone down well. The newly launched Juizee Pop did little to lift sales. Analysts say its diluted fruit juices (made from concentrate) also face intense competition from rivals like Uni-President and Master Kong (see WiC67).

All of Zhu’s big investments are now hurting Huiyuan’s bottom line. In the first half of this year, Huiyuan made an adjusted net loss of Rmb69.2 million. That’s actually an improvement, compared with its adjusted net loss of Rmb261.7 million in the first half of 2009.

To pay for those investments, Huiyuan increased its debt load significantly, says CBN Weekly. Its gearing ratio (measuring the ratio of debt to equity) surged from 29.5% in June 2009 to 70.3% as of the first half of this year, well above the industry standard.

Huiyuan’s recent financial troubles have prompted the Chinese media to debate whether Beijing made the right decision in blocking Coke’s generous bid.

Analysts now argue that a tie-up with Coke could well have provided Huiyuan with the added expertise and capital needed for a real sea change in its fortunes.

Indeed, Coke probably has Beijing to thank for what could have been a substantial overpayment for Huiyuan. In late July, French dairy group Danone sold its 23% share in Huiyuan to private equity player SAIF for $254 million – that’s half the price per share Coke was prepared to pay.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.