After accompanying Shanxi Fenjiu for 6 years, why did China Resources reduce its holdings for the second time?

China Resources, which has accompanied Shanxi Fenjiu (600809.SH) for 6 years, has started to reduce its holdings.

On May 20th, Shanxi Fenjiu announced that its second largest shareholder, China Resources Group's indirectly controlled subsidiary, Huachuang Xinrui (Hong Kong) Co., Ltd. (referred to as "Huachuang Xinrui"), plans to reduce its holdings by 8 million shares through block trading within 3 months after 15 trading days, with the transaction price determined by the secondary market price, and the reduction ratio not exceeding 0.66% of Shanxi Fenjiu's total share capital.

Based on a rough estimate using the closing price of 264.57 yuan/share on May 20th, after this reduction, Huachuang Xinrui will cash out over 2.1 billion yuan.

Previously, in the third quarter of 2023, Huachuang Xinrui reduced its holdings of Shanxi Fenjiu by 2.7 million shares, reducing its stake from 11.38% to 11.16%.

Sources related to Shanxi Fenjiu told TradeWind01 that due to the lack of disclosure requirements for block trading by the Shanghai and Shenzhen Stock Exchanges at that time, it was not publicly disclosed.

The background for China Resources' decision to reduce its holdings significantly again at this time is that Shanxi Fenjiu just went through a "challenging autumn" in 2023.

With the decline in the prosperity of the liquor industry, Shanxi Fenjiu's high revenue growth rate over the past three years may be difficult to sustain, with its full-year revenue growth rate dropping from 31.26% in 2022 to 21.8% in 2023.

When TradeWind01 inquired about Shanxi Fenjiu's growth plan for 2024, the company indicated that the revenue growth target for 2024 is above 20%, with the net profit growth expected to be faster than revenue.

On the day after the announcement was made, Shanxi Fenjiu fell by 1.22% to 261.33 yuan/share.

Pressure from Reduction

The alliance between China Resources and Shanxi Fenjiu began with the wave of mixed ownership reform of state-owned enterprises.

Before the alliance, Laobaigan Liquor (600559.SH) introduced employees and distributors to hold shares through private placements in 2014; Shede Winery (600702.SH) introduced external shareholder Tianyang Group in 2016.

In 2018, Shanxi Fenjiu's controlling shareholder, Shanxi Xinghuacun Fenjiu Group Co., Ltd. (referred to as "Fenjiu Group"), transferred 99.16 million shares of Shanxi Fenjiu to Huachuang Xinrui at a price of 52.04 yuan/share (pre-adjusted equivalent to about 35.27 yuan/share), making Huachuang Xinrui the second largest shareholder of Shanxi Fenjiu with a 11.45% stake.

Based on Shanxi Fenjiu's pre-adjusted closing price of 264.57 yuan/share on May 20th, it is roughly estimated that China Resources' annualized return on investment in Shanxi Fenjiu over 6 years is close to 40%.

Huachuang Xinrui is held by China Resources Entrepreneurship and China Resources Entrepreneurship Joint Fund Phase I (Limited Partnership) (referred to as "Joint Fund") with stakes of 80.62% and 19.38% respectively.

From February 5, 2018 to the end of 2022, Shanxi Fenjiu's pre-adjusted stock price increased by nearly 7 times from less than 40 yuan when China Resources invested, and even during the historical high market in 2021, Huachuang Xinrui did not reduce its holdings Huachuang Xinrui quietly reduced its holdings of Fenjiu by 2.7 million shares in the third quarter of 2023, reducing its stake from 11.38% to 11.16%. This is also the first time that CR Holdings has reduced its holdings of Fenjiu.

However, in the fourth quarter of 2023 and the first quarter of 2024, Huachuang Xinrui did not have any further reduction actions.

It wasn't until May 20th when Shanxi Fenjiu announced that Huachuang Xinrui plans to reduce its holdings by 8 million shares through block trading, within 3 months after 15 trading days, with the trading price determined by the secondary market price, and the reduction ratio not exceeding 0.66% of Shanxi Fenjiu's total share capital.

In this announcement, Shanxi Fenjiu stated that the reason for Huachuang Xinrui's reduction was: "According to the cooperation agreement with Lianhe Fund, it faces the fund's expiration exit arrangement, so Lianhe Fund needs to reduce its indirectly held company shares."

In addition, CR Venture, which holds 80.62% of Huachuang Xinrui's shares, explicitly stated in the announcement that it will continue to hold shares of Shanxi Fenjiu and has no reduction plan.

Adjustment of "Fenjiu Leader"

The current reduction of Huachuang Xinrui is due to the pressure faced by the joint fund for expiration exit.

However, it is undeniable that under the pressure of industry downturn, the high growth momentum of Shanxi Fenjiu in the past may be difficult to maintain.

From 2021 to 2023, Shanxi Fenjiu's revenue growth rates were 42.75%, 31.26%, and 21.8% respectively, showing a gradual slowdown in revenue growth.

After entering the threshold of 30 billion in revenue, the "Fenjiu Leader" feeling growth pressure is readjusting.

The first priority of the adjustment is to clear inventory.

In 2023, Shanxi Fenjiu's inventory of goods increased by 24.87% year-on-year to 5.135 billion yuan, accounting for 44.36% of the total inventory, an increase of 1.76 percentage points year-on-year.

According to information from sources close to Shanxi Fenjiu obtained by Xinfeng (ID: TradeWind01), due to high inventory in the provincial market, Shanxi Fenjiu held a special meeting in January this year to address market digestion issues. The provincial market has already digested the goods from 2023, but the overall inventory level is still slightly high. At the same time, distributors have already paid for part of the goods for 2024, indicating that there is still more new inventory for 2024 that needs to be digested.

The second adjustment is to "reduce costs and increase profits".

In 2023, Shanxi Fenjiu achieved historical lows in both sales expense ratio and management expense ratio, at 10.07% and 3.76% respectively.

In the first quarter of 2024, Shanxi Fenjiu's expenses further contracted, with the sales expense ratio decreasing by 0.48 percentage points year-on-year to 7.47%, and the management expense ratio decreasing by 0.09 percentage points year-on-year to 1.99%.

Under the cost reduction and efficiency improvement, Shanxi Fenjiu's net profit margin exceeded 40% for the first time in the first quarter, reaching 40.86%.

Sources related to Shanxi Fenjiu confirmed to Xinfeng (ID: TradeWind01) the company's expected budget reduction for 2024.

A white liquor analyst from a securities firm in East China told Xinfeng (ID: TradeWind01) that Fenjiu's cost optimization is aimed at stabilizing the ex-factory price, reducing the space for distributors to take advantage of low prices and extract expenses The third adjustment lies in the refinement of management.

During the six-year partnership between Shanxi Fenjiu and China Resources, the most direct assistance brought by the latter to the former lies in channel sharing. By leveraging the channels of China Resources, Fenjiu achieved expansion in markets outside the province.

From 2018 to 2023, Shanxi Fenjiu's performance achieved rapid growth as scheduled. In 2023, the revenue reached 31.928 billion yuan, more than three times that of 2018.

In terms of market segmentation, the revenue growth in markets outside Shanxi province has always been faster than that in its domestic market. The revenue contribution from markets outside the province increased significantly from 42.86% in 2018 to 61.57% in 2023.

The trend of faster growth in markets outside the province than in the domestic market is expected to continue in 2024.

TradeWind (ID: TradeWind01) learned from sources close to Shanxi Fenjiu that the growth rate in the domestic market in 2024 is expected to be 20%, while the growth rate in markets outside the province will be faster than that in the domestic market.

However, problems have arisen. Due to the different growth targets of Fenjiu in domestic and external markets, and the different incentives for distributors, there have been cases of low-priced products flowing back to the domestic market, disrupting pricing.

To address this issue of products flowing back, the above-mentioned liquor analyst told TradeWind (ID: TradeWind01) that starting from June this year, Fenjiu will implement the "Five Codes" linkage measures (including product tray code, box code, box code, bottle code, and cap code) to control the terminal.

Sources related to Shanxi Fenjiu also confirmed to TradeWind (ID: TradeWind01) the news that the "Five Codes" linkage system will be launched in the second half of the year.

As the liquor industry shifts to competition in existing stock, the past practice of pushing inventory to distributors no longer translates into actual sales, and Fenjiu, which has set an industry "growth miracle," is finally starting to carefully calculate.

At this point, the leading liquor companies may not only compete in the size of their channel influence but also test each company's operational capabilities down to the terminal in a refined manner