Where does Quanyang Spring come from? Where is it going?

Zebra Consumer Chen Xiaojing

As the peak season approaches, the battle in the bottled water market is imminent. Everyone shouldn't just focus on the Hong Kong-listed fast-moving consumer goods leader Nongfu Spring. In fact, the A-share mineral water stock Quanyangquan (600189.SH) is also worth a closer look.

Jilin Forest Industry, China's first forestry stock, has built its industrial foundation on the water sources of Changbai Mountain and cultivated the mineral water brand Quanyangquan. In 2017, the company completed its restructuring, becoming the first A-share mineral water stock.

In 2023, Quanyangquan's mineral water sales exceeded 1 million tons, with revenue reaching 800 million yuan and net profit surpassing 100 million yuan, once again showcasing the strength of water sellers.

However, due to the drag from two other business segments and goodwill impairment, Quanyangquan reported an overall loss of 457 million yuan in 2023 and continued to lose money in Q1 2024.

How can Quanyangquan eliminate the drag from other businesses? In the seemingly attractive bottled water market, where giants dominate and competition is fierce, can Quanyangquan leverage capital to break into the top tier? Whether it can overcome these challenges will determine how high this company can climb.

Transformation

Investors in primary and secondary markets are filled with PTSD when it comes to the Northeast market, hence the long-circulated saying: "Investment stops at Shanhaiguan."

The consumer market is no exception. In China's vast market, with countless consumer white horses across various sub-sectors, the Northeast has almost none.

Therefore, the market naturally holds higher expectations for Quanyangquan (600189.SH), a mineral water company from Jilin.

This company wasn't originally named Quanyangquan but Jilin Forest Industry. Records show that state-owned Jilin Forest Industry Group is one of China's four major forest industry groups, a top 500 manufacturing company, and one of Jilin Province's top ten enterprises, with operations located in the Changbai Mountain forest region.

In October 1998, Jilin Forest Industry went public, becoming China's first forestry stock. At the time, its products included timber and particleboard. Around its IPO, its revenue was 300-400 million yuan, with net profit nearing 100 million yuan.

However, within a few years, the company fell into a predicament of plummeting revenue and losses in adjusted net profit, relying on non-recurring gains to stay afloat for a long time.

With poor performance, lackluster business prospects, and a persistently low market cap, the company remained on the fringes of the capital market for years.

This situation saw a substantial change in 2016. In December that year, Jilin Forest Industry announced plans to issue shares to acquire a majority stake in Quanyangquan Beverage from Forest Industry Group, Ruidejiaxing, and Quanyang Forestry Bureau, valuing the target company at 1.172 billion yuan.

It turned out that five water sources, including Quanyangquan, Xiaquan, and Xianrenquan, had been discovered in Changbai Mountain. Forest Industry Group, leveraging its proximity, established Quanyangquan Beverage in 2001 to launch mineral water products, laying the foundation for Jilin Forest Industry's transformation.

Confidence

In 1989, C'estbon introduced China's first bottled water in Shenzhen. Its founder, Zhou Jingliang, is hailed as the "Father of China's Packaged Water" in the industry.

Six years later, Wahaha launched both mineral water and purified water products. In 1996, it signed Jing Gangshan as its spokesperson, popularizing the song "My Eyes Only Have You." Later, it enlisted Wang Leehom as its spokesperson for 20 years, with "Love You Equals Love Myself" sweeping across China.

Zhong Shanshan, a former Wahaha distributor, founded Nongfu Spring in 1996. With the slogan "Nongfu Spring is a little sweet," the brand gradually rose to the top of the bottled water market.

By 2023, China's packaged drinking water market had steadily grown to 200 billion yuan, becoming the largest sub-category in the country's soft drink industry. Nongfu Spring, C'estbon, and Ganten (later founded by Zhou Jingliang) firmly held the top three spots.

As the market continues to expand, bottled water consumption upgrades, new channels emerge, and consumers grow weary of traditional brands, new players have entered the scene.

After years of development, China's bottled water market has formed a clear positioning hierarchy: natural mineral water > natural water > purified water and other drinking water.

Thus, water sources have become the core of competition among major brands. Nongfu Spring has consistently used water sources to upgrade its business. More brands, such as Evergrande Spring, Kunlun Mountain, and 5100, have followed the model of securing water sources first before launching bottled water.

In this regard, Quanyangquan enjoys unique advantages. Its water is sourced from five high-quality mineral water springs in the heart of Changbai Mountain, with all 21 categories and 241 indicators meeting EU and German mineral water standards.

At the same time, Quanyangquan has deepened its collaboration with Sinopec Easy Joy, securing a vast sales channel.

Changbai Tianquan (Beijing) Marketing Co., Ltd., Quanyangquan's subsidiary responsible for mineral water sales, is 60% owned by Quanyangquan, with Sinopec Easy Joy and Sinopec Sales holding 20% each. Another joint venture, Jilin Linhai Xueyuan Beverage Co., Ltd., is 40% owned by Quanyangquan, with Sinopec Easy Joy and Sinopec Sales holding 35% and 25%, respectively.

As of July 2023, Sinopec Easy Joy had over 28,000 stores nationwide, making it China's largest chain of directly operated convenience stores, serving more than 250 million members.

In 2023, Quanyangquan sold over 180 million yuan worth of mineral water through Sinopec Easy Joy and Linhai Xueyuan Beverage. Thus, many consumers outside the Northeast were introduced to Quanyangquan through Sinopec Easy Joy's channels.

Another significant advantage for Quanyangquan is its status as a listed company. It is one of the few beverage companies on the A-share market and the only one primarily focused on bottled water.

In early 2018, the company raised 422 million yuan through a private placement, planning to invest in projects such as Changbai Tianquan's 200,000-ton carbonated mineral water plant, Jingyu Haiyuan's 400,000-ton mineral water plant, and sales channel development.

Challenges

After injecting the mineral water business, Jilin Forest Industry promptly rebranded as "Quanyangquan."

In 2017, Quanyangquan's mineral water sales reached 600,000 tons. After years of stagnation, it finally achieved stable growth, surpassing 1 million tons in 2023.

The recent acceleration in sales growth stems from Quanyangquan joining the bottled water competition. Promotions like "free mineral water with fuel" and "20% off for two items on e-commerce platforms" have helped the company gain traction in new channels.

In recent years, extreme competition has triggered a price war in the bottled water market, dragging almost everyone into the fray. While the major players have maintained their pricing systems, others—whether premium brands or new entrants—have joined the promotional race.

As a result, Quanyangquan's 2023 mineral water sales grew by 66.95% compared to 2017, but revenue only increased by 47.78%, directly impacting profitability. In 2017, the company's mineral water business had a gross margin of 46.83%, which dropped to 39.47% in 2023.

In 2017, Quanyangquan's mineral water business contributed 90.1244 million yuan in net profit, with 46.5945 million yuan attributable to the listed company. By 2023, the subsidiary's net profit reached 139 million yuan, with 111 million yuan attributable to the listed company, marking a tentative foothold in China's bottled water market dominated by giants.

However, due to significant declines in the company's original core door business and the park landscaping business acquired during the 2017 restructuring—along with a 369 million yuan goodwill impairment—Quanyangquan's 2023 revenue fell 11.58% year-on-year to 1.122 billion yuan, with net profit attributable to shareholders at -457 million yuan, down 891.93% year-on-year.

The Q1 2024 report, also released on April 15, showed Quanyangquan's revenue grew 5.97% year-on-year to 233 million yuan, with net profit attributable to shareholders at -5.6625 million yuan.

Thus, Quanyangquan can only rely on its strategy of "streamlining non-core businesses" and its market development approach of "stabilizing Jilin, expanding outward, and radiating nationwide," while continuing to focus on major clients and e-commerce channels to drive its mineral water business.

These strategies have helped Quanyangquan go from 0 to 1. The question now is whether they can help it carve out a niche in the bottled water market dominated by brands like Nongfu Spring and continue its journey from 1 to 10.