From fake foreign milk powder to real international enterprises, Jianhe Group has spent 10 years
In 1999, Luo Fei and Luo Yun brothers established Guangzhou Hopson in Guangzhou, focusing on probiotics, and registered the Hopson trademark in 2000. Prior to that, the two brothers, who had a master's degree in industrial fermentation and a bachelor's degree in microbial engineering from South China University of Technology, ran a cosmetics ingredient company, Baihaobo.
Due to its limited strength, Hopson initially only launched nutrition powders such as "apple powder solid drinks, pear powder solid drinks", and entered the budding mother and baby store channels and relatively low threshold single pharmacies. It was not until 2002 that Hopsbione reached a strategic partnership with the French company Raman to officially open The "Probiotic Kingdom" of Hopsbio. At the end of 2002, the outbreak of SARS epidemic in China, the Solife biobiotics that are known to improve immunity are regarded as "good medicine" by consumers, which suddenly opened the market, Luo Fei shaped the brand image with the trend, an advertising slogan of "the baby is less sick, the mother is less worried", so that the Synbiotic probiotics have become synonymous with infant probiotics for a time, and also let it support the revenue of Synbiotic for nearly 20 years.
But Luo Fei's ambitions do not stop there, after the melamine incident in 2008, domestic consumers' trust in domestic milk powder fell to the bottom, and Euromonitor data showed that the market share of domestic milk powder fell from a minimum of 70% before 2008 to 30% in 2015. It was once crushed by foreign-funded enterprises. Relying on a keen sense of business smell, Luo Fei took a different path, in July 2008 in France registered Hopson Company, in the country with the name of "French Hopson" to launch infant milk powder, French Hopson milk powder to the outside world to emphasize the use of European milk source original can imports, with a high price of more than 300 yuan / can in a batch of foreign milk powder to kill a blood road. What consumers do not know is that the so-called French Hopson company has a registered capital of only 10,000 euros.
Fake foreign milk powder French Hopson has been selling well in China for several years, according to the company's financial report, from 2008 to 2013, Hopson's net profit increased from 0.35 billion yuan to 743 million yuan, an increase of 20 times. It was not until 2013 that Because of the unusually high price of milk powder, Hopson was fined 163 million yuan by the National Development and Reform Commission for anti-monopoly investigation, and it was only when it was pickpocketed by the media that it was a fake foreign brand, and Luo Fei was forced to admit publicly at the 2013 interim results meeting: Hopson was only sold in China.
In order to get out of the storm of fake foreign milk powder, Hopson began to lay out its international business.
In 2013, the Group acquired a stake in Isigny Sainte Mère (ISM), a well-known French dairy producer.
In 2015 and 2016, Hopson invested RMB 10.2 billion to acquire SWISSSE, a well-known health product brand. At the same time, the American organic infant and toddler food brand Health Times is also included in the Umbrella.
In 2016, Hopson acquired Dodie, a French maternal and child care brand.
In 2017, in the 10th year of the launch of the French Hopson Milk Powder, Hopson Organic Infant Formula Milk Powder was finally "exported to domestic sales" and listed on the French market.
On May 22 of the same year, Luo Fei announced at the Hopson Dealer Conference that Hopson Group was officially renamed "Jianhe Group", officially moving from fake foreign brands to the world.
After the transformation of Jianhe Group, Luo Fei still did not stop the pace of "buying, buying and buying". In 2018, the Group acquired Good Goût, a French organic baby food brand. In 2020, the NewH² Innovation Fund of Jianhe Group announced a strategic partnership with Else Nutrition, a new plant-based nutrition brand. Acquired solid gold, a pet nutrition brand, in the same year. In 2021, Jianhe acquired Zesty Paws, an online pet nutrition brand in the United States. Since then, Jianhe Group has expanded its territory to include infant nutrition and care products BNC, adult nutrition and care products ANC and pet nutrition and care products PNC.
Behind the internationalization is the peak of huge debts
However, frequent mergers and acquisitions have also made Jianhe Group heavily indebted. Since the company's large-scale mergers and acquisitions began in 2015, the asset-liability ratio of Jianhe Group has remained high. According to the data, from 2015 to 2021, the asset-liability ratio of Jianhe Group was 73.97%, 77.50%, 70.19%, 67.35%, 64.73%, 63.98% and 70.98% respectively. Over the same period, the company's current ratio also fell to 0.8 from 3.42 before the merger in 2014. Although the company's short-term solvency is acceptable, it is still significantly weakened compared with before the merger, indicating that the company has a certain degree of liquidity risk in short-term debt repayment.
More critically, Jianhe Group's liabilities are dominated by long-term borrowings and show an upward trend, from 2016 to 2021, the company's long-term borrowings were 2.243 billion yuan, 1.844 billion yuan, 2.692 billion yuan, 3.752 billion yuan, 4.039 billion yuan, 4.004 billion yuan and 4.311 billion yuan, respectively, while before 2016, the company's long-term borrowings have been 0. The good news is that on March 25, 2022, Jianhe Group received a number of refinancing credits totaling US$1.2 billion, which will significantly improve its cash flow situation.
The debt problem of Jianhe Group has also attracted the attention of major investment banks, and Moody's, S&P, and Damo have successively lowered their evaluations and target prices.
On April 1, Moody's downgraded the Jianhe Group Company family rating from "Ba2" to "Ba3" and the senior unsecured rating from "Ba3" to "B1".
Shawn Xiong, Assistant Vice President and Analyst at Moody's, noted that "while the recently announced $1.2 billion refinancing will significantly enhance H&H International Holdings' liquidity profile, the huge debt generated by the acquisition of Zesty Paws, combined with deteriorating profit margins, will make the company unlikely to deleverage in the next 12 to 18 months, reaching a level of 3.5-4.0 times." ”
Moody's expects the Group's adjusted EBITDA margin to remain around 15% over the next 12-18 months. These forecasts reflect increased competition Chinese mainland some infant nutrition and care product categories and rising costs for some of the company's raw materials.
Coincidentally, on April 4, S&P adjusted the outlook for Jianhe Group's long-term issuer credit rating from "stable" to "negative" and confirmed Jianhe's "BB+" long-term rating and "BB" issuance rating.
S&P noted that H&H International Holdings will need more resources to protect its market share in the increasingly competitive infant formula market. At the same time, cost pressures are rising and consumer spending is tightening. The company's overall growth rate and EBITDA margin in 2021 were 3% and 15.3%, respectively, below the 5%-10% and 16%-18% levels previously expected by S&P. This is largely due to the poor performance of the infant formula market, which accounts for about half of H&H International's gross profit, enough to offset the improvement in adult supplement sales.
"As the birth rate declines, competition for infant formula will become more intense, which will prompt companies to use more promotional tactics and increase investment in distributors." The company's recently increased distribution network has seen lower marginal returns. H&H International Holdings' point of sale has grown by 50% over the past two years, but infant formula sales growth has fallen to 3% and -2% in 2020 and 2021, respectively, compared with double-digit growth in the infant nutrition division. The growth rate of the infant formula industry in the same period was 0%-2%. So far, the company has been maintaining its market share of infant formula, but this comes at a cost. S&P believes H&H International Holdings may be deviating from its goal of reducing the debt/EBITDA ratio below 3x by 2023. Poor performance in a challenging operating environment largely explains this situation.
Not only that, but S&P also stressed that rising raw material prices and persistently high operating expenses may compress Jianhe International's profit margins.
On April 14, Morgan Stanley released a research report saying that it maintained H&H International Holdings' "keeping pace with the broader market" rating, and the target price was reduced from HK$16 to HK$12.
Damo believes that the expansion of the pet nutrition and care business and the stabilization of the adult nutrition and care products business will help boost the company's revenue growth this year, but the investment in new business and higher financial leverage may also drag down profitability. While valuations are at historic lows, there is a lack of catalysts to reintroduce profits.