The newly purchased subsidiaries dragged down the performance, and the expansion of Tianrun Dairy continued unabated

Tianrun Dairy, which occupies a place in the market outside Xinjiang, suffered its first decline in net profit in 9 years.

According to the latest financial report, Tianrun Dairy's revenue in 2023 will be 2.714 billion yuan, a year-on-year increase of 12.62%, and its net profit will be 142 million yuan, a year-on-year decrease of 27.71%. Prior to this, Tianrun Dairy has achieved revenue and net profit growth for 8 consecutive years.

Breaking the growth inertia of Tianrun Dairy is its newly purchased subsidiary, Xinnong Dairy. In May 2023, Tianrun Dairy won the entire equity of Xinnong Dairy. However, in the first year of acquisition, Xinnong Dairy recorded a loss, which had an impact on Tianrun Dairy's profit in 2023 of -95.35 million yuan. Tianrun Dairy replied to a reporter from the Beijing News on April 18 that the loss of Xinnong Dairy was mainly due to the impact on production and sales during the transition period, resulting in the impairment of milk powder and cattle in stock.

In recent years, Tianrun Dairy has become the No. 1 brand in the dairy industry in Xinjiang under the strategy of "using Xinjiang resources to make the national market", and the expansion of markets outside Xinjiang has become the key to maintaining its performance growth. Since 2022, Tianrun Dairy has made frequent investment moves, first setting up a subsidiary Tianrun Qiyuan in Shandong for the North China market, and then aiming at the field of adult milk powder to include Xinnong Dairy under its command, and the 200,000-ton dairy product processing project is also on the way. Among them, Tianrun Qiyuan will use the sub-brand "Jiali" and abandon Xinjiang milk source. Tianrun Dairy replied that Tianrun Qiyuan will make differentiated products to maintain competitiveness.

The purchase of new subsidiaries dragged down the performance

Judging from the financial data, Tianrun Dairy's newly purchased subsidiary, Alar Xinnong Dairy Co., Ltd. (hereinafter referred to as "Xinnong Dairy"), has a great impact on its net profit.

In May 2023, Tianrun Dairy announced the acquisition of 100% equity of Xinnong Dairy from Xinnong Development and Shahe Jianrong for 326 million yuan, so as to realize the integration of dairy resources in Xinjiang, give full play to the synergy between the two parties in terms of products, channels and brands, and enhance market competitiveness.

According to the assessment report, Xinnong Dairy is an enterprise integrating forage planting, dairy farming and dairy processing, with 4 large-scale pastures and 8,900 dairy cows, and its holding subsidiaries have 4 pastures with a total of 5,500 dairy cows. In addition, Xinnong Dairy also has a liquid milk processing plant and a milk powder processing plant, with an annual output of 60,000 tons of normal temperature dairy products, 40,000 tons of low-temperature dairy products, and 8,000 tons of whole milk powder.

From 2019 to 2022, the performance of Xinnong Dairy continued to grow, with revenue of about 232 million yuan, 267 million yuan, 323 million yuan, and 306 million yuan respectively, and the net profit attributable to the parent company was -46.1284 million yuan, 26.5341 million yuan, 29.2341 million yuan, and 29.3859 million yuan respectively.

However, the performance of Xinnong Dairy after the consolidated statements was not satisfactory. In 2023, the impact of Xinnong Dairy on the profit of Tianrun Dairy will be -95.35 million yuan, of which the total profit of Xinnong Dairy from June to December 2023 will be -56.9 million yuan, and the revenue and net profit will be 205 million yuan and -56.8956 million yuan respectively, and the corresponding depreciation and amortization of the appraised part of Xinnong Dairy will reduce the profit of Tianrun Dairy by 27.37 million yuan, and Tianrun Dairy will increase the financing principal by 651 million yuan due to the acquisition, and the average borrowing interest rate will be 2.84%, an increase in June 2023 - The interest expense in December was 11.08 million yuan.

Tianrun Dairy replied to investors in August 2023 that in the short term, the company's profits will be under pressure after the consolidation of Xinnong Dairy, but in the long run, it can create synergies with Tianrun Dairy's current business, and the advantages outweigh the disadvantages. Xinnong Dairy's milk powder products and large-package products form a useful supplement to Tianrun's existing product structure, which will avoid the fierce competition in the infant formula milk powder track, focusing on the field of middle-aged and elderly milk powder, and Tianrun Dairy's existing more than 800 stores are also a good channel for milk powder sales.

On April 18, Tianrun Dairy replied to a reporter from the Beijing News that the loss of Xinnong Dairy mainly came from the impairment of milk powder and cattle in stock. Since the end of 2022, Xinnong Dairy has been in a state of transition, and its production and sales have been affected to a certain extent, but the milk production of dairy cows will not wait for sales, resulting in a large amount of powdering. At present, Tianrun Dairy has incorporated Xinnong Dairy into its own management system, gradually depleting inventory and eliminating cattle.

Dairy expert Song Liang believes that in recent years, the sales of adult milk powder have been growing, and the growth rate last year was about 12% to 15%, so it is worthwhile for Tianrun Dairy to acquire Xinnong Dairy, and Xinnong Dairy should transform to professional nutrition in the future.

The market outside Xinjiang drove the performance growth

According to the data, Xinjiang Tianhong Paper Co., Ltd. (hereinafter referred to as "Xinjiang Tianhong"), the predecessor of Tianrun Dairy, was listed in 2001, mainly engaged in machine-made paper, chemical products and import and export materials and equipment, etc., and suffered continuous losses from 2004 to 2007. From 2010 to 2012, due to the external impact on the paper products industry and the decline in the company's competitiveness, coupled with the shortage of raw material supply, Xinjiang Tianhong's main business continued to lose money, and the operating profit was negative.

In 2013, Xinjiang Tianhong completed a major asset restructuring, all the original assets and liabilities were placed, and at the same time, 96.8% of the equity of Xinjiang Tianrun Biotechnology Co., Ltd. was placed, officially entering the dairy industry, and the restructuring was achieved in the same year. Since January 2014, the stock abbreviation of Xinjiang Tianhong has been changed to Tianrun Dairy.

From 2015 to 2019, Tianrun Dairy acquired 100% of the equity of Tianao Animal Husbandry, launched a new product of Ecolean concentrated yogurt, increased the technical transformation of milk beer beverages, and at the same time opened up markets and e-commerce channels outside Xinjiang, achieving double-digit growth in revenue and net profit. In order to speed up the market layout, Tianrun Dairy established a sales company in 2018, and the channel layout has shifted from the past community convenience stores and fruit stores to some chain supermarkets in Guangzhou and East and North China.

Tianrun Dairy once said in its 2018 financial report that the market outside Xinjiang is an important factor for it to maintain rapid growth, and it will build a differentiated core product cluster by establishing specialized sales channels for milk beer, Ecolean and room temperature milk. From 2015 to 2019, its revenue in the foreign market increased from 175 million yuan to 584 million yuan, and the proportion of revenue increased from about 3% to 35.88%.

The Shandong subsidiary abandoned the Xinjiang milk source

Affected by the external environment, from 2020 to 2022, Tianrun Dairy's net profit fell back to single-digit growth, but its investment in the market outside Xinjiang has not weakened.

In the 2021 financial report, Tianrun Dairy put forward the strategy of "using Xinjiang resources to make a national market". In January 2022, in order to break the company's low market share in the Beijing-Tianjin-Hebei region, Tianrun Dairy set up a joint venture holding subsidiary, Tianrun Qiyuan Dairy Co., Ltd., in Shandong, using the "Jiali" sub-brand, with the Shandong market as the core, to carry out market development and channel construction in Beijing-Tianjin-Hebei, Henan, and Northeast China. In May 2023, Tianrun Dairy acquired 100% equity of Xinnong Dairy, and took a fancy to the latter's organic certified milk source and milk powder products. In 2023, Tianrun Dairy's revenue in Xinjiang and outside Xinjiang will be 1.451 billion yuan and 1.249 billion yuan respectively, and the proportion of revenue in the market outside Xinjiang will increase to about 46%.

Successive investment and mergers and acquisitions have not stopped Tianrun Dairy. In November 2023, Tianrun Dairy issued a prospectus for the issuance of convertible bonds to unspecified objects, planning to raise no more than 990 million yuan to build a dairy processing project with an annual output of 200,000 tons to supplement working capital. The Shanghai Stock Exchange required Tianrun Dairy to disclose the product information of Xinnong Dairy and Tianrun Qiyuan and the differences with the fundraising project, explaining the feasibility of the new capacity digestion measures.

Tianrun Dairy replied that Xinnong Dairy only has one product type of room temperature UHT milk (ultra-high temperature sterilized milk), which is the same as this fundraising project, but due to process limitations, it is temporarily unable to produce the high-quality products planned for this fundraising project. At the same time, if the existing UHT products are transferred to Xinnong Dairy for production, the freight cost to markets outside Xinjiang will increase by about 30% on average. Tianrun Qiyuan is located in Shandong, it is difficult to use Xinjiang milk source, and it is planned to use the milk source of Australasia Ranch and other large-scale pastures nearby.

Song Liang believes that the reason why Tianrun Dairy has become the first brand of Xinjiang dairy industry has a lot to do with its development of markets outside Xinjiang. The North China market is different from the South China and East China markets, especially the East China market, which has a particularly high recognition of Xinjiang's milk source. If Tianrun Qiyuan abandons Xinjiang milk source, it may lose its competitive characteristics.

Tianrun Dairy replied that Tianrun Qiyuan will use the "Jiali" brand, without the promotion of Xinjiang milk source, but will make differentiated products, and milk beer and yogurt still use the original technology and strains.

Beijing News chief reporter Guo Tie

Edited by Zhu Fenglan

Proofread by Diyan Chen