The dilemma of overcapacity in the sugar substitute industry is difficult to break

The sugar substitute industry, which has been running wild in recent years, pressed the "pause button" last year. The net profit of natural sweetener manufacturer Rhine Biotech in 2023 will fall by 53.8%, the net profit of erythritol manufacturer Bowling Bao in 2023 will fall by 59.5%, and erythritol manufacturer Sanyuan Biotech is expected to deduct non-net profit in 2023 by 63.04%-71.05% year-on-year. Relevant companies said that the industry is facing the dilemma of increased competition due to the destocking of customer inventories and the difference between supply and demand expectations.

Competition in the sugar substitute market has intensified

According to public information, Rhine Biotech is one of the main manufacturers of plant sweeteners in China, and its products include monk fruit extract, stevia extract, etc. In 2023, Rhine Biotech will achieve an operating income of 1.49 billion yuan, a year-on-year increase of 6.7%, and a net profit of 82.51 million yuan, a significant decrease of 53.8% year-on-year.

In 2021 and 2022, the natural sweetener business of Rhine Biotech increased by 53.9% and 41.3% respectively, while in 2023, the revenue of Rhine Biotech's natural sweetener business was 900 million yuan, an increase of only 1.5% year-on-year.

In the previous investor survey, Luo Huayang, secretary of the board of directors of Rhine Biotech, responded that the natural sweetener industry has encountered the problem of intensified competition caused by the destocking of customer inventories and the poor supply and demand expectations of the industry, which has had a great impact on the revenue and profit of Rhine Biotech. In addition, with the decline in the market price of products, the impairment of some inventories and the increase in market expenses also affected the net profit performance of Laine Biotech.

In contrast, erythritol producers had a tougher time last year.

According to the annual report announced by Bowlingbao, in 2023, Bowlingbao's revenue and net profit attributable to the parent company will both decline, of which the revenue will be 2.523 billion yuan, a year-on-year decrease of 6.96%, and the net profit attributable to the parent company will be 54 million yuan, a year-on-year decrease of 59.47%. At the same time, the gross profit margin of Bowling Bao in 2023 is only 8.1%, a new low in recent years, compared with 13.4% and 11.6% in the same period in 2021 and 2022.

In this regard, the management of Bowling Bao blamed the continuous decline in gross profit margin on market competition, believing that early high-margin products have turned into low-margin products, and the rising cost of raw materials in 2023 will also make matters worse.

From the perspective of sub-business, the rapid decline in the performance of the sugar alcohol business is the main reason for the decline in the performance indicators of Bowlingbao. In 2023, in the functional sugar business of Bowlingbao, the revenue of sugar alcohols will be 210 million yuan, a year-on-year decrease of 41.8%, and the gross profit margin of the sugar alcohol category will also decline significantly, from 14.9% in 2022 to -9.7%.

Behind the sharp decline in the performance of the sugar substitute industry is the situation of overcapacity. In 2022, according to a rough statistics from a third-party research institution, the total production capacity of erythritol that can be produced by only six leading manufacturers will reach 445,000 tons/year, which is 20 times the total consumption in 2021. According to Frost & Sullivan's forecast, the total global demand for erythritol in 2022 will only be 173,000 tons. According to the financial report of Bowlingbao, the influx of a large amount of production capacity in the short term, coupled with the decline of the consumer side, has brought vicious competition in market prices, and the domestic erythritol market price in 2023 will fall from 30,000 yuan per ton at the peak to 9,500 yuan.

The demand for "sugar-free" has increased, and the market has temporarily recovered

The market is finally showing signs of recovery in the fourth quarter of 2023.

In the fourth quarter of 2023, Laine Biotech said that its single-quarter sales were 600 million yuan, a year-on-year increase of 43.4%, and the sales revenue of natural sweeteners in a single quarter was 380 million yuan, and the gross profit margin increased by 12 percentage points. Rhine Biotech said that this is mainly related to the recovery of the industry in the fourth quarter, the recovery of market demand and the company's measures to optimize the product structure.

In addition, the performance forecast released by Sanyuan Biotech on April 1 said that in the first quarter of 2024, the company is expected to achieve a net profit of 23 million to 29 million yuan, an increase of 194.6%-271.4% over the same period last year.

As for the reasons for the growth of performance, Sanyuan Bio believes that on the one hand, it is due to the increase in orders from downstream customers, the increase in sales of main products, and the gradual increase in capacity utilization, and on the other hand, it is related to the company's active marketing strategy and international market development.

At the same time, the gradual self-healing of the market has also contributed to the recovery of the market price of erythritol. With the strong increase in the market demand for "sugar-free" food and beverages, the rapid expansion of the downstream market has led to the acceleration of the supply and demand of upstream sweeteners, and the substitution of the sweetener stock market has also become a powerful booster to promote the accelerated expansion of natural sweeteners. Previously, the World Health Organization classified aspartame as a substance that may cause cancer to humans, and also forced some sugar-free food and beverages to use natural sweeteners. The growing demand for sugar-free and low-sugar beverages has formed a certain support for the sugar substitute market.

NielsenIQ data shows that the revenue of the domestic sugar-free beverage industry in 2023 will be 24.1 billion yuan, a year-on-year increase of 26%. iiMedia Consulting also predicts that the domestic sugar-free beverage market will reach 61.56 billion yuan in 2025.

In addition, the guidance and support of policies provide a good growth environment for the rapid development of the natural sweetener market.

In 2023, the Singapore government officially implemented the "Beverage Sugar Restriction Order", requiring nutrition grade labels and sugar content labels to be displayed on packaged beverages for sale, and prohibiting the advertising of high-sugar beverages. In November 2023, the "Shanghai Patriotic Health and Health Promotion Regulations" implemented in Shanghai, China, proposed to encourage sellers of sugar-sweetened beverages to standardize the installation of health reminder signs in relevant commodity sales areas.

Laine Biotech said that in the future, as more countries and regions adopt the method of formulating unified health labels in the market, through clear supervision of traffic lights, guide consumers' shopping choices, and efficiently popularize the concept of healthy food and drink, it will help promote the rapid expansion of the "sugar reduction" market.

It is worth noting that although the sugar substitute business is showing signs of recovery, the huge production capacity still worries the industry.

Experts said that this round of sugar substitute expansion is on the one hand the expansion demand of the enterprise itself driven by high yields, and on the other hand, it is also related to the capacity construction of local governments to attract investment incentives for leading enterprises. In the next step, sugar substitute companies will solve the problem of low gross profit of existing products by developing new technologies and new products, and at the same time accelerate the expansion of application scenarios other than beverages, such as baking, candy, snack food, seasoning and other scenarios to obtain new increments.

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