Wu Xiangdong, the "godfather of spirits" who founded the Jin Liufu brand and owns two listed liquor companies, is under supervision.

On July 24th, the Shenzhen Stock Exchange issued a supervision letter to Huazhi Liquor Company (300755.SZ), the "first share in the circulation of alcohol".

On March 9, 2020, Beijing Huazhi Chen Xiang Electronic Commerce Co., Ltd. (hereinafter referred to as "Huazhi Chen Xiang"), a subsidiary of Huazhi Wine Co., Ltd., purchased real estate from the related party Xinhua Union Holdings Limited (hereinafter referred to as "New Hualian Holdings"). On the same day, Huazhi Chen Xiang signed a credit and debt set-off agreement with New Hualian Holdings and the related party Huazer Group Co., Ltd. (hereinafter referred to as "Huize Group").

Together, the two transactions involved more than 90 million yuan, but the related matters were not disclosed by Huazhi Wine until August 6, 2022, so the Shenzhen Stock Exchange issued a regulatory letter to remind them.

As early as May this year, Huazhi Wine Company received a supervision letter from Yunnan Securities Regulatory Commission as a result of the above incident, and issued a warning letter to a number of senior executives, including Wu Xiangdong, chairman of Huazhi Wine Company, which was recorded in the integrity files of the securities and futures market.

Xinhua United Holdings is the controlling shareholder of * ST Xinlian (000620.SZ). The latter controller Fu Jun is the brother-in-law of Wu Xiangdong, the real controller of Huazhi Wine Co., Ltd., and the two form a "brother-in-law" relationship.

Behind these two related party transactions, which were not disclosed in time, it was Huazhi Wine Company that bailed out * ST Xinlian when it was cash-strapped.

Huazhi Liquor is not well-off either, and in the downward cycle of the liquor industry, Huazhi, which is in the lower reaches of the industry, has a particularly strong sense of terminal sales pressure. This is also directly reflected in its financial report, which has been caught in the dilemma of increasing income without increasing profits since the second quarter of last year.

When the industry environment changes, what should the "godfather" do?

A surge in debt

Behind the regulatory warning of the related party transaction between Huazhi Wine and New Hualian Holdings, there is a hint of the former bailing out the latter.

According to the supervision letter, as early as March 9, 2020, Huazhi Chen Xiang, a wholly-owned subsidiary of Huazhi Wine, signed a house sale contract with the related party Xinhua Lian Holdings, agreeing to buy Building 32 of Beijing Private Enterprise headquarters Base from New Hualian Holdings at a price of 51.518 million yuan. The deal was not submitted to the board of directors of Huazhi Wine for approval until August 2022 and was also reflected in the 2022 report.

However, it is worth mentioning that Huazhi Wine Company's 2022 annual report shows that it and New Hualian Holdings generated a total of 96.37 million yuan in transferred property related transactions during the reporting period, which is different from the amount of related transactions disclosed above.

In addition, according to the regulatory letter, on March 9, 2020, Huazhi Chen Xiang also signed a credit and debt set-off agreement with New Hualian Holdings and the related Huize Group, involving a total amount of 39 million yuan. However, the deal was not reflected in Huazhi's annual report from 2020 to 2022, and details of the debt offset agreement have not yet been disclosed.

In May this year, as a result of the above two transactions, Wu Xiangdong, chairman of Huazhi Wine Company, Peng Yuqing, then general manager, Zhang Ruping, then secretary of the board of directors, Li Wei, current general manager, and Liang Fangbin, current chief financial officer and secretary of the board of directors, were all issued warning letters by the Yunnan Securities Regulatory Commission and recorded in the integrity files of the securities and futures market.

In addition to the related party transactions mentioned in the regulatory letter, in 2021, Huazhi Chen Xiang also sold the Beijing property of Xinhua Union Holdings through a judicial auction platform with a base price of 48.62 million yuan.

The background of the above transactions is that the liquidity crisis of Xinhualian Holdings is gradually emerging. Its literature and travel platform * ST Xinlian was insolvent in 2022, faced with delisting, had no choice but to wear a hat, and is currently in the stage of bankruptcy restructuring. According to * ST Xinlian 2023 half-year results forecast, the first half of the net profit is expected to be a huge loss of 1.341 billion yuan to 1.087 billion yuan.

But on the other side, Huazhi is not well-off. By the end of 2022, the short-term loan of Huazhi Wine reached 1.366 billion yuan, a sharp increase of 160.55% over the same period last year. Huazhi Wine was attributed to the increase in bank loans during the reporting period. And 428 million yuan of its 1.178 billion monetary funds are bank acceptance margin and e-commerce margin, the rights are limited, and its available monetary funds are far from enough to cover short-term liabilities.

In 2022, Wu Xiangdong and his controlled Huazer Group and Hunan Jindong Liquor Co., Ltd. applied for a comprehensive credit line of 3.903 billion yuan for Huazhi Distillery and its wholly-owned subsidiaries. The increase in loans during the reporting period directly led to a year-on-year increase in financial expenses of 62.7% to 21.59 million yuan.

ID:TradeWind01 asked people related to Huazhi Wine about the reasons for the change in financial charges, which they said was "due to the company's increase in short-term borrowing at the end of 2022 for operational needs", but did not specifically explain the whereabouts of the funds. The annual report is attributed to the increase in the size of bank loans and the increase in interest charges.

Bind with key customers

Since 2022, the market has gradually realized that the channel inventory of the liquor industry is high and the life of dealers is difficult. You can also get a glimpse of Huazhi's financial results.

From 2020 to 2022, the revenue growth of Huazhi Liquor was 32.2%, 50.97% and 16.73% respectively, which was basically in line with the high performance of a group of head liquor enterprises.

This is mainly due to the model of Huazhi's binding with customers of head brands such as Mao Wu, which allows it to keep growing even as revenue from peers such as 838883.NQ falls.

According to the Soochow Securities Research report, from 2016 to the first half of 2018, the products of Maotai series and Wuliangye series contributed more than 80% of Huazhi's revenue, with a gross profit margin of about 20% for the distribution of Maotai and Wuliangye products.

It is worth mentioning that from 2015 to the first half of 2018, more than half of the 53-degree Feitian Moutai and 52-degree Puwu products sold by Huazhi Wine were purchased directly from liquor companies, while the rest were purchased through suppliers. In the first half of 2018, the proportion of 53-degree Feitian Maotai directly supplied by its wine enterprises was as high as 70%.

There is a significant difference in the price of products directly supplied by wine enterprises and those supplied by suppliers. Take 53 degrees Feitian Maotai as an example, if the time is July 2023, the purchase price of Feitian Maotai should be 969 / bottle, but the supplier's purchase price should be about 2700 yuan / bottle.

This is a spread of about 1700 yuan per bottle.

At the scene of the listing ceremony of Huazhi Wine in 2019, Li Baofang, then chairman of Maotai Group, and Liu China, then general manager and chairman of Wuliangye Group, came forward to ring the platform for it.

It can be said that the "Mao five" constitutes the basic plate of Huazhi Wine, but under the reality that the inventory of the channel is high and the prices of some brands are upside down, the profit performance of Huazhi Wine has also been seriously damaged last year.

Although Huazhi's revenue is still growing since the second quarter of 2022, its net profit has been negative one after another, with its full-year net profit falling sharply by 45.77% to 366 million yuan compared with the same period last year. On the one hand, the reason is that its financial expenses have increased by more than 60% in 2022, and loan interest expenses have eroded profits; on the other hand, sub-high-end spirits, which were more profitable in the past, are becoming difficult to sell.

In 2022, Huazhi's gross profit margin decreased by 6.93 percentage points to 14.03%, while its net profit margin decreased from 9.22% to 4.29%, becoming a "victim" of inverted prices in the liquor market.

In order to increase profits, Huazhi Wine Co., Ltd. exclusively cooperates with the winery to promote the business of customized wine. Wu Xiangdong is the founder of the liquor OEM model, and the Jin Liufu brand he founded produced the first bottle of wine with the help of the Wuliangye production line.

As the pricing power of custom wine is in the hands of Huazhi Wine Company, the gross profit margin of the product is significantly higher than that of other agent products. According to its prospectus, the gross profit margin of custom liquor is 40% to 57%, while that of Feitian Moutai is only 33.57%. Today, Huazhi Liquor has launched "Wuliangye vintage Liquor" in cooperation with Wuliangye Group and "Guizhou Moutai Liquor (Gold)" in cooperation with Moutai Group.

In theory, relying on the channel advantage of Huazhi Wine in terminal stores, the mode of "famous wine drainage and customized wine profit" can increase its profits. According to ID: TradeWind01, there are more than 2000 Huazhi liquor stores and more than 30, 000 high-quality retail terminals so far. High-quality retail terminals include KA stores, terminal suppliers and so on.

But this is not an easy task, because the immediacy of alcohol sales determines that chain stores are not mainstream channels.

According to Euromonitor International, KA stores, catering hotels and famous tobacco hotels are important liquor distribution channels in China, which account for more than 80% of the alcohol consumption market.

Another set of data is that between 2015 and the first half of 2018, Huazhi branded stores accounted for less than 20 per cent of revenue.

And in the environment where the sales of the top-end wine companies in the market are not as expected, it is also a question mark whether Huazhi's customized wine brand is strong enough to support its counter-trend growth.