6689.HK
Hongjiu Fruit issues more shares

The leading Chinese distributor of high-end fruit has been forced to raise more capital to help bridge a gap between incoming payments and outgoings

Key Takeaways:

  • In the first half of 2023, its receivables were equivalent to 92.4% of total liquid assets
  • The company’s cash flow turned positive in the first three quarters of 2023 with a net inflow of 26.9 million yuan

    

By Li Shih Ta

One of China’s leading fruit distributors is in a financial squeeze.

In its third fund-raising effort in less than two years, Chongqing Hongjiu Fruit Co. Ltd. (6689.HK) announced on Jan. 21 that it would generate about HK$820 million ($740 million) through a new share placement, using the proceeds to strengthen its supply chain, pay off debt and replenish working capital. 

The company will issue up to 189 million new shares at HK$4.35 per share to at least six independent parties, with a one-year lock-up period. The new issuance will equate to about 11.8% of total shares after the placement, and 16.6% of the enlarged volume of H shares.

It was bitter news for investors to swallow. The day after the announcement, Hongjiu’s share price plunged 14% to HK$3.74. The sell-off left the stock a whopping 91% below its September 2022 IPO price, wiping about HK$13.4 billion off its market value.

Three bites of the cherry

In fact, Hongjiu has now sought a cash infusion three times in the 16 months since its listing. On April 4 last year, it issued almost 30.5 million new shares to domestic investors at 16.4 yuan per share, raising 500 million yuan. Then two weeks later the company placed another 14.96 million shares with 23 investors at HK$23.61 per share, raising about HK$350 million.

The company was in need of a capital top-up after burning through its cash. Its operating cash flow was stuck in negative territory from 2019 to 2022. Hongjiu was still nursing a cash flow deficit of 314 million yuan at the end of last June. The balance did not turn positive until the nine-month results, released in October, showed a net cash inflow for the period of about 26.9 million yuan.

The cash crunch was blamed on a growing gap between trade receivables and the company’s upfront payments for quality fruit. By the end of June 2023, the company had about 560 million yuan in cash compared to receivables of 10.2 billion yuan, equivalent to 92.4% of total liquid assets.

From vendor to fruit tycoon

The high rate of outstanding payments stems from the business model of sourcing exotic fruit from across the world to supply to wholesalers in China. 

Founder Deng Hongjiu started out as a porter at Chaotianmen Wharf in Chongqing, selling fruits from bamboo baskets. Years later he set up a company with supply chains extending to Taiwan, Southeast Asia, and even Chile in a bid to create a high-quality fruit brand. After more than 20 years, Hongjiu has grown into the largest Chinese proprietary distributor of fresh fruit and the biggest provider of imported fresh fruit from Southeast Asia.

The company held a durian festival in Shanghai last April to promote the pungent fruit. Hongjiu is the largest durian distributor in China by 2022 revenue, also ranking among the top five distributors of mangosteen, dragon fruit and longan.

Unlike its rival Shenzhen Pagoda Industrial Group Co. Ltd. (2411.HK) which sells directly to consumers, Hongjiu mainly caters to wholesalers. Under its end-to-end model, Hongjiu buys directly from overseas orchards, cutting out intermediaries during the importing and distribution process to minimize fruit losses and maximize profit.

The system helped Hongjiu achieve a gross profit margin of 15.4% last year, higher than Pagoda’s 11.3%. In the first three quarters of 2023, the company’s revenue rose 26.4% to 13.4 billion yuan, but the profit attributable to shareholders was not announced. In the half-year earnings, profit attributable to shareholders was 800 million yuan, down slightly from 850 million yuan in the equivalent half of 2022.

Despite persistent revenue growth, the company has been forced to take on more debt as excessive receivables strained its finances. As of June 30, 2023, bank borrowings had reached 2.78 billion yuan, up 49.2% from the 1.86 billion yuan in the same period a year earlier.

Hongjui supplies produce on 180-day credit to retain its wholesale customers. But, at the same time, it has to pay suppliers in advance to ensure access to high-quality fruits.

Supply and demand squeeze

In the first half of 2023, the turnover period for trade receivables increased to 188.5 days from 144.8 days at the end of 2022, according to the earnings statement. As of June 30, 2023, the credit impairment loss on trade receivables amounted to 184 million yuan, 47.8% higher than the 124 million yuan a year earlier.

The company said it had to extend the payment terms for regional wholesalers and small supermarkets grappling with pandemic problems and economic woes. Simply put, customers are not paying up on time, or at all.

Meanwhile, Hongjiu has had to make advance payments to suppliers within a tightening timeframe.  The turnover days for advance payments fell to 33.4 days from 38.3 days in 2022, as the company sought to ensure stable supplies from growers.

In other words, outgoings are accelerating while incomings are slowing down. The business model that drove its success is now a cash drain.  And with China’s weak economic recovery, investors are skeptical about the prospects for recovering the money owed, putting pressure on the share price.

While raising funds through various channels, Hongjiu is also trying to tackle the excessive receivables. Credit lines are being tightened for some customers, while review procedures and debt collection efforts are also being ramped up. At the same time, the fruit distributor is also investing more money in live streaming and e-commerce to cultivate more customers who can settle bills in a shorter period.

In addition, the company told a shareholders’ meeting last December that it was looking to develop its online business and expand into the vegetable market. Unlike high-end fruit, vegetables are in constant demand as daily necessities, but the company needs to figure out how to integrate the businesses and grow its revenue base.

Hongjiu’s shares are now trading at historic lows, with a price-to-earnings (P/E) ratio of 3.9 times compared with 12.5 times for Pagoda. But the stock could stage a recovery as pandemic shocks fade, if the company can improve its finances, diversify its sales and benefit from more efficient customs clearance for imports. 

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