On October 17, Yihai Kerry Arawana Holdings Co., Ltd. announced the complete sale of its wholly-owned subsidiary, Zhalai None Network Agricultural Co., Ltd. (referred to as "Zhalai Company"), along with a debt waiver arrangement. This subsidiary, which previously supported Yihai Kerry's sugar business, was ultimately divested from the listed company due to ongoing losses and insolvency.
This move aims to "optimize the asset structure." With traditional business profitability weakening and new business growth stagnant, Yihai Kerry is facing low net margins and significant idle capacity. This year, the company has issued two announcements regarding delays in fundraising projects.
According to the announcement on October 17, Yihai Kerry’s wholly-owned subsidiary, Inner Mongolia Hefeng Agricultural Co., Ltd., signed an agreement with Xingan League Zhongheng Agricultural Management Center (Limited Partnership) to transfer its 100% stake in Zhalai Company. Following the completion of the transaction, Zhalai Company (renamed Inner Mongolia Tianlu Sugar Technology Co., Ltd.) will no longer be included in Yihai Kerry's consolidated financial statements.
Notably, this equity transfer is accompanied by a substantial debt waiver. To support Zhalai's operational cash flow, Yihai Kerry has provided four loans starting from October 31, 2024 (the first two loans, totaling 104 million RMB, are secured by machinery and real estate, while the latter two, amounting to 197 million RMB, are unsecured). As of the announcement date, the total principal and interest of operational loans provided amount to 301 million RMB.
To facilitate this transaction, Yihai Kerry established the following debt waiver terms: a waiver of 100 million RMB in loans; should Zhalai Company repay 53.9 million RMB by June 30, 2026, and start normal operations, Yihai Kerry will waive an additional approximately 97.4 million RMB.
This means Yihai Kerry will waive up to 197 million RMB total to divest this insolvent subsidiary from the listed company.
According to the announcement, Zhalai Company's audited total assets for 2024 amounted to 239.01 million RMB, total liabilities were 377.95 million RMB, and owner’s equity stood at -138.94 million RMB, with operating revenue of 514,900 RMB and a net loss of 34.65 million RMB.
The sale of Zhalai Company reflects Yihai Kerry's mounting pressures. In August this year, Yihai Kerry issued announcements regarding the delays of several fundraising projects, including the "Yihai Kerry (Qingdao) Food Industry Co., Ltd. - Food Processing Project" and "Oil Refinery and Supporting Engineering Construction Project" situated in Kunming, both postponed to December 31, 2027. These projects, which mainly involve various types of flour, peanut products, sesame oil extraction, and soybean and rapeseed pressing, originally had a two-year construction timeline with planned production dates of October 2022 and October 2023.
When Yihai Kerry went public in 2020, it raised 13.933 billion RMB (net proceeds of 13.693 billion RMB), primarily for 21 capacity expansion projects aimed at boosting capacity and diversifying product offerings, with a total investment of 174.674 billion RMB, including plans to allocate 13.693 billion RMB from the raised funds. By June 30, 2025, only 11.825 billion RMB of these funds had been utilized, leaving 2.486 billion RMB unspent.
However, implementation has not gone smoothly, with Yihai Kerry announcing project delays annually since 2022 across multiple initiatives, stemming primarily from sales not keeping pace with capacity expansion.
Currently, Yihai Kerry faces a significant idle capacity issue; in 2024, the capacity utilization rates for oil pressing and refining were only 56.94% and 49.97%, respectively. Continuing with the large-scale fundraising projects amid insufficient capacity utilization undoubtedly exacerbates the issue of overcapacity.
The company disclosed that in the first half of this year, ten fundraising projects did not meet expected returns. Specifically, influences from weak demand persist; in the flour business, large wheat processing groups are steadily expanding capacity, leading to increased industry concentration and intensified competition, resulting in lower-than-expected project benefits. For soybean pressing projects, soybean and soybean meal prices show a downward trend, but the longer procurement cycle for soybeans means that raw material costs decline lag behind product price drops, leading to subpar project benefits. Similarly, products like wheat starch and protein face weak demand and falling market prices.
Under the dual pressures of rising raw material costs and decreasing demand, when will Yihai Kerry see a turning point?
Yihai Kerry's revenue is composed of two parts: kitchen foods and feed materials and oil technology, with kitchen foods—including edible oils, rice, and flour—accounting for nearly 60% of total revenue and boasting a gross margin significantly higher than the feed materials business, making it the company's core business.
Since 2020, Yihai Kerry has experienced a downward trajectory in gross margin primarily due to substantial price increases in soybeans. During the period of rising raw material costs, Yihai Kerry found it difficult to pass on cost pressures downstream, leading to reduced margins. Since September 2022, while soybean prices have started to decline, Yihai Kerry's gross margins have not shown significant recovery due to falling product prices offsetting the benefits of declining raw material costs.
In addition to declining raw material costs, fierce industry competition, sluggish downstream demand, and decreased willingness to pay from distributors have collectively driven down product prices. The shrinkage of demand and decline in product structure have become significant constraints on Yihai Kerry's performance growth.
In the first half of this year, Yihai Kerry recorded a revenue growth of 5.67% and a 60.07% increase in net profit attributable to shareholders, marking a rebound after two years of continuous revenue decline. However, diving deeper, kitchen food revenue only grew by 2.69%, while feed materials increased by 10.81%, serving as the primary growth driver. The improvement in the feed materials business is mainly due to year-over-year declines in soybean prices, coupled with favorable downstream breeding demand, while low-end products within the kitchen foods segment still face intense competition.
Overall, edible oils, packaged rice, and packaged flour remain in a highly mature and slowly growing "stock market." Yihai Kerry maintains its leading market share in edible oils, with substantial shares in the other two sectors as well. However, amidst shrinking consumer demand, the company can only expect future growth through structural changes.
In recent years, Yihai Kerry has focused on promoting high-end products and extending its product lines to include condiments, yeast, daily chemicals, and pre-made dishes; however, the impact of these product reforms on overall performance has been limited.
For Yihai Kerry, the most challenging issues are low profitability and high debt levels. In 2023 and 2024, the company's net profit margin excluding extraordinary items dropped to about 0.5%, improving to 1.2% in the first half of this year, but still relatively low, mainly benefiting from the restoration of gross margins due to declining raw material costs.
Under the combined pressures of difficult transmission of raw material cost burdens and shrinking demand, Yihai Kerry's profitability has significantly declined, and its growth narrative has shifted. After its IPO in 2021, the company's stock price peaked at over 140 RMB (adjusted for splits) but currently hovers around 30 RMB, only 21% of its highest point.
On the other hand, Yihai Kerry's debt levels remain high, with a debt-to-asset ratio of 56% in the first half of this year, short-term interest-bearing debt reaching 83.19 billion RMB, long-term interest-bearing debt at 5.385 billion RMB, and cash on hand amounting to 44.372 billion RMB, yielding a cash-to-short-term debt ratio of only 0.53. Financial expenses are projected to reach 428 million RMB in 2024, and the substantial interest-bearing debt compresses profit margins. More importantly, amidst declining net profits, liquidity risks cannot be overlooked.
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