Huiyuan to purchase assets from Suntory for $18.9m

Financial results of China Huiyuan Juice Group

China Huiyuan Juice Group Thursday announced a plan to purchase partial assets from Suntory (China) Holdings Co for 117.66 million yuan ($18.9 million), in hopes of expanding its presence in China's tea and coffee beverage market.

Under a Framework Agreement signed on Thursday, Huiyuan will acquire 50 percent of Suntory (Shanghai) Foods Marketing Co as well as all of Suntory (Shanghai) Foods Co, according to a filing posted by the Hong Kong-listed fruit and vegetable juice producer.

As part of the contract, Huiyuan will issue new shares worth 117.66 million yuan to Japanese beverage producer Suntory Holdings, the parent company of Suntory (China).

Suntory will establish a strategic cooperation with Huiyuan in areas such as product development, quality control and supply management and help its Chinese partner expand into other segments, "particularly in tea and coffee drinks," said the filing.

Huiyuan has to diversify its product portfolio and seek new profitable sectors, as high material costs are narrowing down the profit margin of its core business - medium- and high-concentration juice, Ma Wenfeng, an industry analyst with Beijing Orient Agribusiness Consultants, told the Global Times Thursday.

In addition, Huiyuan has not performed well in the mainstream sector, referring to low-concentration juice, which is full of strong competitors such as US beverage company Coca-Cola, which makes popular orange juice Minute Maid, said Yan Qiang, a partner of Beijing-based Hejun Consulting.

According to the company's financial reports, it did not see any robust growth in the past three years.

In 2013, the company reported profit of 228 million yuan, compared to 2012's 16.16 million yuan, but still lower than the figure of 310 million yuan in 2011.

Analysts said that Huiyuan has long been counting on government subsidies and assets selling. Zhu Xinli, chairman of Huiyuan, even had the intention of selling the whole company to Coca-Cola in 2008, according to media reports. However, the Ministry of Commerce did not approve the deal in 2009, citing antitrust laws.

Last year, it earned 426 million yuan in total revenue, boosted by the sales of a plant in Shanghai and assets in Chengdu and received 225 million yuan worth of government subsidies.

Huiyuan can achieve little in the mature tea drinks market, which has been dominated by Taiwan-headquartered tea drinks makers such as Ting Hsin International Group for a long time, unless the company can introduce distinctive drinks with the help of Suntory's more advanced research ability, Yan told the Global Times Thursday.

The coffee drinks sector seems to have more opportunities, said Ma. "But Huiyuan will also be confronting an uphill battle in the sector, as it has to compete with veterans like Nestlé and will need really lots of time as well as money in marketing."

The deal with Suntory can hardly contribute to brand establishment in China where the Japanese company still has small market recognition, remarked Yan.

Yan also noted that Huiyuan should improve its management and cling to China's large beverage market which sees annual growth of 10 percent, instead of selling assets.