Campaigns against corruption, official waste hit sales, stock price of Tibet 5100
Shares in Tibet 5100 Water Resources Holdings Ltd, a luxury mineral water producer in the Chinese mainland, fell more than 16 percent during afternoon trading in Hong Kong following media reports that its partnership with the national railway operator had ended.
The shares ended 12.7 percent lower at HK$2.2 (28 cents), compared with a decline of 3.09 percent in the Hang Seng Index.
The company did not provide any explanation for the drop by press time, but analysts said the major reason was that its largest customer, China Railway Corp (CRC), reportedly stopped purchasing its products.
Since 2007, CRC's subsidiary China Railway Express (CRE) had procured Tibet 5100's bottled mineral water and given it free to high-speed railway passengers, according to Tibet 5100's prospectus released in June 2011.
However, starting from Sunday, the service was suspended at railway stations in Beijing as a part of CRC's internal anti-corruption crackdown, domestic news portal yicai.com reported, citing unidentified sources.
A person close to the matter told the Global Times on Monday that all railway stations around China stopped offering free bottled mineral water as of Sunday.
"This is a direct order from the CRC. There is no indication when the suspension will end," said the person on condition of anonymity. Although he declined to give a specific reason, he noted that the CRC was under disciplinary inspection.
The CRC, a spinoff of the former Ministry of Railways, could not be reached for comment by press time.
Given the central government's campaigns against corruption and extravagant official spending, it is not surprising that CRC would reduce its operating costs, Yan Qiang, general manager of Beijing-based consulting firm China-USA Benchmark Group, told the Global Times on Monday.
CRE has spent 1.59 billion yuan ($256 million) on bottled water since 2008, according to estimates provided by yicai.com.
This is not the first time that CRE has suspended free bottled water supplies. According to Tibet 5100's annual report issued in April, in the first half of 2014, sales to CRE were suspended because the previous procurement agreement with the company had expired at the end of 2013.
As a result of the temporary suspension, sales to CRE accounted for only 13 percent of Tibet 5100's total sales in 2014, a decrease of 28 percentage points from 2013.
"Losing CRE, which usually contributes about half of Tibet 5100's revenue, will really cast a shadow over the prospects of the water company," said Yan.
Tibet 5100 did not reply to the Global Times e-mail inquiry on this subject by press time, but the company said in its prospectus that the government's investigation into the railway authorities could have a negative effect on its business relations with CRE.
In 2011, former railways minister Liu Zhijun and former deputy chief engineer of the disbanded rail ministry Zhang Shuguang were put under disciplinary investigation for allegedly taking bribes and received suspended death sentences in 2013 and 2014 respectively.
Apart from the risks associated with China's ongoing anti-corruption campaign, Tibet 5100 also faces fierce competition in the high-end bottled water industry, Yan said. This segment of the beverage market, which experienced an average growth rate of 50 percent to 60 percent in sales in recent years, was expected to be worth more than 30 billion yuan by 2016, the Xinhua News Agency reported on July 20.
Some high-end water brands' gross margins can be almost as high as those of domestic liquor brands, said media reports. Tibet 5100's gross margin in 2014 was 63 percent, Wuliangye Yibin Co's liquor business saw its gross margin in 2014 reach 75.5 percent.
The promising market has attracted many players from the beverage sector and other industries. Taiji Group Co, a domestic leading pharmaceutical company, ventured into the high-end bottled water industry in early July.
"Tibet 5100 lags behind many [of its competitors] in terms of sales networks and marketing and is more vulnerable to fierce competition unless it diversifies its product range," Yan noted.
