Hengshun Vinegar Industry’s 2020 Semi-annual Board of Directors Operation Review

The contents of the 2020 semi-annual board of directors’ operating review of Hengshun Vinegar Industry (600305) are as follows:

1. Discussion and analysis of operating conditions

During the reporting period, Affected by the new coronavirus epidemic, the world economy has been hit hard. The condiment industry, as a people's livelihood industry, has still maintained a steady development trend despite some impacts. As a leading company in the vinegar industry, it is also facing many development opportunities and challenges after experiencing this rebirth: opportunities come from the accelerated pace of consumption upgrades, increased industry integration, and brand advantages are gradually emerging; challenges are the industry growth rate Slowing down, industry competition intensifies, and uncertainties in enterprise development increase.

While preventing and fighting the epidemic, the company's board of directors is also actively adapting to market changes and exploring new models for corporate development. During the reporting period, the company actively implemented the basic principles of “focusing on main business, prioritizing ecology, and green development”. Focusing closely on the business goals set at the beginning of the year, we insist on focusing on epidemic prevention and risk prevention and control on the one hand, and ensuring market supply and recovery on the other. At the same time, we advance marketing reform, project construction, operation management improvement and other tasks in an orderly manner. The main condiment business Showing a trend of growth against the trend.

During the reporting period, the company's consolidated statements achieved revenue of 953 million yuan, a year-on-year increase of 7.39%; of which, condiments achieved revenue of 898 million yuan, a year-on-year increase of 8.64%. The net profit attributable to shareholders of listed companies was 149 million yuan, a year-on-year increase of 3.63%; the net profit attributable to shareholders of listed companies after deducting non-recurring gains and losses was 133 million yuan, a year-on-year increase of 11.44%.

During the reporting period, the company promoted the following key tasks:

1. Concentrated efforts and focused on the main business. Focusing closely on the three main businesses of "deepening the vinegar industry, growing the wine industry, and expanding the sauce industry", we will strengthen all channels, by deeply cultivating traditional channels, intensive cultivation of supermarket channels, strong attack on e-commerce channels, and fully entering catering channels and Develop major customer channels and make every effort to consolidate and enhance the sales scale and market share of vinegar, making it the “best-selling product” of cooking wine and the “best-selling product” of sauce products.

2. Dig deeper into culture and highlight value. The first is to continue to strengthen cooperation with the Xinhua News Agency National Brand Project, CCTV, and high-speed rail media, and use its strong trust and communication power to add points to the Hengshun brand; the second is to increase the exploration of century-old cultural connotations and prepare for the 180th anniversary celebration activities, and launched the product publicity and promotion plan; the third is to promote the renovation project planning of the museum sauce garden and Jiuhai New Hall and the construction of the brand terminal store standardization system, build a flagship store, and realize the vision of "Hengshun Taste. Well-off Life".

3. Strengthen the foundation and implement the project. Three major projects have been started so far. The first is the balsamic vinegar production expansion and construction project, which is expected to be put into use in June 2022; the second is the cooking wine production expansion project, which is expected to be put into use in early 2022. After completion, it will accelerate the goal of doubling the cooking wine production capacity; the third is the cooking wine production expansion project, which is expected to be put into use in early 2022. For the fully digital reshaping project, we signed a contract to introduce the SAP enterprise management platform to fully promote the digital transformation of enterprises to break through development bottlenecks and achieve agile response, precise management and control, efficient collaboration, and smooth operations.

4. Deepen reform and seek innovation and change. The first is to implement changes in the traditional channel marketing system and implement a theater system, reintegrating the existing 36 areas into eight theaters, integrating overseas channels, and strengthening the operational awareness of overall market planning. The second is to implement smart retail reform and integrate existing e-commerce channels, museum retail channels and Hengshun shopping mall resources; the third is to implement the reform of operation management mechanism and continuously standardize the standardization, institutionalization, process and transparency of operation management.

5. Integrate resources to lose weight and strengthen your body. The first is to work hard on “slimming down”. Make every effort to promote the goals set at the beginning of the year to integrate, clean up or exit non-core main businesses; the second is to make a fuss about "strengthening the body". Optimize the layout and planning of industrial space for the existing land of more than 1,200 acres, focus on improving the output rate per unit area, and complete the spatial development plan of Hengshun Park to achieve "three-life integration" (the integration of production, ecology and life) The modern industrial park has a clear direction.

In the second half of the year, the company will further deepen the internal transformation of the company and make every effort to promote high-quality development of the company.

We insist on focusing on the development of the three core main businesses, strive to expand and cultivate growth categories, set business goals to benchmark the highest level in the industry, outperform the average growth rate of the industry, and continue to consolidate the leading position in China's vinegar industry. Further optimize the talent structure, increase efforts to recruit and introduce high-quality and high-potential talents, strengthen career planning and directional training of talents, use high-quality talents to drive high-quality development of the enterprise, reserve talent momentum for the development of the enterprise, and fully realize the goals set at the beginning of the year various business objectives.

Main business by industry, product and region

Unit: Yuan Currency: RMB

Note: According to the new revenue standard, freight will be reclassified Classified to operating costs. Calculated on the same basis, the gross profit margin of condiments increased by 1.97 percentage points compared with the same period last year.

2. Possible risks

The procurement of raw materials and quality control in the production process of the condiment industry are related to food safety. The country has promulgated a series of laws and regulations with the food safety law as the core. The rapid integration of channels in the condiment industry, structural adjustment, and changes in consumer behavior patterns have brought many challenges to condiment manufacturers. The upgrading of products, technology, capital, human resources and other aspects has become a topic that enterprises must face directly, and companies face various risks.

1. Risk of raw material price fluctuations

The main raw material of vinegar is glutinous rice, which accounts for more than 30% of the company’s production costs. If there is a fluctuation due to the influence of macro-control, it will inevitably affect Gross profit margin is an important risk that a company faces in terms of profitability.

2. Risk of brand infringement

The company’s Hengshun brand has strong credibility and wide popularity in the condiment industry. It is the representative of Zhenjiang vinegar. Although in recent years In recent years, the country has increased the protection of Chinese time-honored brands and well-known Chinese trademarks. However, in recent years, some small companies have still tried to imitate Hengshun's trademarks and trade names. If the company's brand is infringed, it may lead to a decrease in consumer trust, causing the company to face reduced orders and hindered marketing plans, thereby affecting the company's performance level.

3. Food safety control risks

With the country’s increasing emphasis on food safety, the deepening of consumers’ awareness of food safety and the enhancement of their awareness of rights protection, food safety and quality control have It has become the top priority in the production and operation of food processing enterprises. The state and relevant departments have successively promulgated the "Implementation Rules for Quality and Safety Supervision and Management of Food Production and Processing Enterprises", "Agricultural Products Quality and Safety Law of the People's Republic of China", "Food Safety Law of the People's Republic of China", "Food Safety Law of the People's Republic of China" A series of policies and regulations such as the National Standard Management Measures are used to regulate the production and operation behavior of food processing enterprises to protect the interests of consumers to the greatest extent. Since the establishment of the company, product quality has met the requirements in previous national market sampling inspections. Nevertheless, if the company's quality management work is negligent or product quality problems occur due to other reasons, it will not only generate compensation risks, but may also affect the company's reputation and the sales of the company's products. Therefore, the company may suffer losses due to errors in product quality and safety control. potential business risks.

The company attaches great importance to the above potential risks. The management and relevant departments have carefully studied and implemented the response plan and effectively carried out risk prevention and control work.

3. Analysis of core competitiveness during the reporting period

The company is a "Chinese time-honored brand" enterprise. It was founded in 1840 during the Daoguang period of the Qing Dynasty. As the first of the "Four Famous Vinegars", Zhenjiang Xiang As a representative of vinegar, it is currently the largest and most modern vinegar production enterprise in China and the only listed vinegar enterprise. It has formed an industry with obvious industry status, high brand awareness, wide channels, and a combination of intangible traditional craftsmanship and modern innovation. Technical advantages, superior quality and many other competitive advantages. The company's production and sales of vinegar products have long ranked first in the country, and it is the largest and most modern vinegar production enterprise in China;

(1) The brand value is huge and the potential for consumption upgrading is high. The company's brand has a high degree of capturing consumers' minds and is the largest sustainable competitive advantage in the consumer goods industry.

In addition, vinegar, especially Hengshun balsamic vinegar and related products (vinegar drinks, vinegar capsules, etc.), as healthy foods, will have huge future consumption space. According to Japan’s per capita comparable research, the domestic per capita consumption of vinegar and its products is at least More than 3 times the room for improvement.

(2) Unique brewing techniques create unique product characteristics. In 2006, the State Council included Zhenjiang Hengshun balsamic vinegar brewing technology in the first batch of national intangible cultural heritage lists. It is also the only traditional handicraft technology selected in the food manufacturing industry in Jiangsu Province. Hengshun balsamic vinegar uses high-quality glutinous rice as raw material, adopts the traditional technique of solid-state layered fermentation, and is refined through more than 40 processes including wine making, fermented grains making, and vinegar pouring. It is uniquely known as "sour but not astringent, fragrant and fragrant". Slightly sweet, rich in color and fresh in taste, the longer it is stored, the more mellow it will be." The unique brewing technology makes vinegar products extremely profitable. The gross profit margin of high-end products is more than 50%, giving it an investment value that most condiments do not have.

(3) Product quality and safety have always led the industry, and the quality control system is superior to similar companies. Through food chain traceability management, the company has established a complete management system from farmland to table. Strict control puts the company's quality and safety in an industry-leading position and eliminates food quality and safety risks. Vinegar itself has high acidity and is not easy to deteriorate. The acidity of Hengshun vinegar is even higher than that of overall vinegar products, which has a very strong food safety barrier.

During the reporting period, the company's core competitiveness continued to improve.