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    Fathom China

    Fuling Zhacai: Steady, Not Trendy

    Chongqing Fuling Zhacai Group (“Fuling Zhacai”) created a national market for a salty niche side dish from China’s remote hinterland: hot pickled mustard tubers. That success would be like putting anchovies in every American kitchen. The well-run state-owned company has room to grow. The problem is the product: it is an inexpensive condiment, lasts a long time, is eaten in tiny quantities, lends itself to a small set of dishes, and is not a...

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    Ant Financial And Tencent: Satisfying Fintech Regulators

    Regulatory scrutiny of Ant Financial and the fintech arm of Tencent Holdings (“Tencent”) has raised concerns that Beijing wants to restrict China’s fintech industry, or to hand big parts of it to state-owned companies. A close examination of Beijing’s actions so far, however, reveal that recent controls stem from a financial de-risking campaign launched in 2017. Beijing wants to avoid Wirecard-like frauds and other instability by ensuring that...

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    Ping An Good Doctor: Living Off Its Parent

    Ping An Good Doctor seems like a candidate for a short attack. The company earns about half its money from related-party transactions with its parent. It also spent nearly US$100mn to buy a firm from its parent for reasons that are unclear, then recorded nearly all the assets as intangible. The structure of PAGD’s variable-interest entity in China was strange from the start, and now that the owners of the VIE have resigned from PAGD’s board, it...

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    JD: Seeking A Growth Strategy

    China’s number-two e-commerce company is known for quick deliveries of genuine products, especially electronics. Yet JD’s traditional strengths provide fewer advantages today. Competitors who operate third-party platforms, like Alibaba Group Holding (“Alibaba”), provide more products, deliver almost as fast and have earned consumers’ trust. In response, JD wants to expand toward lower-income users in the countryside, and to promote its own third...

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    Haitian Food: Tight Channels Impede Growth

    Several online sources of varying reliability have indicated that Foshan Haitian Flavoring and Food (“Haitian”), a maker of condiments that include soy sauce, oyster sauce and sesame oil, has sold more product to its distributors than its distributors can sell to retailers—a practice known as “stuffing the channels.” Such practices would enable Haitian to hit revenue targets in the short term but would cause long-terms sales declines as...

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    Baozun: Dominating A Low-Margin Industry

    Baozun is China’s biggest provider of end-to-end e-commerce services for major brands. It does everything companies need to run online stores—warehousing, marketing, call centers, web-page design and more. Baozun’s leading position looks secure as big foreign companies, which constitute most of its customers, appear pleased with its services.

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    Alibaba: Making Nice With The State

    Many observers of China’s internet companies have a perception that Alibaba Group Holding (“Alibaba”) is in trouble with the government. We have heard concerns that Alibaba is too big to control, too rich at a time of looming economic hardship, and that now-retired founder Jack Ma is too powerful. Two developments support that theory: Ma’s resignation, and a new e-commerce law that took effect in January 2019. Yet Fathom China disagrees. We see...

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    Baidu: Falling From The Ranks

    Baidu is falling from the ranks of the great powers. Unlike the other BAT companies, Alibaba Group Holding (“Alibaba”) and Tencent Holdings (“Tencent”), Baidu has not thrived on mobile phones or in markets outside its core search business. Instead, Baidu’s effort to scrape more income from search has alienated users, who increasingly find Baidu’s results irrelevant or even dangerous. Baidu has good prospects in the booming market of cloud...

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    Dingli: Poised For A Lift

    Zhejiang Dingli Machinery (“Dingli”) enjoyed first-mover advantage in China’s soaring market for aerial work platforms—machinery like cherry pickers that allow workers to operate safely from several stories high. Dingli started early, built a technology advantage and has a strong distribution network. Although it is considered expensive in China, its equipment still sells at 20% less than that of foreign competitors. Dingli is poised to benefit...

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    Han’s Laser: A Story With More Holes Than Swiss Cheese

    Han’s Laser Technology Industry Group (“Han’s Laser”) misled shareholders about a huge real-estate investment in Switzerland. The company bought a property in the ski village of Engelberg and called it a research center. As the small renovation budget swelled to US$140mn, Han’s Laser told a series of half-truths to hide its real plan: owning a tourism hotel. The investment creates manifold opportunities for undisclosed related-party transactions...

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    Sino Biopharm: Industry Reforms Are A Tough Pill

    Sino Biopharmaceutical (“Sino Biopharm”) is one of China’s most successful drug makers, but it faces headwinds. The politically well-connected firm is a holding company with 30 subsidiaries, and this report focuses on the three most important. All are under pressure from government efforts to cut drug prices, and sales revenue is falling for many of Sino Biopharm’s top drugs. In search of new markets, Sino Biopharm is shifting from its...

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    Kingdee: Leading The Transition To Cloud

    Kingdee International Software Group (“Kingdee”) is one of China’s largest suppliers of business process management software. Its products help businesses integrate and automate supply chain management, customer relations, human resources and other functions. Most revenue still comes from on-premise software that clients install on their own servers. The next step up in technology is to the cloud, where Kingdee’s main service is software-as-a-...

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    Hengrui: Regulatory Reforms Create Uncertainties

    Jiangsu Hengrui Medicine (“Hengrui”) is a leading Chinese drug firm that grew by making generic medications whose patents have expired. An estimated 70% of its revenue comes from generics, especially those that fight cancer. Recent government reforms are driving down drug prices, threatening Hengrui’s margins and profits. Following a few years of market chaos, the company’s position should improve as small rivals drop out and unit sales increase...

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    JD Logistics: Great Service At Great Expense

    China’s second-biggest e-commerce company, JD.com (“JD”), in 2016 launched a new business—it opened its logistics services to non-JD merchants. JD had long been known for its vertically integrated warehousing and deliveries, in contrast with industry leader Alibaba Group Holdings (“Alibaba”), which outsources both. JD tried to turn a cost center into a profit center in 2017 by creating JD Logistics (“JDL”). JDL will deliver pretty much anything...

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    Yirendai: Strategic Retreat

    Yirendai ranks among China’s top companies in the troubled industry of online peer-to-peer lending, or P2P. Its platform puts together individual borrowers and lenders, and charges high fees. To protect consumers from usurious interest rates and Ponzi schemes, Beijing has passed a spate of regulations that are driving smaller firms out of business. Yirendai will likely rank among the survivors but with limited room for growth. The company’s...

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    Tencent Games: Culture Industry Under Pressure

    The Chinese government in March 2018 stopped approving new online games. The cessation hurts Tencent Holdings (“Tencent”), which earns 37% of its revenue from games. A government restructuring that has clogged the approval pipeline is widely misunderstood. It is part of the Communist Party’s tightening grip on the audio-visual industry, including games. Game approvals will resume when the current phase of grip-tightening is complete, which is...

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    Autobio: Solid Reputation, Tight Executive Group

    Autobio Diagnostics is poised to benefit from China’s booming healthcare services industry. The company has a good reputation but a few odd points. It has escaped controversy in an industry that is beset by scandal, although Fathom China thinks it should do a better job of explaining why its reported gross margins are so high.

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    Dali Foods: Consumers Want More

    Dali Foods Group (“Dali Foods”) is a large family-controlled maker of snack foods and drinks. It is known as a copycat that develops inexpensive me-too products, promotes them with celebrity-based marketing campaigns, and distributes them to lower-income consumers across vast swathes of China. Yet Dali Foods’ target demographic is shrinking as incomes rise, and even lower-end consumers are now looking for higher-quality fresh and healthy foods....

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    58.com: Strong Position In Online Listings

    Attached is our report on China’s leading online listings business, 58.com, sometimes called the Craigslist of China. The company is in a strong position. It faces no major competitors in its two main business lines: real estate and blue-collar recruitment. Management looks steady. A series of restructurings raised concerns but 58.com seems to have come through well. This is one of Fathom China’s more upbeat reports.

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    YY: Contending With Short Video

    Attached is our report on China’s pioneering livestreaming company, YY, which faces new challenges. The biggest is the quick rise of popular apps that share short videos and compete for eyeballs among YY’s user demographic. At the same time, more livestreaming competitors force YY to share more revenue with its hosts. Oddly, government crackdowns on livestreaming and short videos work to YY’s advantage by forcing its more adventurous competitors...

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    BYD: New Subsidy Regime, New Battery Challenger

    The world’s biggest maker of battery-powered vehicles, BYD, faces a tricky transition. Markets for the private company’s electric vehicles, or EVs, have long been driven by government subsidies for buyers. Beijing is curtailing subsidies for buyers in favor of incentives to boost supply. If Beijing’s scheme succeeds, BYD will almost certainly benefit. If not, then BYD will face a setback just as pressure from other EV makers grows. Meanwhile,...

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    Beijing Enterprises Water Group: Local Finance Faces Freeze

    Beijing Enterprises Water Group (“BEWG”) is China’s biggest water treatment company. The state-owned firm builds facilities to clean the water that flows into homes and factories, and to treat the sewage that flows out. It has also moved into restoring waterways that suffered heavy pollution during China’s 40-year industrial boom. Although state-owned, BEWG’s leaders come from an entrepreneurial private company acquired in 2008. Key to BEWG’s...

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    Hollysys: Beset By Challenges

    Hollysys Automation Technologies (“Hollysys”) makes systems that control industrial processes such as power plants, rail lines and petrochemicals. The former state-owned firm was privatized and taken public through a reverse merger. Hollysys faces stiff challenges. It earns much of its revenue from small to mid-sized coal-fired power plants that are under pressure to close, and its railway systems face strong competitive pressure. The company is...

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    China Dairy: Mengniu Turns Sour, Yili Looks Creamy

    China’s dairy industry is dominated by two giants who together control 33% of the market: China Mengniu Dairy (“Mengniu”) and Inner Mongolia Yili Industrial Group (“Yili”). Both face the twin problems of low milk prices and slow milk-consumption growth. The two seem to be converging from very different backgrounds. Mengniu started as a freewheeling private firm but was brought under government control; Yili started as a state-owned company but...

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    Online Lottery: Hoping The Ban Lifts

    China’s online lottery is forbidden fruit—juicy and banned. Selling online lottery products, including sports gambling, will almost certainly enable whatever companies receive a license to hit the revenue jackpot. The consensus opinion of people who profess to know the government’s thinking is that the 2015 ban will end, but when is anybody’s guess. Few expected it to last this long. Two companies will likely stand at the front of the line for...

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    LotSynergy: Clinging To A Contract

    The main business of China LotSynergy Holdings until 2015 was to supply video lottery terminals – basically slot machines – to China’s lottery. Then LotSynergy lost its exclusive supply contract amid a corruption scandal in which top lottery officials vanished into detention. LotSynergy says it has the right of first refusal when the contract opens up for tender but Fathom China is skeptical.

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    Man Wah: Bubba Goes To Beijing

    Man Wah Holdings (“Man Wah”) came from nowhere to dominate the US market for “motion upholstery,” otherwise known as reclining furniture. Family-run Man Wah operates vertically integrated furniture factories and sells under its own brand, Cheers. When its low-priced, innovative products hit US markets around 2007, they were just what American couch potatoes wanted, and revenue soared. Recent competition from Chinese rivals has forced Man Wah to...

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    China Lodging: Facing Angry Franchisees

    China’s second-biggest hotel chain, China Lodging Group (“China Lodging”) is well run and has a sound expansion plan. The company’s franchise model has allowed it to grow fast and meet strong demand for low-priced hotels; now it is moving into mid-priced hotels. Yet China Lodging faces a big new challenge: angry and empowered franchisees. The company’s franchisees in mid 2016 created a collective-bargaining organization and launched street...

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    Xinyi Solar: Sunny Year Ahead

    Xinyi Solar Holdings (“Xinyi Solar”) is China’s biggest maker of glass for solar cells, which are arrayed into solar panels to generate power from the sun. The company was in 2013 spun off from Xinyi Glass Holdings (“Xinyi Glass”), the subject of a related Fathom Profile in January 2017. Family-run Xinyi Solar is well managed and enjoys a good reputation, and its political connections run to the highest level of the Communist Party. Its clients...

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    Xinyi Glass: Strong Company, Fragile Market

    Xinyi Glass Holdings (“Xinyi Glass”) ranks among China’s top glass makers. Its main product is float glass, most of which is sold directly to construction companies. Some of Xinyi Glass’s float glass is also processed into higher-margin products such as insulated or tinted construction glass, or automobile glass. Family-run Xinyi Glass is well managed and enjoys a good reputation. Its main challenges are external – the float glass industry is...

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    51job: Waiting For Upstarts To Wither

    51job is China’s biggest online job-recruitment website, and one of its oldest. Its market share is shrinking due to competition from specialized websites, or “verticals,” that target specific industries. Yet thanks to fast growth in the online recruitment market, 51job’s revenue is expanding and its leading position in the industry looks secure in the short term. The company turned profitable in 2002 and now earns two-thirds of its revenue...

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    China Biologic: The Quest For More Plasma

    China Biologic Products (“China Biologic”) ranks among China’s biggest makers of plasma products in a nation with a severe shortage of a key raw material: human plasma. Raw plasma comes from paid donors and is converted into products that treat blood disorders. Donors are sadly few because of the stigma of poverty and the lingering effects of past health scandals. Yet two recent changes bode well. First, the government lifted price caps on...

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    Ctrip: Dominating A Changing Industry

    Ctrip.com International (“Ctrip”) stands as China’s unrivaled online travel agency, or OTA. The well-run company’s purchase of Qunar Cayman Islands (“Qunar,” pronounced CHOO-nar) in late 2015 neutralized a top rival and ended a profit-killing price war. Government regulations have led to big changes in the market. The country’s state-owned airlines want to direct ticket buyers away from agencies and OTAs and toward their own sites. Although that...

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    BYD: Subsidies Spark Electric Car Sales

    After years of false starts, BYD is China’s top seller of battery-powered passenger cars and a respectable number five in battery-powered buses. The big-talking private company, which also makes traditional cars and batteries, can thank the government for creating the market. But BYD faces many challenges. Fickle government subsidies to buyers have caused market havoc. Scams are rampant, with cities collecting subsidies for ghost fleets and...

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    On-Demand Services: Baidu Struggles

    This report examines China’s on-demand industry, sometimes referred to as “online-to-offline,” or O2O. Specifically, we assess the competitive prowess of Baidu in three categories: food takeout, restaurant coupons and movie ticketing. In all areas, we find that Baidu compares unfavorably to rivals backed by either e-commerce giant Alibaba Group Holding (“Alibaba”) or social-media king Tencent Holdings (“Tencent”). All well-funded Internet giants...

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    Sino Biopharmaceutical: Good Assets, Bad Disclosures

    Sino Biopharmaceutical (Sino Bio) is related to Thailand’s biggest company, agribusiness giant Charoen Pokphand (“CP Group”). Chairman Tse Ping is nephew to CP Group’s billionaire tycoon chairman. Sino Bio itself is a holding company that operates mostly through joint ventures with state-owned companies. Its most important firms are market leaders in drugs that combat hepatitis. The biggest of those companies enjoy good reputations and operate...

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    New Oriental Education: Facing The Test

    New Oriental Education and Technology Group (“New Oriental”) is China’s best-known tutoring company in a nation of compulsive students. It maintains a strong market position but its revenue sources are changing fast. New Oriental made its name helping older students prepare for overseas university entrance exams, yet such enrollment is in decline. Instead, half of New Oriental’s revenue now comes from students in kindergarten through 12th grade...

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    Profile: Kingsoft

    HK:3888—Thanks to Amazon, the US cloud-services industry is finally profitable. The company’s cloud unit, Amazon Web Services (“AWS”), contributed more than half of Amazon’s operating profit in late 2015. Who might become the AWS of China? One commonly mentioned candidate is Kingsoft Cloud, a subsidiary of Hong Kong-listed Kingsoft. This report examines Kingsoft Cloud’s role within Kingsoft and within the constellation of firms owned by Kingsoft...

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    Profile: Vipshop Holdings

    Vipshop has become the go-to online discount store for brands seeking to dump excess inventory. But the firm is now transitioning away from its initial business model, as it it increasingly also sells non-discounted, in-season clothing. So far, Vipshop’s shift does not appear to have alienated its mainly young and female customer base.

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    Profile: Alibaba Health Information Technology

    Ali Health, one of several offspring of e-commerce giant Alibaba Group, plans to sell drugs online and provide cloud-based services for hospitals and patients. But because China’s health care system is dominated by powerful hospitals and overseen by weak regulators, Ali Health’s grand plans to take health care online have limited prospects.

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    Profile: JD.com

    JD.com is the biggest challenger to China’s undisputed heavyweight ecommerce champion, Alibaba Group. JD.com is a retailer rather than a platform for third-party sellers. This business model means JD.com is saddled with higher logistics costs, but also earns loyalty from customers who like its quick service and quality assurance.

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    Profile: China Huishan Dairy Holdings

    Huishan Dairy is one of many firms cashing on China’s surging demand for dairy products. Huishan says much of its growth comes from northeastern China, particularly its home province of Liaoning. We examined Huishan’s operations in Liaoning and found minimal evidence of the rapid growth that the company claims in its public statements.

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    Profile: Soufun Holdings

    Soufun Holdings

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    Profile: Biostime International Holdings

    Biostime is an up-and-coming leader in China’s infant-formula industry. Its has the most successful domestic brand at the high end of the market, and its new medium-priced brand is expanding quickly into lower-tier cities. Chinese consumers like Biostime’s products because they are imported—indeed, many buyers mistakenly think they are French.

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    Profile: Hanergy

    Hanergy Thin Film Power Group (“HTF”) is a much maligned company owned by China’s richest man. It produces equipment that makes thin-film solar panels. HTF sells nearly all its equipment to its parent company, Hanergy Holding Group (“Hanergy Holding”), which makes solar panels and sells them back to HTF for use on rooftops or solar farms. Such circular dealings leave many questions, including whether either company produces in quantities that it...

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    Profile: Youku Tudou

    Youku Tudou (Cayman) (“Youku”) is China’s best-known online video site. Do not confuse its services with those of YouTube, which provides mostly user-generated content like home videos. Youku is more like Netflix in emphasizing TV shows and movies. Youku faces serious new challenges. Increased competition has bid up the cost for premium content that viewers demand. Its most formidable competitors are part of big, rich conglomerates, whereas...

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    Profile: China Luxury Still Glitters

    Many observers believe that China’s luxury market, caught between the twin pincers of an anti-corruption campaign and an economic slowdown, faces a long-term decline. Our research does not support this view. To the contrary, China’s increasingly sophisticated consumers are spending more on a wide range of luxury products, with a few categories as exceptions. The change from several years ago is that much of this spending has moved overseas,...

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    Profile: Tingyi (Cayman Islands) Holdings

    Tingyi (Cayman Islands) Holding

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    Profile: Great Wall Motor: Off The Road

    Great Wall Motor was once considered China’s most promising private car company. It had an excellent reputation, a strong and charismatic founder, a strong position in the fast-growing market for SUVs, and a head start in exporting cars to developed markets. Today, Great Wall risks losing its way.

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    Profile: Wuxi PharmaTech (Cayman)

    Wuxi PharmaTech (Cayman)

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