Shanghai Jahwa faces huge loss in fourth quarter

What former chairman Ge Wenyao predicted two months ago has been proven entirely correct, after Jahwa released a dismal 2016 earnings forecast on Wednesday.

The leading domestic consumer brand Shanghai Jahwa United Co Ltd is expected to see its net profits plummet 90 percent to 226 million yuan ($32 million) in 2016, according to the announcement. The fourth quarter reported a net loss of 207 million yuan, which is the biggest loss since the company went public in 2001.

Ge, Jahwa's former chairman who was in office for over 20 years until 2013, predicted on his personal Weibo account in late November that it was highly possible the company would report a net loss up to 200 million yuan in the fourth quarter.

Jahwa explained in the announcement that the shrinking net profit is mainly due to an unusually high profit base in 2015. The company made a one-time profit by selling its 23.84 percent stake in TianJiang Pharmaceutical Co Ltd.

The company also said that sales shrank last year, but investments increased. One of the biggest investments was the sponsorship of Tmall Nov 11 Singles Day shopping carnival gala, which is estimated to have cost over 80 million yuan.

When Xie Wenjian became Jahwa's chairman and chief executive officer in 2013, he set the 12-billion-yuan annual sales revenue target for 2018, equivalent to a 23 percent annual increase. With the disappointing fiscal result, Xie resigned from all his positions in late November.

Shanghai-listed Jahwa saw its price soar to peak of 75.38 yuan per share in May 2013. However, it has been dropping over the past three years, closing at 26.61 yuan per share on Thursday.

Frequent personnel changes are another major reason for the company's decline. Between 2010 and 2013, Jahwa reported no resignation or removal in the senior executive team. However, at least 25 senior executives, including the general manager, the finance director and independent directors, since resigned or were removed from their positions.

What should be noted in the earnings forecast was that Jahwa received 27 million yuan net profit by working as a sales agent for Japanese personal care brand Kao, which brought in up to 12 percent of the company's total net profit last year. However, the two companies' strategic sales contract was due to expire on Dec 31, 2016 and no renewal was signed.

"Jahwa is very likely to reach its historic sales bottom in 2017 due to stopping cooperation with Kao. As the main distribution channels of department stores and supermarkets are contracting, the company will face huge challenges," said Shi Hongmei, a senior analyst at Shanghai-based Orient Securities.