Latest / Investor Exchange / Zhongxin Fruit & Juice Demonstrates Remarkable Operational Resilience In HY2025

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Zhongxin Fruit & Juice Demonstrates Remarkable Operational Resilience In HY2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:07
  Welcome back to the Deep Dive. Today, we are going to try and squeeze every
• 0:12
  last drop of value out of a financial report that is honestly pretty baffling.
• 0:18
  Squeeze is definitely the right word for this one. Yeah. I mean,
• 0:21
  we have a situation here where revenue is just free falling.
• 0:24
  I'm talking dropping by nearly half.
• 0:27
  But then somehow their profit margins are actually hitting record highs.
• 0:31
  Right. It is one of those classic cases where if you just glance at the headlines,
• 0:35
  you walk away with one story.
• 0:36
  But if you actually sit down and open the books, you get a completely different
• 0:39
  and frankly, a much more complicated narrative.
• 0:42
  Exactly. So the company we were doing a checkup on today is Zongson Fruit and Juice Limited.
• 0:48
  That is the one. And for any of you listening who maybe aren't glued to the
• 0:51
  Asian markets every day, Let's set the scene a bit.
• 0:54
  This is a Singapore-listed company, right? Correct.
• 0:57
  They are listed on the Catalyst board in Singapore. And for those who might
• 1:01
  not be familiar with that, think of the Catalyst board as sort of the junior
• 1:03
  exchange. Like for smaller companies.
• 1:06
  Yeah, exactly. It is usually for smaller, faster-growing companies.
• 1:10
  It has slightly different regulatory requirements compared to the main board.
• 1:14
  And you often find these very specific niche players trading there. Okay.
• 1:19
  But while the stock ticker is sitting in Singapore, the actual apples are being
• 1:23
  squeezed somewhere else entirely.
• 1:25
  That is right. The actual physical operations are deep in the PRC in China.
• 1:29
  Specifically, they operate in the major apple-producing regions.
• 1:33
  So their whole model is they take apples, they squeeze them down into concentrated
• 1:37
  juice, and then they sell that concentrate in bulk to big beverage manufacturers.
• 1:42
  So it is a pretty simple business model on paper. Squeeze fruit and sell the juice.
• 1:46
  Very straightforward, yes. But our mission today is to look at their unaudited,
• 1:50
  condensed interim financial statements.
• 1:53
  This is for the six months ended December 31st, 2025.
• 1:57
  Basically, their half-year scorecard, or what they call HY2026.
• 2:01
  And I have to say, as an investor, looking at this scorecard,
• 2:04
  it is extremely confusing.
• 2:06
  It is definitely a mixed bag. Well, let's start with the top-line numbers, the revenue.
• 2:10
  Because calling it a mixed bag feels a little generous when you see a drop of 43.7%.
• 2:17
  Yeah, that is a massive contraction. There is no getting around that.
• 2:21
  I mean, they went from roughly 168.1 million RMB down to just about 94.7 million.
• 2:29
  That is practically half the business just vanishing year on year.
• 2:33
  If you are a shareholder doing the general, you are probably panicking.
• 2:36
  And you would be totally justified in being concerned. But context is everything
• 2:40
  with these reports. You have to look at why it dropped so hard.
• 2:43
  Management actually paints a very specific picture in the documents. What is their excuse?
• 2:47
  They attribute the drop to weaker demand, which obviously sounds bad.
• 2:51
  But they also make sure to point out that the comparison period,
• 2:54
  so the six months ending December 2024, was unusually strong.
• 2:58
  Ah, okay. So we are looking at a high base effect. Exactly. Last year saw elevated
• 3:03
  purchasing activity across the board.
• 3:05
  So this period looks like a total crash, but it might actually just be more
• 3:08
  of a moderation or normalization of the market.
• 3:11
  Okay. But even with a high base last year, the volume drop is still pretty wild.
• 3:15
  I saw they sold about 9,900 metric tons of apple juice last year.
• 3:20
  In this period, it was only about 5,600 tons.
• 3:23
  Yeah, that is a lot of juice that just did not leave the factory. Right.
• 3:27
  And here is the part that I am really struggling to wrap my head around.
• 3:30
  In a standard manufacturing business, which is what this is due, volume is everything.
• 3:37
  You have all these fixed costs. You have factories. You have heavy machinery.
• 3:40
  You have staff on payroll. So if your sales volume suddenly drops by 40 percent.
• 3:46
  Those fixed costs should completely eat you alive. Your margins should just
• 3:51
  collapse. That is the textbook rule, yes.
• 3:54
  Economies of scale work in reverse when volume drops. But that did not happen here. No, it did not.
• 3:59
  And this is exactly where you as an investor need to put on your detective hat.
• 4:03
  Because despite that massive revenue drop, their gross profit margin actually
• 4:07
  increased. Which is crazy. It really is.
• 4:09
  It went from 16.3% last year up to 19.2% this period.
• 4:14
  How is that even mathematically possible? Did they just stop paying people or
• 4:17
  something? No, they did not do that.
• 4:20
  Management's official explanation is that they implemented technical and technological upgrades.
• 4:25
  Basically, they are claiming that they are extracting the juice more efficiently
• 4:29
  now and managing their utility costs much better.
• 4:33
  Enhancing production efficiency is the phrase they use. You sound a little skeptical of that explanation.
• 4:38
  Well, I mean, efficiency is the standard corporate buzzword answer,
• 4:41
  right? It sounds great on a report.
• 4:43
  And sure, optimizing costs definitely plays a part. But if you dig deeper into
• 4:48
  the numbers, I think there is a structural reason for it.
• 4:51
  We need to look at their product mix. Right, because they do not just sell apple juice.
• 4:55
  Exactly. They also sell fructose. I saw that in the revenue breakdown.
• 4:59
  The concentrated apple juice brought in 60.4 million RMB, but the fructose brought in about 33 million.
• 5:06
  Right. And if you track the historicals, fructose revenue actually held up relatively
• 5:11
  better than the standard juice revenue during this downturn.
• 5:14
  And typically, specialized products like fructose can command a very different
• 5:17
  margin profile than commodity apple juice.
• 5:20
  Oh, I see. So while management is praising their better machines,
• 5:24
  I suspect a big part of this margin bump is simply because they sold a lower
• 5:28
  proportion of their low-margin commodity product.
• 5:30
  The mix naturally shifted in their favor, even as the total volume shrank.
• 5:35
  Okay, that actually makes a lot of sense. So they are selling less overall.
• 5:39
  But the stuff they are managing to sell is inherently more profitable. Precisely.
• 5:44
  And I guess that explains how they managed to stay profitable overall despite the revenue crash.
• 5:48
  I mean, net profit was definitely down. It dropped 37.8%, down to 13.5 million
• 5:54
  RMB. But they stayed in the black.
• 5:56
  Which, to be completely fair to management, is a real achievement given that volume drop.
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  A lot of companies facing a 40% sales decline would have immediately posted
• 6:05
  a heavy loss. True. It is resilient.
• 6:09
  But profit is, well, profit is just an accounting opinion, right? Cash is a fact.
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  And when I turned over to the condensed, interim, consolidated statement of
• 6:18
  cash flows, the story stopped looking so resilient. Yes.
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  This is the critical pivot point of our whole deep dive today.
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  If you only looked at the income statement, you would say, hey,
• 6:29
  this is a tough business, but they are managing it well. Right.
• 6:32
  But if you look at the cash flow statement, you start to see the bleeding.
• 6:35
  It is not even just bleeding. It is a full-on hemorrhage.
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  Net cash used in operating activities was 33.9 million RMB.
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  They are burning cash. Rapidly. How can a company report a $13.5 million profit
• 6:49
  on one page and then show they burn $34 million in cash on the next page?
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  Where is all the actual money going? It is all going straight into the warehouse.
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  The inventory. The inventory.
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  This is, without a doubt, the single biggest red flag in this entire financial report.
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  If you look at the balance sheet assets back in June 2025, they had about 36
• 7:08
  million RMB tied up in inventory.
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  Just six months later, by December 2025, that number ballooned to nearly 98 million RMB.
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  It almost tripled in six months. It tripled. And we have to explain why this
• 7:22
  happens, because it is a quirk very specific to the agriculture industry.
• 7:27
  If you run a factory that makes plastic toys and sales slow down,
• 7:32
  you just flip the switch and turn off the machines. You stop buying plastic.
• 7:36
  Exactly. You stop buying plastic and you wait. But you cannot do that with apples.
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  The apples are harvested in the first half of the financial year.
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  The farmers literally show up at the factory gate with trucks full of fruit.
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  You have contracts to buy them. You have to buy them. And more importantly,
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  you have to squeeze them right then and there. Because otherwise the inventory
• 7:54
  literally rots in the sun.
• 7:56
  Precisely. You have this very narrow seasonal window to produce your entire
• 8:00
  supply of concentrate for the year.
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  So Zongshin's subsidiary, a company called Yunsheng Zongshin,
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  they just kept the production lines running.
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  They produced roughly their usual massive amount of juice to ensure they had
• 8:14
  supply. Even though nobody was buying it at the other end?
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  The sales slowed down significantly. So you have all this cash going out the
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  door to pay the apple farmers and to run the heavy machinery.
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  But the cash did not come back in from the customers.
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  Instead, all that operating cash literally turned into thousands of barrels
• 8:33
  of juice concentrate just sitting in a dark warehouse.
• 8:36
  And that 98 million RMB in inventory represents a massive risk, right?
• 8:42
  I mean, apple juice concentrate is not exactly gold bars. It has a shelf life.
• 8:46
  It absolutely has a shelf life.
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  It is highly perishable over the long term. And that leads to the big fear for
• 8:52
  any investor looking at this setup.
• 8:54
  Inventory write downs. Tell me more about that. Well, if customer demand does
• 8:57
  not pick up in the next six months, they might have to start selling this massive
• 9:00
  stockpile at a steep discount just to get it out the door.
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  Or worse, if it passes its expiration date, they might literally have to pour it down the drain.
• 9:08
  Oh, wow. And remember that beautiful 19% gross margin we were just celebrating?
• 9:13
  Yeah. That could vanish in a single quarter if they have to impair all this
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  unsold inventory later on.
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  So the net profit we are seeing on the books right now is basically banking
• 9:22
  on the huge assumption that they will eventually sell this warehouse full of
• 9:26
  juice at full market price.
• 9:28
  Correct. Right now they are carrying it on the balance sheet at cost.
• 9:31
  The actual realized profit entirely depends on a future sale that hasn't happened
• 9:35
  yet. OK, well, let's talk about who exactly they're expecting to sell this juice
• 9:39
  to, because this brings up what I think is the most unique and maybe the most
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  controversial aspect of this whole business model.
• 9:46
  The parent trap. It is definitely a trap, but it is also a lifeline.
• 9:50
  It is a lifeline that just comes with some very heavy strings attached.
• 9:53
  Well, you're talking about their corporate family tree. Right.
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  So Zongsen is not really a fully independent actor.
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  They are essentially a subsidiary of a subsidiary of an absolute giant.
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  Their immediate holding company is SDIC Zonglu Fruit Juice Company.
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  We can just call them SDICZL. Okay.
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  And then SDICZL's parent company is SDIC, which is a massive state-owned enterprise
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  in China. Now, usually being backed by a huge Chinese state-owned enterprise
• 10:18
  is seen as a good thing, right? It implies stability.
• 10:22
  The government is probably not going to just let you go bankrupt.
• 10:25
  Generally, yes. It provides a very solid floor for the business.
• 10:29
  But you have to look at the trade receivables in this specific report.
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  99% of the money owed to Zongxin is due from their immediate holding company.
• 10:38
  99%. So they basically only have one customer.
• 10:41
  Effectively, yes. If you look at the sales breakdown out of that $94.7 million
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  total revenue, a massive $94.1 million came strictly from sales to the parent group.
• 10:52
  Wow. So earlier when management blamed the revenue drop on weaker demand,
• 10:58
  what they really meant was mom and dad decided they didn't want to buy as much juice this year.
• 11:02
  That is the harsh reality of it. And this is why I call it a double-edged sword.
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  On one hand, you have a guaranteed anchor customer who has deep pockets and
• 11:10
  is very unlikely to default on their payments. Right. That is the safety net.
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  But on the other hand, you have absolutely zero pricing power.
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  You are just a price taker. You are completely and utterly dependent on the
• 11:22
  parent company's broader global strategy.
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  If the parent company sneezes, Johnson catches a cold.
• 11:29
  There is also this financing mechanism they use with the parent company that
• 11:32
  I found super complex. but it seems really important to how they survive.
• 11:37
  The report keeps mentioning notes receivables and endorsing them to banks.
• 11:42
  Can you break that down into plain English for us? Absolutely,
• 11:45
  because this is the key to understanding how they stay afloat despite burning
• 11:49
  $34 million in cash. Okay.
• 11:51
  So Zongsin sells a massive shipment of juice to the parent company.
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  But the parent doesn't just wire them cash the next day.
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  Instead, they issue a note receivable. Which is basically an IOU.
• 12:01
  Exactly. It is a formal IOU that says we promise to pay you $50 million RMB in, say, six months.
• 12:07
  Okay, but Zongson needs cash today. They have to pay the farmers for the apples right now.
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  Right. So what Zongson does is they take that IOU paper to a commercial bank
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  and they endorse it over to the bank.
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  They essentially say, look, I have this guaranteed promissory note from a massive
• 12:23
  state-owned enterprise.
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  Give me the cash for it right now, and you can collect the full amount from
• 12:28
  my parent company in six months.
• 12:31
  And the bank agrees to that. Yes, but the bank charges a fee for the service,
• 12:35
  basically an interest discount.
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  They take their cut and they give Zonkson the working capital they desperately need.
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  So it is essentially a short-term loan that is secured by the parent company's promise to pay later.
• 12:47
  That is exactly what it is. And if you look at the liability section of the
• 12:51
  balance sheet, their borrowings have actually increased to 105.1 million RMB.
• 12:57
  A huge chunk of that debt is simply this exact type of trade financing. But here is my question.
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  What happens if for some totally unexpected reason the parent company fails
• 13:08
  to pay that note in six months?
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  Does the bank just have to eat the loss? No. And this is the hidden risk that
• 13:13
  a lot of casual investors gloss over.
• 13:15
  These endorsements to the banks usually come with recourse. Meaning what exactly?
• 13:19
  Meaning if the parent company defaults on the note, the bank immediately comes
• 13:23
  right back to Zonkson and says, Hey, your parent didn't pay us,
• 13:27
  so you owe us the money. Wow.
• 13:29
  It acts as a contingent liability. So effectively, Zonkson is leveraging its
• 13:33
  relationship with a parent to get short-term liquidity, but the ultimate financial
• 13:37
  risk still sits squarely on Zonkson's balance sheet.
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  So the web of dependency is just total.
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  Their sales depend entirely on the parent, and their financing depends entirely
• 13:48
  on the parent, too. Correct.
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  You really cannot analyze this company as a normal standalone entity.
• 13:53
  When you buy shares in Zongsen, you are essentially just buying a tracking stock
• 13:58
  for one specific processing division of a much larger state-owned enterprise.
• 14:03
  Now, if the story just ended there, I would probably look at this and say it
• 14:05
  is a risky, low-growth commodity play. Sure.
• 14:08
  But there is this one hidden asset buried in the report that I honestly almost
• 14:12
  missed. It was tucked away in the operational updates, but it seems like a huge deal.
• 14:16
  The Zuzu subsidiary. Yes.
• 14:19
  This is the part of the report that deep value investors get very excited about.
• 14:23
  This is the classic hidden gem potential on the balance sheet.
• 14:26
  OK, so tell us what is going on with Zuzu.
• 14:29
  So Zuzu Zongsen is another subsidiary they own, but it has been completely idle.
• 14:35
  The factory doors are closed. Management explicitly states there is a lack of
• 14:39
  commercial justification to resume production there. So it is basically just
• 14:43
  dead weight, a closed-down factory. Operationally, yes.
• 14:47
  And the idle machinery sitting inside it is valued on the books at only about 2.58 million RMB.
• 14:54
  Okay, so why is this exciting for investors? Because of the land the factory is sitting on.
• 14:59
  Back in June 2024, the company received a preliminary relocation notice from the local government.
• 15:05
  Relocation. That usually sounds like a massive headache for a business.
• 15:08
  Why is that a good thing? In China, it can be a windfall because of rapid urbanization
• 15:12
  factories that used to be way out on the rural outskirts decades ago are suddenly
• 15:16
  sitting smack in the middle of highly valuable residential or commercial development
• 15:21
  zones. Ah, I see where this is going. Right.
• 15:24
  When the local municipal government wants that land back to build apartments
• 15:28
  or malls, they do not just take it.
• 15:31
  They offer financial compensation. And it is often very significant compensation.
• 15:35
  How significant are we talking here? Well, if you look at the books...
• 15:39
  The carrying amount for the Zuzu buildings and the land use rights is listed
• 15:43
  at about 16.4 million RMB.
• 15:46
  Okay. But you have to remember that is just the historical cost.
• 15:49
  That is what they paid for it years and years ago minus accumulated depreciation.
• 15:55
  The actual current market value of that land, if it gets rezoned for commercial
• 15:59
  use, could be multiples of that 16 million.
• 16:02
  So they are essentially sitting on a real estate lottery ticket.
• 16:05
  Potentially, yes. If the compensation negotiations go well and the deal closes,
• 16:10
  it could result in a one-time cash injection that rivals their entire annual revenue.
• 16:15
  They could use it to wipe out all that bank debt. They could fund a massive
• 16:18
  special dividend or it could just sit and strengthen the balance sheet.
• 16:21
  But just to be clear, right now it is still just a notice.
• 16:24
  Yes, it is just a preliminary notice. The compensation discussions are still
• 16:28
  completely ongoing, but you can tell the company is actively preparing for it.
• 16:33
  They are currently going through an amalgamation process. Amalgamation.
• 16:36
  That is basically just a fancy legal term for merging two companies, right? Exactly.
• 16:41
  They are merging the idle Zuzu entity into the active Yunsheng entity.
• 16:46
  It cleans up their whole corporate structure. It integrates.
• 16:50
  Cuts down on administrative costs because you no longer have to file two separate
• 16:54
  sets of tax returns or maintain two different boards of directors.
• 16:58
  That makes sense. But strategically, it also dramatically simplifies the legal
• 17:02
  process of receiving that future land compensation and actually being able to
• 17:07
  use those funds within the active juice business.
• 17:10
  It is a clear signal that they are tidying up the house and getting ready for a potential cash event.
• 17:14
  That is fascinating. So the real bull case for this stock isn't even necessarily
• 17:18
  about selling more apple juice next year.
• 17:21
  It might actually be a real estate play just disguised as a juice company.
• 17:24
  That is definitely a major pillar of the upside thesis for a lot of value investors
• 17:29
  looking at this right now.
• 17:30
  Let's zoom out a bit and look at the actual road ahead for the core business.
• 17:34
  What is the outlook according to management? Because reading through the lines,
• 17:38
  they seem pretty cautious.
• 17:39
  Cautious is putting it very mildly. They explicitly call out macro risks in
• 17:45
  the Outlook section. And there is one specific word that really jumps off the page.
• 17:49
  Tariffs. Tariffs. Yes. The report specifically notes that exports to the United
• 17:54
  States have been facing higher tariffs since early 2025.
• 17:58
  Now, wait a second. You just told me a few minutes ago that they sell 99% of
• 18:02
  their product to their parent company inside China.
• 18:05
  Why on earth do they care about U.S. import tariffs? Because the pain flows straight downhill.
• 18:10
  You have to remember the parent company, SDIC, is likely aggregating all this
• 18:14
  juice from its various subsidiaries and then exporting it globally.
• 18:18
  And historically, a huge chunk of the world's apple juice concentrate ends up in the United States.
• 18:23
  Oh, I see. Right. So if SDIC suddenly cannot sell as much to the U.S.
• 18:27
  Market because they are getting hit with massive tariffs at the border,
• 18:30
  then SDIC naturally does not need to buy as much raw concentrate from Zongxin.
• 18:35
  Ah. So even though Zongxin isn't putting juice on a boat to New York themselves,
• 18:41
  their product is still heavily exposed to those trade winds. Exactly.
• 18:45
  That tariff wall in the U.S. creates a massive inventory backlog over in China,
• 18:50
  which directly leads to that weaker
• 18:52
  demand, quote, we starred the whole discussion with. It all connects.
• 18:55
  And what about the weather? I saw climate mentioned as well.
• 18:57
  It is always a persistent risk in any agricultural business.
• 19:01
  You are completely at the mercy of nature.
• 19:03
  You have a bad spring frost or a severe summer drought.
• 19:07
  The crop yield drops and the price of raw apples spikes.
• 19:11
  That immediately squeezes your margins. But frankly, looking at the balance
• 19:15
  sheet today, the trade tariff issue is the much more immediate threat to that
• 19:20
  mountain of inventory they are holding.
• 19:21
  Right. And I assume given the severe cash burn and all these looming macro risks.
• 19:26
  Shareholders probably shouldn't be waiting by the mailbox for a dividend check anytime soon.
• 19:30
  Absolutely not. The board was very explicit about this. No dividend has been
• 19:34
  declared for this period.
• 19:35
  Makes sense. And honestly, with a negative operating cash flow of almost $34
• 19:40
  million, RMB paying out a cash dividend right now would be highly irresponsible.
• 19:46
  They need to conserve every single yuan of liquidity they have just to keep
• 19:50
  the lights on and keep funding the working capital until they can finally sell off that inventory.
• 19:55
  So let's try to wrap all this up. If you are listening to this and trying to
• 19:58
  evaluate it from an investor's perspective, how do we summarize this whole situation?
• 20:03
  I would break it down into two very distinct camps.
• 20:06
  The bear case is honestly pretty scary.
• 20:09
  Yeah. You are looking at a company that is rapidly burning through cash.
• 20:13
  They are piling up highly perishable inventory and they are facing a geopolitical
• 20:18
  trade environment that is directly hurting their one and only customer.
• 20:21
  You are essentially buying into a business with negative sales momentum and
• 20:24
  extreme dependency on a parent entity.
• 20:27
  That is the bear case. And what is the bull case to counter that?
• 20:30
  The bull case is that this is a classic deep value setup.
• 20:34
  You are buying a company that is somehow still profitable despite a massive revenue downturn.
• 20:39
  It is likely trading well below the true value of its underlying assets.
• 20:44
  You have the ultimate safety net of a state-owned parent to prevent bankruptcy.
• 20:48
  And most importantly, you have this massive potential catalyst sitting there
• 20:52
  in the Zuzu land compensation that could just unlock incredible value practically overnight.
• 20:57
  It really is just a massive tug of war between the hidden balance sheet assets
• 21:01
  and the very grim cash flow reality.
• 21:04
  It absolutely is. And I think the most important question we can leave everyone
• 21:07
  with today goes right back to that warehouse. The 98 million RMB mountain of juice.
• 21:12
  The mountain of juice. You have nearly 100 million RMB of stock just sitting there waiting.
• 21:17
  We know the macro environment is getting tougher with these new tariffs.
• 21:20
  So the critical question is this.
• 21:22
  Will they actually be able to convert that inventory into cash at those beautiful
• 21:27
  19% margins they are reporting today?
• 21:30
  Or is all that juice just a ticking time bomb that is going to turn into a massive,
• 21:34
  painful write-down six months from now?
• 21:36
  Is it liquid gold or is it just a liability taking up space?
• 21:39
  That is exactly the million-dollar question you have to answer.
• 21:42
  Well, that is a fantastic place to leave it. a really fascinating look at how
• 21:47
  a relatively small company gets caught in the massive gears of global trade
• 21:52
  and urban real estate development. It is never just about squeezing the fruit.
• 21:56
  Definitely not. But before we completely sign off, we do have to cover our legal basis.
• 22:01
  This content is intended to serve strictly and only as an informational,
• 22:05
  independent, objective summary of recent events and should in no way be interpreted,
• 22:10
  construed or relied upon by any party as inside information or financial advice.
• 22:14
  Thanks for joining us for this deep dive. We will catch you on the next one.