Donkey quack medicine is a multibillion dollar business for Dong-E-E-Jiao. Can it last?

Yesterday, Dong-E-E-Jiao — China’s largest manufacturer of a dubious but popular nutritional supplement known as ējiāo (阿胶), donkey-hide gelatin, and colla corii asini — held an online question-and-answer session with investors.

The session revealed that the company has 64,616 individual shareholders, and the questions focused on Dong-E-E-Jiao’s new range of products, and attempts to diversify.

Dong-E-E-Jiao currently has a market capitalization of 24.39 billion yuan ($3.40 billion). It is one of five listed companies under CR Pharmaceutical Group (a division of China Resources, a massive state-controlled conglomerate).

Ejiao, produced in the county of Dong’e 东阿县 in Shandong Province, has a history of 3,000 years (according to the company) and is used in traditional Chinese medicine (TCM) for its qualities of “enriching the blood and nourishing the yin.” It is produced as a powder or paste, which can be mixed with water and other ingredients and drunk as a tonic. Ejiao can also be eaten in cake form in a product known as gùyuángāo 固元膏, reportedly a favorite snack of the Empress Dowager Cixi (慈禧太后 Cíxǐ Tàihòu).

Several investors at yesterday’s session wanted to know about Dong-E-E-Jiao’s Yānzhēnqīng 燕真卿, a snack product based on the expensive delicacy “bird nest” (燕窝 yànwō), which is usually served in soup, and is widely prized for its nutritional value. It is produced by harvesting the nests of the swiftlet bird, which uses its gummy saliva to build its nest on cave walls.

During the last few years, Dong-E-E-Jiao has attempted to diversify its product range away from ejiao, branching out to skin care products, candy, and snacks, notably bird nests. Bird nests, however, represent Dong-E-E-Jiao’s most obvious attempt at diversifying, and hence investors asked in the online session whether the product was actually profitable. The company’s evasive answers did not provide any details aside from the vague assertion that the product was “flourishing” and represented the company’s strategy of becoming a “leading brand of Chinese nutrition trusted by consumers.”

The market for bird nest nutritional products is indeed large: According to an industry report, the scale of bird nest consumption in China was around 40 billion yuan ($5.58 billion) in 2020, with a compound annual growth rate of 33%. Dong-E-E-Jiao launched its first bird nest product, Yanzhenqing, in December 2019, and by June 2020, the company reported that monthly sales had exceeded 500,000 units (a box containing six bottles of 70 grams or 0.15 pounds each retails for 399 yuan or $55).

On Dong-E-E-Jiao’s live broadcast channel on Tmall, the product was being touted as highly nutritious for pregnant women and for “making children smarter.” Dong-E-E-Jiao does not actually manufacture the bird nest product itself, but subcontracts production to another company, Yānzhīchū Foods (Xiamen).

Dubious accounting

In this year’s Singles Day online shopping festival, Dong-E-E-Jiao’s ejiao tonic was as per usual on the list of the top 10 tonic products. In early November, Dong-E-E-Jiao announced seemingly impressive financial results:

• Revenue of 3.04 billion yuan ($425.31 million) for the first three quarters of the year, a year-on-year increase of 7.81%, and a net profit of 513 million yuan ($71.63 million), an increase of 70.24%.
• For the third quarter alone, the company reported revenue of 1.22 billion yuan ($170.48 million), an increase of 7.14%, and a net profit of 205 million yuan ($28.62 million), an increase of 34.95%.

Yet the financial report also contained some more concerning aspects: Over the first three quarters, the company reported sales expenses of 1.14 billion yuan ($159.87 million), an increase of 22.99%, and a decrease in operating cash flow of 45.96% to 1.28 billion yuan ($179.84 million), a decrease of 45.96%, mainly due to lower sales. Indeed, as one article that analyzed the company’s report pointed out, as of the end of September, Dong-E-E-Jiao’s accounts receivable were 482 million yuan ($67.30 million), an increase of 80.52% year-on-year, meaning that the products that have been reported as sold have not yet been paid for.

The article also notes the common perception that Dong-E-E-Jiao, as a TCM company, focuses too much on marketing rather than research and development: Over the first three quarters of this year, the company spent 1.14 billion yuan ($159.87 million) on sales and marketing (37.59% of total revenue for the period), but only 93.65 million yuan ($13.07 million) on research and development, or 3.09% of total revenue.

In fact, Dong-E-E-Jiao’s sales expenses have always been high and its research and development low, but until 2019, this was a winning strategy. In 2017 and 2018, the company reported revenue of 7.37 billion yuan ($1.023 billion) and 7.38 billion yuan ($1.024 billion), and a net profit of 2.04 billion yuan ($285.40 million) and 2.08 billion yuan ($291.12 million).

Another problem the company may be facing is overly aggressive pricing: In 2019, the retail price of ejiao was 73 times higher than in 2006. By 2019, the company was stuck with a large unsold inventory, and reported a drop in revenue of 59.68% to 2.95 billion ($413.16), and a net loss of 444 million yuan ($61.99 million).

Then from 2019 to early 2021, the company cleared inventory of more than 2 billion yuan ($279.26 million), and reduced accounts receivable by more than 1 billion yuan ($139.63 million). During this period, the company reportedly closed down production for several months at a time.

Illicit supply chain

By March 2022, following two years in which the company reported a net loss of $800 million, Dong-E-E-Jiao seemed to have turned the corner, reporting revenue for the first quarter of 890 million yuan ($124.27 million), a year-on-year increase of 21.4%. Yet in 2021, the company still depended on ejiao products for about 90% of its revenue, and thus the diversification into beauty, candy, and bird nest products has not yet made much headway.

This presents Dong-E-E-Jiao with a dilemma: In 2017, The Donkey Sanctuary, an organization based in the U.K., estimated the annual demand for donkeys at 10 million, which is a quarter of the estimated global population. China’s ejiao industry consumes up to 4.8 million hides each year, and China’s dwindling stock of donkeys means that Dong-E-E-Jiao has become dependent on a controversial and often illicit supply from Africa. High demand from China has caused unregulated slaughterhouses to be opened across Africa, where traders are buying up animals and theft is increasing rapidly, undermining communities that depend on them.

Furthermore, last week, The Donkey Sanctuary released a new report containing evidence that in addition to endangering livelihoods, the trade in donkey hides risks spreading zoonotic diseases from Africa to Asia: Genetic testing of skins sourced from a slaughterhouse in Kenya revealed positive samples for African horse sickness and MRSA, a group of antibiotic-resistant bacteria.

The takeaway

Although Dong-E-E-Jiao now produces bird nests as well as ejiao, the company’s attempts to diversify away from ejiao and the controversial trade of donkey hides have been unsuccessful.