Just six days after Junlebao resubmitted its updated IPO prospectus to the Hong Kong Stock Exchange on August 20, a regulatory notification threatened to overshadow the company's second attempt at a Hong Kong listing. The first filing had lapsed in January. On August 26, the Centre for Food Safety (CFS) of Hong Kong's Food and Environmental Hygiene Department reported that four samples of one-liter Junlebao pure milk, imported by Junlebao (Hong Kong) International Trading Co., Ltd., had colony counts at or exceeding 10 per milliliter during routine import checks, breaching the legal standards under Hong Kong's Dairy Regulations.
On August 31, Junlebao issued a statement detailing its full-process investigation. The company attributed the issue to improper handling during loading and unloading at its Hong Kong warehouse, which damaged some packaging and compromised seals, leading to contamination. Junlebao stressed that the affected products were UHT milk in traditional-character packaging, produced exclusively for the Hong Kong market on May 7, 2026, and had passed factory inspections. A retest of retained samples by Shijiazhuang Customs Technical Center on August 30 confirmed compliance with Hong Kong standards. The CFS noted that while the elevated colony counts indicated substandard hygienic conditions, they did not suggest a risk of food poisoning. All affected batches were sealed and stored at the importer's warehouse, never reaching the market.
Why would an incident with no actual harm and a plausible explanation of warehouse mishandling trigger such intense market reaction? The answer lies in Junlebao's pending IPO review status with the Hong Kong Stock Exchange.
Understanding the Compliance Breach
Let's first clarify the event. Under Hong Kong's Dairy Regulations, pasteurized or UHT-treated milk must have colony counts not exceeding 10 per milliliter. The affected batch comprised one-liter UHT milk, which under normal processes should have very low bacterial counts. All four samples hit or exceeded the threshold, indicating seal failure during storage or transport. The CFS's routine import testing is a standard procedure, with non-compliant samples publicly disclosed. Junlebao (Hong Kong) International Trading is a wholly-owned overseas platform of Junlebao, meaning the entire chain from production to export and Hong Kong warehousing operates within the company's own system. The problem arose precisely in its own warehouse's handling operations—a revealing detail.
The quality control chain for dairy products is extensive, spanning farms, factories, cold chains, and terminal storage. Any lapse in soft management at any stage can lead to issues. Junlebao's attribution of fault to warehouse handling is logically plausible but also exposes a management concern: whether the aseptic standards applied in domestic factories are fully aligned in execution and personnel training when extended to overseas operations. However, the persuasiveness of Junlebao's response must be weighed against two distinct regulatory frameworks. Under mainland China's Food Safety Sampling Inspection Measures (State Administration for Market Regulation Order No. 15), inspection agencies must verify and record sample appearance, condition, seal integrity, and other factors that could affect results. Non-compliant samples must be rejected. Under this framework, damaged packaging would preclude testing—a defense that wouldn't hold in mainland inspections. But this was not a mainland inspection; it was routine import monitoring by Hong Kong's CFS under its own regulations, evidence rules, and liability systems.
A second often-overlooked point involves the distinction between two physical objects. The Shijiazhuang Customs Technical Center tested Junlebao's factory-retained samples on August 30, not the four samples flagged by the CFS. Factory-retained samples passing only confirms the product's condition at the point of manufacture, not its state upon arrival at the Hong Kong warehouse or during subsequent handling and inspection. Junlebao's response identifies the timing of the issue—damage occurred post-arrival during loading and unloading—but the importer's responsibility for warehouse storage management remains. A company's unilateral claim of warehouse damage does not automatically validate a causal link in regulatory terms.
Hong Kong's regulatory process does allow for appeals. Reports from third-party testing commissioned by the company lack legal effect and cannot overturn official CFS results; they can only serve as reference materials for appeal. Junlebao's retained sample retest and explanatory statement appear more geared toward reassuring mainland consumers and investors than serving as a substantive challenge to Hong Kong's regulatory findings. For a company using Hong Kong as an international springboard and undergoing exchange review, this incident is likely to be noted by the HKEX and could become a supplementary question in the review process.
Junlebao's Leadership in Low-Temperature Milk
Ranked by 2025 retail sales in mainland China, Junlebao stands as the third-largest national dairy company, trailing only Yili and Mengniu. According to its prospectus, revenue grew from RMB 17.546 billion in 2023 to RMB 19.832 billion in 2024 and RMB 20.382 billion in 2025. For the first half of 2026, revenue reached RMB 10.609 billion, up 6.6% year-on-year, with core business revenue growing 10.3%. Adjusted net profit climbed from RMB 603 million in 2023 to RMB 1.161 billion in 2024 and RMB 1.262 billion in 2025; the first half of 2026 saw RMB 745 million, up 12.7%. The adjusted net margin rose steadily from 3.4% in 2023 to 7.0% in the first half of 2026.
Low-temperature liquid milk drives this performance. In the first half of 2026, this segment generated RMB 4.93 billion in revenue, up 25.2% year-on-year, accounting for 46.5% of total revenue—approaching half and becoming the largest revenue stream. Junlebao's market share in low-temperature liquid milk reached 15.6%, securing the top national position. Upstream heavy-asset investments form a protective moat: as of June 30, 2026, Junlebao operated 33 self-owned farms and 20 production facilities, with 198,000 dairy cows and a 63% raw milk self-sufficiency rate—the highest among large integrated dairy companies in China.
Cash Flow Generation and Liquidity Gaps
Cash flow metrics in the prospectus merit close attention. On the generation side, Junlebao's net operating cash flow stood at RMB 2.02 billion in 2023, RMB 3.53 billion in 2024, and RMB 1.96 billion in the first three quarters of 2025—a notable decline from RMB 2.623 billion in the same period of 2024. The reasons are clear: falling raw milk prices, terminal price reductions, and slower distributor payment cycles all weigh on operating cash flow.
On the outflow side, capital expenditures totaled RMB 3.29 billion in 2023, RMB 2.56 billion in 2024, and RMB 1.73 billion in the first three quarters of 2025, channeled into self-built farms, a national production matrix, and cold chain networks. The Jiangmen base began operations in April 2026, and the Chuzhou base is planned with an annual capacity of 450,000 tons—expansion continues unabated.
The most strained moment came at the end of the third quarter of 2025. Junlebao held RMB 1.421 billion in cash and equivalents, against RMB 1.908 billion in short-term borrowings due within one year, RMB 1.317 billion in contract liabilities, RMB 1.599 billion in other payables, RMB 1.653 billion in non-current liabilities due within one year, and RMB 229 million in accounts payable. Total current liabilities reached approximately RMB 9.527 billion, while current assets stood at only RMB 5.649 billion. The cash balance couldn't cover any single major short-term obligation.
Inventory presents another key metric. At the end of September 2025, inventory totaled approximately RMB 2.596 billion, ranking as the third-largest asset after fixed assets of RMB 7.829 billion and biological assets of RMB 4.905 billion. Dairy products, especially low-temperature items, have short shelf lives; slow channel turnover ties up cash and carries impairment risk. Interest expenses remain a rigid burden, with total bank loans hovering around RMB 10 billion, reaching RMB 10.509 billion by mid-2026. With total liabilities of RMB 17.233 billion and a debt-to-asset ratio of 76.57%, financial costs will continue to erode profits. Junlebao's leverage is notably higher than industry peers. Despite seemingly robust operating cash flow, heavy-asset expansion combined with short-term debt pressure keeps liquidity perpetually tight.
The RMB 2.7 Billion Dividend Puzzle
The tighter the cash position, the more conspicuous a move stands out: large dividends distributed before the IPO. The prospectus shows declared dividends of RMB 530 million in 2023, RMB 363 million in 2024, and RMB 1.8 billion in 2025—the latter including a RMB 1 billion special dividend approved at an October temporary shareholders' meeting. Cumulatively, approximately RMB 2.693 billion was declared over three years, nearly matching total adjusted net profit for the period. Controlling shareholder Wei Lihua, through direct holdings and employee stock platforms, commands 59.26% of voting rights. By that ratio, over RMB 1.5 billion of the RMB 2.7 billion dividends flowed to the controlling family. The combination—heavy interest-bearing debt, insufficient cash to cover short-term obligations, near-total distribution of profits pre-IPO, then raising funds via listing for working capital and expansion—invites scrutiny in any review process. In late May, the China Securities Regulatory Commission issued six specific inquiries regarding Junlebao's overseas listing, focusing on historical equity changes, shareholder look-through checks, and equity incentive transfers by former employees.
Distributor Attrition and Contract Liabilities
According to the prospectus, Junlebao's distributor count fell from 6,025 in 2023 to 5,608 in 2024, then to 5,485 in 2025, and further to 5,236 by mid-2026—a persistent net decline. Revenue from offline distributor channels dropped from 66.3% of total revenue in 2023 to 59% in the first half of 2026. Over half of distributors have partnered for more than three years, contributing about 82% of distributor-channel revenue, indicating a stable core base but clearly struggling to add new channels. To offset distributor contraction, Junlebao has increased investment in KA retail and direct sales channels, formed a joint venture with Mixue Bingcheng to build the Xueniu Farm for raw milk supply, raised its stake in Yoghurt to 42.86% to enter the freshly made beverage sector, and grew B2B dairy ingredient revenue to RMB 507 million in the first three quarters of 2025, surpassing the full-year 2024 figure. These transformations require higher operating costs and longer investment cycles.
The RMB 1.317 billion in contract liabilities represents the reservoir of distributor advance payments. Its trajectory serves as a leading indicator of channel confidence. Viewed alongside inventory levels and capacity utilization, Junlebao faces a typical transition-phase scenario: the old engine cools while the new one warms, with the most expensive period being the gap in between. Goodwill and impairment also warrant attention. As of September 2025, goodwill stood at approximately RMB 730 million, stemming from acquisitions including Derong Packaging, Laisier, Qizhi Dairy, Xi'an Yinqiao, and Sikqi, with cumulative impairments of about RMB 230 million already recognized. The associate Yoghurt experienced reputational issues in 2024, with net store closures exceeding 500; Junlebao recognized approximately RMB 60 million in impairment on this investment. Recent precedents loom large. In 2024, Mengniu recorded approximately RMB 3.9 billion in goodwill and intangible asset impairments from its 2019 acquisition of Australia's Bellamy's, plus approximately RMB 830 million in share of losses from associate Modern Dairy, together slashing attributable net profit by 97.8% year-on-year to just RMB 105 million. The impairment lethality of heavy-asset, M&A-driven dairy expansion during cyclical downturns—Mengniu has already paid that tuition for the entire industry. Junlebao's fixed assets of RMB 7.829 billion, biological assets of RMB 4.905 billion, and goodwill of RMB 730 million all face revaluation risk in the current falling milk price cycle.
Disclaimer
This article is based on analysis of public company information disclosed by listed companies in accordance with their legal obligations, including but not limited to temporary announcements, periodic reports, and official interactive platforms. The author strives for fairness and accuracy but does not guarantee completeness, timeliness, or precision. Nothing herein constitutes investment advice, and no responsibility is assumed for any actions taken based on this article.