Summary of Key Issues
Lancang Ancient Tea (the first Pu-erh tea company listed on the Hong Kong stock market) faced three major crises due to the unauthorized actions of two senior executives, Wang Juan and Zhang Muheng: private lending, illegal authorization, and inventory discrepancies in the warehouses. These issues exposed the company's flaws in governance, which relied heavily on personal relationships rather than formal systems, as well as shortcomings in managing operations across different locations. After an external investigation, the company implemented reforms and shifted from a system based on personal connections to a more standardized approach. However, it still struggles with declining performance and a cooling industry demand.
I. Senior Executives Caused Three Major Problems
The two employees, who had worked together for nearly 20 years, treated the company like their own private domain:
1. Private Lending: At the end of 2024, then-General Manager Wang Juan needed to fund personal expenses and asked then-Director Zhang Muheng to use the seal of a subsidiary, Guangzhou Kangrui, to sign a loan contract for 10 million yuan (without the knowledge of the company's board of directors). When the loan was due, Wang Juan failed to repay it, and the lender sought arbitration, demanding that the company pay back the principal plus interest; Wang Juan was held jointly responsible.
2. Illegal Authorization: Zhang Muheng granted unauthorized authority to Guangzhou Minghui to conduct a business deal worth 30 million yuan in processed tea products. When Minghui breached the contract, the Hebei-based company sued Lancang Ancient Tea, resulting in the freezing of 23 million yuan in assets (nearly 30% of the company's cash). The company lost the first-instance lawsuit and is currently appealing.
3. Theft from the Warehouse: Wang Juan secretly removed 35 tons of new tea products (valuing 35.2 million yuan) during off-hours, and Zhang Muheng helped cover up the incident. It was only during an inventory check that it was discovered that these products had been stolen while being exchanged for older tea.
II. The Root Causes
There were two main reasons for these problems:
- Unconditional Trust in Senior Executives: Founder Du Chunyi placed almost complete trust in Wang Juan and Zhang Muheng (who joined the company in 2007 and held key positions in sales and finance), allowing them to use company seals and approve contracts without strict procedures, relying solely on personal relationships to maintain control.
- Weak Remote Management: The headquarters is located in Yunnan, while the marketing center and core subsidiaries are in Guangzhou (2000 kilometers apart), making it impossible for the headquarters to effectively monitor and manage operations. For example, the use of seals and the management of warehouses in Guangzhou were beyond the headquarters' control.
III. Reforms: Moving from “Personal Relationship-Based Management” to “Systematic Governance”
After the incidents, the company took decisive action:
1. Hold Individuals Accountable: Wang Juan was identified as directly responsible for the losses, and Zhang Muheng was held mainly accountable (he received a reprimand but was temporarily retained to address the remaining issues).
2. Improve Systems: The company overhauled its systems for seal usage, contract approval, and warehouse management—seals must now be approved in advance, inventory checks are conducted regularly, and contracts require multiple levels of review.
3. Reclaim Centralized Control: The previously autonomous Guangzhou subsidiary is now under stricter oversight by the headquarters, ending the practice of delegating too much power to senior executives.
The three major crises have been largely resolved: the stolen tea products were replaced, the litigation cases are still in appeal, and the responsibilities for private lending have been clearly defined at the individual level.
IV. Improved Governance, but Business Challenges Remain
Although the internal issues have been addressed, the company's financial difficulties persist:
- A Peak After Listing: The company saw revenue and profit increases upon listing in 2023, but in 2024, revenue dropped by 31% (to 360 million yuan) with a loss of 300 million yuan; in 2025, revenue further decreased by 39% (to 220 million yuan) resulting in a loss of 90 million yuan.
- Changing Industry Conditions: Pu-erh tea was once hyped as a financial product, but the bubble has burst, and consumer behavior has returned to more rationality. Additionally, the overall economic environment is weak, making it difficult to sell products.
- Declining Product Sales: Revenue from the company's main product lines (1966 series and Tea Mommy series) has decreased by more than 40%, with sales declining across all market segments, from high-end to mid-range.
The company needs a new team to rebuild its distribution channels and adjust its products if it is to overcome these challenges and emerge from the financial downturn.
Conclusion
Lancang Ancient Tea has used this internal crisis as an opportunity for governance improvements. However, to truly turn things around, it must address the fundamental issue of struggling to sell its products. While improved governance is essential, a thriving business is ultimately what matters most. This situation also serves as a lesson for other family-owned companies or those that rely on senior executives: personal relationships cannot replace established systems, and remote management cannot be left unregulated.