China dairy

Chinese dairy firms set for consolidation boost

As China is pushing ahead with policies to regulate its dairy industry, analysts see opportunities for the large domestic players such as China Mengniu Dairy.
Foreign-made infant formula has been popular in China since the 2008 melamine scandal
Foreign-made infant formula has been popular in China since the 2008 melamine scandal

Chinese infant formula producers will be the main beneficiaries as Beijing speeds up regulating the industry to boost confidence in local products, according to analysts.

A group of government departments led by the Ministry of Industry and Information Technology submitted the proposals recently to the State Council, with a view to releasing guidance on M&A transactions in the dairy industry within two months, according to a research report from Citic Securities this week.

The guidance would reveal government’s determination to consolidate the industry and create several high-profile local brands, the report said.

“Consolidation in the industry will leave a larger market share and more M&A opportunities for high-quality domestic companies, especially those state-owned industry leaders,” said Dennis Wang, a Shanghai-based analyst with UBS Securities.

Wang expects leading local companies to increase a market share by 7%-8% from foreign milk powder firms and small domestic companies.

There has already been some movement.

China Mengniu Dairy, China’s largest milk supplier in terms of sales, in June announced a plan to fully acquire Yashili International for HK$124.6 million ($16 million) from shareholders including Carlyle. It earlier paid KKR and CDH HK$3.17 billion ($409 million) in a partial acquisition of China Modern Dairy, increasing its stake from 1% to 28%.

The report from Citic said consolidation would help to clean up the market and eliminate companies with products considered lower quality.

It comes as China has moved to clamp down on the high price of some milk powder brands and increase quality of such products.

China’s National Development and Reform Commission (NDRC) on Tuesday imposed a total fine of Rmb670 million ($110 million) on six infant formula producers for antitrust violations. The companies that punished were foreign groups Nestle, Abbott Laboratories, Fonterra, Danone and Friso, along with Biostime, which is based in China but imports formula from France.

Wyeth, Japan’s Meiji and Chinese group Beingmate were also found to have fixed prices but were exempted of any fine, as they “actively reported the monopoly agreement and provided evidence for the NDRC’s investigation,” according to the NDRC statement on Tuesday.

All of them were asked by the regulator to cut prices before the probes, and they did so as requested.

The NDRC told media that the punishments were to guarantee food safety and curb monopoly behavior and were not designed to discriminate against international companies.

The punishment also came along with China’s decision on Sunday to halt imports of some whey protein concentrate and milk-based powder sourced from Fonterra, the world’s largest dairy exporter. Fonterra revealed that three batches of whey ingredients made at a New Zealand plant may have contained bacteria that can cause a rare illness called botulism.

Stocks of Chinese dairy companies rose upon the Fonterra news on Monday. China Modern Dairy surged by 9.8% and Yashili International closed up 2.5%, while the Hang Seng Index edged up 0.16% the same day.

However, some investors still have concerns on the quality of Chinese infant formula.

“Consumers have lost confidence in local brands. A problem found in some global brands does not necessarily mean parents will turn to the local products,” said a Hong Kong-based fund manager who refused to be identified because the issue is sensitive.

Foreign-made infant formula has been dominant on the mainland since a 2008 scandal that involved infant formula of major domestic producers being tainted with melamine, a chemical that may have been added to fool government’s protein content tests but was toxic, leading to the death of six children.

“Chinese companies will rapidly develop in the next five years, only under the condition that there are no more scandals or problems,” said Charlie Chen, a director and head of China consumer at BNP Paribas.

¬ Haymarket Media Limited. All rights reserved.
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