Investors bank on Chinese dairy firms as domestic demand to soar
Investors have bought up shares of companies including China Modern Dairy and China Mengniu Dairy, betting that the country’s huge consumer market will fuel China’s long-term intake of milk products.
China’s current per capita dairy consumption rate of 23 kilograms is less than half of its Asian neighbours, according to Macquarie.
What has held back demand and the industry’s growth was public food concern first sparked by a milk scandal in 2008. For investors, Huishan Dairy, based in north-east China, is a draw as it controls several steps in the production chain — from grass planting to dairy processing and developing — giving it more control over quality.
“For Huishan, the vertically integrated business model is attractive,” said Anson Chan, an analyst at KGI Securities in Hong Kong. “Everyone is trying to build their own farms, looking to buy land, buy herds.”
Among Huishan’s current investors is Hong Kong billionaire Cheng Yu Tung, whose family controls the Chow Tai Fook jewellery empire.
Huishan Dairy is offering 3.79bn shares in a range of HK$2.28-$2.67 each, valuing the deal at up to HK$10.12bn, said IFR, a Thomson Reuters publication.
Bookbuilding is set to begin today with pricing slated for Sept 19.
The price range is equivalent to 14.5 to 17 times China Huishan’s forecast earnings for 2014, in line with the P/E ratio of 16.9 times for China Modern Dairy, according to Reuters data.
Huishan Dairy has received commitments worth $220m from three cornerstone investors — Norway’s Norges Bank, Yili Group and Cofco Agricultural Industry Management — IFR added.
The capital-raising would allow Huishan Dairy, which has been in operation for more than 60 years, to expand its herd of cows and boost production.
Macquarie said China’s raw milk supply shortfall reached a record high in 2012 while only 17% was considered premium quality.
“Scarcity of quality raw milk was to blame for most safety incidents,” Macquarie said in a research report in July, referring to the recurring issue of chemical-tainted powdered milk.
As of 2012, the top 10 dairy farm operators in China had a total herd size of just over half a million, or 3.7% of the total number of cows in China.
Huishan Dairy is the country’s second-largest producer of raw milk, with a 1% market share, behind Modern Diary’s 1.3% share, Macquarie estimates.
The investment banks leading the Huishan Dairy offering are Deutsche Bank, HSBC, Goldman Sachs and UBS.
CIMB, Investec Capital Asia and Jefferies will also act as joint bookrunners.
