Banking & Finance

Following an udder strategy

The biggest Hong Kong IPO for months is for a Chinese dairy firm

Cow w

Sourced by Huishan from Australia

Does Yang Kai know something we don’t about China’s single-child policy?

Last week, the chief executive of Huishan Dairy, which is about to IPO in Hong Kong, told the South China Morning Post that his firm is gearing up for an easing in the rules limiting most families to a single child. Yang reckons that as the one-child policy is relaxed – meaning urban families can have two children – that will likely jumpstart demand for domestic infant formula.

Huishan – based in Shenyang in Liaoning province – is betting that China’s dairy industry will not only enjoy a boost from a rising birth rate; but likewise that his own firm will be able to persuade increasing numbers of local consumers to buy a product – local milk and baby milk powder – that’s still struggling to overcome the taint of a dairy scandal five years ago (see here for more details).

That’s why Huishan has tried to position itself as superior to its rivals because of the way that it manages its supply chain. It doesn’t just make dairy products, it breeds its own cows. Huishan already owns the country’s second largest herd including imported heifers from Australia. And it feeds its cows with alfalfa seed from North America as fodder.

Huishan plans to raise up to $1.3 billion in what is set to be Hong Kong’s largest initial public offering in four months. It says it will buy up to 500,000 more cattle with the proceeds to increase its herd and improve milk yields. Huishan’s annual production of raw milk reached two million tonnes last year, while its output of baby formula totalled 240,000 tonnes.

The IPO has attracted plenty of interest. The cornerstone investors include Yili Group, one of China’s largest dairy firms, Norway’s central bank, and the private equity arm of state-owned food industry giant COFCO Group (which also owns a major stake in China’s largest milk producer by sales volume, Mengniu). Together the three took up shares worth $220 million, representing a decent slice of the entire IPO. The rest of the offer was reportedly fully subscribed on the first day.

Hong Kong billionaire Cheng Yu-tung (who owns the Chow Tai Fook jewellery chain among other things) was also an earlier investor in the dairy in 2011.

Industry observers say COFCO’s investment in Huishan is not purely for financial gain. “There is little doubt that Cofco invested in Huishan because of Mengniu. What it’s trying to achieve is to help Mengniu secure the quality and quantity of its supply,” says Song Liang, a dairy analyst from the Distribution Productivity Promotion Centre.

Huishan is already a key supplier of raw milk to Mengniu and its rival Yili in the Liaoning region.

After the tainted milk scandal, Mengniu has invested heavily in securing a more reliable supply of raw milk. Back in May, it increased its stake in Hong Kong-listed Modern Dairy. In 2011, Modern Dairy sold almost all of its output to Mengniu.

At first sight, the involvement of COFCO and Yili as major investors in the deal looks odd. Huishan, which produces infant formula and other milk products, is a direct competitor to Yili and Mengniu. But the sense is that the three firms may have come to an informal agreement.

“It suggests that Huishan has reached some kind of understanding with Yili and Mengniu in the sense that they will not attack each other’s turf. Judging from Huishan’s positioning, it seems that the company plans to expand primarily in the northeast region but not nationally like the other two,” Lei Yongjun, head of the China Dairy Industry Committee told 21CN Business Herald.

According to Liaoning Daily News, Huishan controls about 80% of the market in Shenyang and nearby areas. But its share in the entire northeast is only 20%.

Huishan hired HSBC as one of its sponsors and joint global coordinators of the IPO. The listing is expected on September 27 in Hong Kong.


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