Cream of the crop

Is dairy products giant Yili set for a takeover by Sunshine Insurance?

yili milk

Plenty of tycoons aspire to the title of China’s Warren Buffett. Increasingly, the country’s insurers seem to be modelling themselves on Buffett’s firm Berkshire Hathaway, using their insurance income to fund wider ambitions.

The acquisitive Anbang Insurance is most of the way through its $6.5 billion purchase of Strategic Hotels & Resorts, Bloomberg reports, after buying 15 of the hotelier’s 16 properties. Foresea Insurance, a little-known unit of investment conglomerate Baoneng, has been engaged in a vicious battle over the ownership of property giant Vanke. And so investors weren’t too surprised when news filtered through this month that Sunshine Insurance has accumulated a 5% stake in China’s largest dairy firm Yili. The unsolicited investment has stoked speculation of a hostile takeover bid similar to the saga at Vanke (see WiC317).

Headquartered in Beijing, Sunshine Insurance was established in 2005 by a number of state giants including Sinopec, Chinalco and China Southern Airlines. The insurer bought about 5.7 million shares in Yili last week, taking its holding in the dairy firm above the threshold that requires stock exchange disclosure.

In Yili’s 2015 annual report, Sunshine was the fifth biggest shareholder with a 1.83% stake. The insurer says that the recent Yili purchase was a “financial investment” and that it is not planning to raise its stake in the next 12 months. However, Caixin Weekly reports that Yili executives are worried about the potential for a takeover, or that Sunshine might seek a more active role at the firm.

Yili is now negotiating with other shareholders for support, a company insider told the magazine.

Yili’s shareholding structure, like Vanke’s, is highly fragmented, encouraging unsolicited interest from outsiders. Hohhot Investment, a state-owned investment firm in Inner Mongolia, is Yili’s largest shareholder but it only owns 8.8%.

“Sunshine is breathing down Hohhot’s neck. It could easily become the single biggest shareholder and then overhaul Yili’s management,” the Economic Observer suggested.

China’s insurers were once restricted to purchases of low-risk bonds but they began buying stocks after the regulator relaxed investment rules for the sector in 2012. Backed by abundant liquidity – sometimes through sales of wealth management products – the insurers have mainly invested in property shares. But Economic Observer says they are beginning to turn their attention to other “quality assets”, perhaps taking the view that parts of the real estate market look overpriced.

Yili has a market-leading 20% share of China’s dairy business. As of this week, its market value was Rmb97 billion ($15 billion), or roughly 18 times its 2015 earnings.

Its closest rival Mengniu Dairy – which is worth Rmb50 billion – was also in the news last week, when its chief executive Sun Yiping resigned for “personal reasons”.

The 49 year-old Sun will depart with three other directors, and Caixin Weekly says that COFCO, Mengniu’s biggest shareholder, forced the reshuffle because it wants better returns from its businesses.

Sun’s resignation came less than a month after Mengniu posted a dismal 20% decline in first half net profit to Rmb1 billion, or less than a third of Yili’s earnings during the same period.

COFCO became Mengniu’s single largest shareholder in 2009, prompting a series of managerial reshuffles but failing to grab back market leadership from Yili.

That could be a lesson for some of the potential predators in the market today. “The dairy industry is different from the property or banking sectors. It requires a lot of expertise. Take Mengniu as an example: you can’t simply parachute in a professional manager to take control,” an op-ed in the People’s Daily noted. “Even if Sunshine Insurance raises its stake in Yili, it will still need the cooperation of its managerial team.”

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