A ferment of activity

Why did dairy giant Mengniu sell its fast-growing yogurt brand Junlebao?


Junlebao: began with yogurt drinks in 1995 but grew fast under Mengniu

Were it not for regulatory pressure and massive debt, acquisitive conglomerates like Anbang and HNA would very likely still be clinging to their trophy assets around the world – as opposed to letting them go in fire sales. Their prime assets such as the upscale hospitality chain Radisson or the world-famous Waldorf Astoria can be hard to come by. But why is Mengniu, one of the top two dairy companies in China and under no comparable constraints, also shedding one of its most promising businesses?

The Hohhot-based firm said early this month that it would be selling its entire stake, or 51% interest, in Shijiazhuang Junlebao, a yogur drink and infant formula maker, for Rmb4 billion ($581 million).

Additionally Mengniu will receive a special cash dividend of $568 million. The proceeds constitute nearly 10 times what it paid for control of the Hebei-based company in 2010.

And yet, some commentators believe Junlebao is worth more. “The return on investment over a decade is likely to be above 10 times. And Junlebao’s sales could probably reach Rmb15 billion in 2019, and Rmb20 billion in 2020. If it goes public without a hitch, the valuation of this stake should be higher. Rmb4 billion for a 51% interest – that really comes across as a bit low,” claimed Shanghai-based International Financial News.

In a filing with the Hong Kong stock exchange, Mengniu explained that Junlebao “has been operating relatively independently under its own brand in the past few years” and there have been “limited synergies” between the pair.

Given the “differences in product positioning”, the disposal was described as being in line with the company’s strategy “to continually focus on premium dairy products”.

Mengniu, in which state-owned COFCO Group has a 20% stake, also claimed the move could help facilitate future investment opportunities, as it looks to improvethe performance of its premium product range, which it says has relatively high growth and margin prospects.

Established in 1995 by Wei Lihua, a Hebei native, Junlebao started out making a yogurt drink. That was a market segment overlooked by the major dairy companies, which were more focused on baby formula at the time.

Taking this alternate route helped Junlebao bypass the melamine scandal that skewered the milk powder makers in 2008, even though it had received investment from Sanlu and promoted some of its products under the subsequently stigmatised brand (see WiC6).

After Sanlu went bankrupt, Junlebao bought back all of its holding (around 17%) and then received Rmb469 million from new investor Mengniu for a controlling stake. Offering one of the largest manufacturing facilities in northern China, Junlebao helped to boost Mengniu’s market share in China’s yogurt market to above 30%, according to Beijing-based Economic View.

Under Mengniu’s direction, Junlebao also grew rapidly. Its annual sales reached Rmb13 billion last year, versus Rmb1.26 billion in 2009, according to Sina.com.

Apart from benefiting from Mengniu’s distribution network, Junlebao tapped into the rising popularity of yogurt drinks in general in China, where sales have surged by at least a fifth each year since 2014, even surpassing fresh milk sales in 2017, according to Mintel.

Another growth engine was a successful diversification into infant formula, where sales more than doubled last year, making up 38% of its total revenue.

“Letting go of Junlebao equates to shaving off tens of billions in revenue from Mengniu’s books, which is not a good news for Mengniu at all, given it is targeting to achieve annual revenues of over a hundred billion by 2020,” Song Liang, a dairy analyst, told Guangdong-based Time Finance.

Last year Mengniu’s turnover hit Rmb69 billion, netting Rmb3.04 billion in profit. To make up for the loss of Junlebao it will have to go shopping, Song believes, noting that the likely candidates could be pasteurised milk manufacturers, well-known dairy brands or government-backed entities upstream in the supply chain.

“Mengniu’s selling of Junlebao can be seen as an equity transfer directed by the government. The rationale is to prepare Junlebao to go public. Junlebao has been making strides in recent years, it’s unlikely that Mengniu took the initiative to forego it,” was also the verdict of Wang Dingmian, another dairy analyst, who spoke to Caixin.

The fact that one of the main buyers of Junlebao is Penghai PE, which is indirectly controlled by Hebei’s State-owned Assets Supervision and Administration Commission, gives credence to Wang’s argument.

Its involvement comes in the wake of a policy document released by the local government in April which outlined plans to revive the dairy industry in Hebei (the definition of ‘revival’ is having at least three industry players with annual revenues of Rmb10 billion in the province; and one with Rmb30 billion in sales, which means being in the top three in China or top 20 in the world).

“An IPO could help improve Junlebao’s competitiveness,” Chen Meng, executive director at Xiangsong Capital, told the Economic Observer. “Although it would still be far from being able to challenge Yili and Mengniu, it will become a threat to many of the other regional or tier-two dairy companies.”

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