M&A

Cash cows

Two new bidders go after Huishan Dairy

Cows-w

Moos just in, they’re for sale

Dairy hasn’t been a prominent part of China’s culinary history but tastes are changing as society gets wealthier. That included some of the new offerings at last week’s Mid-Autumn Festival. Traditional mooncake fillings with lotus and red bean paste were still on show. But some of the newer recipes were offering milk tea or yoghurt flavours too.

WiC has written in the past about China’s increasing dairy consumption. Covid-19 seems to be accelerating that trend and even the nation’s traditional breakfasts could be set for a shake-up if one of the country’s most famous doctors gets his way. Zhang Wenhong, a respected infectious disease expert, has been telling parents to give their children milk and eggs rather than congee first thing in the morning (see WiC495).

The China Dairy Industry Association reports that 40% of the population have increased their dairy intake this year, mostly for health reasons. Some 96% of the people it surveyed believe that milk boosts the immune system because it contains lactoferrin, an anti-viral protein.

Tastes are also transitioning from UHT to pasteurised milk – and showing signs of becoming more environmentally conscious in the process. According to China Skinny research, Yili’s organic Satine brand is now Tmall’s third biggest seller. Adopt-a-Cow is fourth in the rankings: a remarkable rise for an independent company only set up at the end of 2016. Its approach is an unusual one: customers get the naming rights for one of its 60,000 Holstein cows and even the chance to visit it at the dairy.

China’s domestic supply of milk can’t satisfy demand. Dairies produced 32.7 million tonnes in 2019, up 0.9% year-on-year (and comprising 3.4% of the world’s total), according to the UN’s Food and Agricultural Organisation. Imports rose 6.4% to 15.7 million tonnes (a fifth of the global total).

Demand should carry on growing, as the country’s per capita consumption of dairy is still less than a third of the global average. One of the potential beneficiaries is Australia but its exports of fresh milk dropped 20% in July after political tensions between the two countries. A month later the Australian government blocked the A$600 million ($437 million) sale of its second biggest milk processor, Lion Dairy, to Mengniu Dairy.

National players like Yili, Mengniu and Bright continue to pioneer the consolidation trend in China. But there are regional players with ambitions to join the leading group.

One such is Chengdu-based New Hope Dairy. It has been on a buying spree this year, paying Rmb1 billion and Rmb1.7 billion for controlling stakes in Ningxia Huanmei Dairy and Ningxia Harmony Dairy, according to S&P Global Market Intelligence. It’s also a leading contender to take control of Huishan Dairy, once China’s largest producers.

Huishan was one of the biggest scalps for short-sellers in 2016, when Muddy Waters alleged financial fraud. This triggered a liquidity crunch; an 85% share price plunge in a single day; and the subsequent disappearance of Huishan’s financial controller.

The company started bankruptcy proceedings a year later in December 2017. A struggle then began to restructure its debt, with creditors squabbling over what was left in the kitty. A December 2018 draft reorganisation plan revealed a total of 2,702 claimants, demanding Rmb72 billion ($10.56 billion).

A number of would-be suitors, including Yili, then pulled out of an intended acquisition after failing to reach a deal with the creditors. The Shanghai-listed group proposed a Rmb1.5 billion cash injection in return for a 67% stake, which was rejected earlier this year.

Shenzhen-listed New Hope and Guangdong-based Yuexiu Dairy are now proposing fairly similar plans for a rescue of Huishan. New Hope is offering Rmb1.5 billion in return for a stake of two-thirds, with Yuexiu tabling an Rmb2 billion offer for something similar. They are proposing that creditors owed more than Rmb500,000 will get back up to a fifth of their money over a three-year period. But many still need to be convinced that the deal is a good one. Huishan’s 180,000-herd is still looking for pastures new, it seems.


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