Investors have lapped up China’s dairy story: soaring consumption, laggardly output, brand premiums. Foreign formula makers take the richest spoils, but domestic producers represent the future. The latest to tell this creamy tale of is China Huishan Dairy Holdings, which last week sold $1.3 billion of stock in Hong Kong. The IPO sold briskly, minted another billionaire in chairman Yang Kai, and netted a nice return for Hong Kong billionaire Cheng Yu Teng, an early investor.
But shares in the Shenyang-based company may face a bumpy ride in the secondary market if Beijing’s dirigiste plans for the dairy industry are realised. Caixin reported Tuesday that under a new policy for dairy consolidation, five selected domestic firms would be showered with preferential loans and tax breaks, worth as much as $4.9 billion. The idea is to create national champions that can compete with foreign infant-formula producers. As the Financial Times notes, this represents another step towards top-down industry consolidation in the wake of a 2008 scandal over melamine-tainted milk that killed six infants and turned parents off domestic formula brands.
All of which is good news for investors in favoured companies like Yili, Mengniu and Feihe, which are reportedly on Beijing’s national-champion list, along with Wondersun and an obscure yak-milk producer. It’s bad news for the likes of Danone and Abbott, which are already reeling from recent investigations into price-fixing. But perhaps the most notable loser could be Huishan, the newly listed integrated milk producer. It doesn’t appear on Caixin’s list. That means it would be at a distinct disadvantage to bigger companies like Mengniu, the largest milk producer. Or perhaps not: Yili was a cornerstone investor in Huishan’s IPO, and presumably had an inkling of Beijing’s thinking on the industry’s future. An investment fund backed by state-owned COFCO, which controls Mengniu, also bought Huishan shares.
As for Yang, the billionaire behind Huishan, he had his own story to tell to IPO investors in Hong Kong: accumulate dairy shares because China is likely to relax its one-child policy, boosting future demand for infant formula. Such a policy reform would play nicely to his strengths and to the dairy expansion story. But he needs to keep a close eye on Beijing’s vision for dairy champions and where Huishan fits in, if he wants to be in the creamy top.
Source: Forbes