Guaranteed Exclusive Analysis

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1 Guaranteed Exclusive Analysis Vol. 7 Issue 4, 2014 Welcome to the April issue of. The potential of the UHT category in China is reflected in the sales figures achieved by Greatview Packaging in its latest report. It s hard not to get caught up in the tale of imported brands which this category has become, making it akin to infant formula in some ways. Yet, as in that case, many of the suppliers are marginal and opportunistic players looking for a quick slice of the action. There seems little wrong with this approach in some ways: many businesses these days seem corporate to the extent that they are devoid of entrepreneurial intent, after all. However it seems probable that in many cases such a mode of market entry misses a trick if there is one market deserving strategic focus (and we d suggest there are many more!) it might just be China. In this context the Pactum deal with Shanghai Bright just announced is an interesting approach that could offer more serious longterm partnership prospects. This raises the question, how will China s alternative milk category trend? Whether China is right for the So Natural soy milks which also form part of the Freedom Foods stable alongside Pactum must be more open to question, given the established position of many local soy milks and the track record in the market of many imported soy milks from suppliers in countries such as Thailand, Malaysia, Japan and the US. However other opportunities are certain to emerge the group s focus on quality is a potential strong suit amongst China s quality hungry consumers! Richard Field Editor richard.field@orrani.com Publishers Guangzhou CCM Information Science & Technology Co., Ltd 17 th Floor, Huihua Commercial & Trade Building, No.80 Xianlie Zhong Road, Guangzhou, , P.R.China Tel: : Fax: econtact@cnchemicals.com UK Head Office Orrani Consulting 12 Lower Camden Place Bath, BA1 5JJ, United Kingdom Tel: +44 (0) Fax: +44 (0) Contents Headlines...2 Expert View...3 Interview with Wang Dingmian on Infant Formula Market...3 Market Dynamics...4 Online Infant formula Sales Grow Rapidly...4 Governmental Direction...4 Netherlands and China Get Closer in Dairy...4 Company Developments...5 Yili Sets Up Overseas R&D Centre...5 Sanyuan to Expand Infant Formula Business...6 Want Want China Continues Dairy Growth...7 Modern Dairy Performs Well in H Chongqing Agriculture Investment to Strengthen Dairy Business...8 Raw Milk Supply...9 Farm Milk Price Falls Slightly in March...9 New Products, Technology & Packaging...10 Greatview Packaging Reports Good Results for News in Brief...11 Royal Dairy Launches Sales Push in Yunnan...11 Dumex Cuts Selected Infant Formula Prices...11 Cheese Imports from New Zealand Exceed Trigger Level...12 Pengxin Acquires Synlait Farms...12 Infant Nutrition R&D Centre Established...12 Dairy Product Prices Ease in February...12 Heilongjiang to Build 100 Modern Dairy Farms...12 Bright Dairy Denies Milk Adulteration...13 New Hope Dairy to Set Up New Plant

2 Headlines CCM interviews Mr. Wang to discuss the current situation in China s infant formula market in terms of state policies, M&A, competition between foreign and domestic brands, etc Recent years rapid development of e-commerce in China are making a mark on infant formula sales, which rose by 50% via this channel in 2013 China and the Netherlands further their economic cooperation, including in the dairy sector At the end of February Yili sets up an overseas R&D center in the Netherlands, making clear its intention to become a more internationalised business On 1 March, Beijing Sanyuan announces a stock offering to expand its infant formula business On 11 March, Want Want China released its financial report for 2013, showing the continued progress made by its dairy products and beverages business On 20 March, Modern Dairy releases its financial report for H1 FY 2014, showing continued strong performance In March 2014, Chongqing Agriculture Investment, lead shareholder of Tianyou Dairy, highlights its dairy development plan for the year, focusing on improved milk production and identifying opportunities overseas In March the farm milk price decreases slightly, reflecting increased milk supply and the high volumes of imported milk powder Greatview Packaging, a key rival for Tetra Pak in China, confirms its ongoing strong expansion in sales in 2013, but challenges to its net profitability are evident Major Companies and Sites Mentioned in This Issue 2

3 Expert View Interview with Wang Dingmian on Infant Formula Market Wang Dingmian, Director of the Guangzhou Dairy Association, is a critical observer in China s dairy industry, well-known for his frank opinions. On 20 March, CCM carried out an interview with Mr. Wang to discuss the current situation in China s infant formula market, in terms of state policies, M&A, competition between foreign and domestic brands, etc. CCM: On 25 December, 2013, the China Food and Drug Administration (CFDA) launched the Detailed Rules for Infant Formula Processor Approval (the Rules). Will the Rules exert a great impact on domestic dairy processors? Wang Dingmian: Yes they are expected to do so. Since the government has tightened the requirements on infant formula production, requiring a step up from food grade to pharmaceutical grade standards, dairy processors will have to invest further in equipment and know-how in areas of production such as air purification and product inspection. The Rules will prove a double-edged sword. On one hand, the increasing costs will ultimately be transferred to buyers. On the other, they will improve the quality and safety of Chinese-made infant formula, which is beneficial to both producers and consumers in the long term. CCM: How will the Rules affect production practices in the case of infant formula? Wang Dingmian: Bulk raw materials such as WMP, SMP and whey products are still allowed as inputs for processing, and infant formula businesses are forbidden to simply re-pack infant formula or to import bulk infant formula. (A public notice Strengthening Supervision of Imported Infant Formula was released by General Administration of Quality Supervision, Inspection and Quarantine of the People s Republic of China in September 2013). The question of base mixes is more complicated. If a processor uses base powder/premix from a 3 rd party supplier, it will not get a new license from 31 May; the Rules requires that wet production + dry mixing of formula must be completed at the same plant, so companies will be not allowed to use base powders from other manufacturers. Bulk shipments of base powder are prohibited for import. International companies which have wet production plant at one place, but produce a base powder overseas to ship into China, like Abbott and Mead Johnson, are moving to a dry process for infant formula production using imported dairy ingredients, from a wet + dry mixing process using base powder. The China Food and Drug Administration (CFDA) announced on 31 March that the if approved by the regional office of CFDA, the processors can use base powder for infant formula for now, but not from January 2016, in line with the original Rules. CCM: Do you see processors like Ausnutria and Biostime which rely mainly on overseas plants building new plants in China in the future as a result of these changes? Wang Dingmian: Not in the short term, but it is hard to say as to the future. Since the new policies on infant formula released by the government are not sufficiently clear in respect of how much control the companies must exert over their supply chains, these processors are keeping an open mind regarding domestic plant investments until the governmental direction is made more explicit. CCM: What s your opinion on Feihe s acquisition of Guanshan Dairy recently? Wang Dingmian: As far as I know, the owner of Guanshan Dairy sought to sell up completely in June 2013 at USD million (RMB million). Eventually, the company was valued at USD82 million (RMB500 million) and Feihe acquired its 70% share with a payment of USD49 million (RMB300 million). The deal is mainly attributed to the heavy pressures which the company faced as a result of the changing government policy and market environment for infant formula in the past few years. Guanshan Dairy is likely to be the largest producer of goat milk formula in China, so it made an ideal acquisition target for Feihe as it seeks to achieve consolidation in that segment. CCM: Recently AC Nielsen reported that domestic infant formula brands accounted for 46% of the total sales in Is the data accurate in your opinion? Wang Dingmian: Yes, it would be accurate. According to our joint survey on China s infant formula market made between four universities (Hong Kong Polytechnic University, South China Normal University, South China Agricultural University and Sun Yat-Sen University), the market share of domestic brands stood at 48-52% in This figure was higher in rural areas, as high as 60% in the past few years. CCM: There is still a gap between domestic and foreign infant formula brands in reputation and market share. Will the gap be narrowed down in future? Wang Dingmian: Probably not. I believe that foreign infant formula brands will still lead the market share in the next several years. The government s policy expects to encourage the emergence of some large infant formula groups through M&A which are better able than the current players to compete with foreign rivals. There is talk of 3-5 companies with annual sales over USD817 million (RMB5 billion) by However, in 2013 some foreign brands such as Mead Johnson and Wyeth achieved sales over USD981 million (RMB6 billion) in the Chinese market, and the top five foreign infant formula brands overall achieved sales of USD4 billion (MB24 billion) in China (vs. total sales of infant formula of USD10 billion (RMB65 billion). It seems likely that the foreign brands will achieve further growth in the future, despite the problems which affected Dumex last year, mainly due to the Fonterra food incident. While some domestic infant formula processors expect to achieve sales growth by raising prices, there are limits to how far they can do this as consumers are becoming more and more selective in the brands which they choose. 3

4 Market Dynamics Online Infant formula Sales Grow Rapidly At present, e-commerce in China is booming, to the benefit of the infant formula industry. According to AC Nielsen, sales of infant formula were about USD9.8 billion (RMB60 billion) in In terms of sales channels, mother & child stores accounted for 42% of the total, traditional supermarkets and stores for 36%, and e-commerce for 22%. In 2013, traditional channels lost share, with sales down by -4%; by contrast, the sales of e-commerce and mother & child stores increased sharply, up 50% and 15% respectively. With the increasing number of e-commerce options and mother & child stores, the competition among various channels will be more intense, potentially exerting downward pressure on the high infant formula prices which have posed problems for many consumers. Many dairy processors are paying increasing attention to developing e-commerce sales as a result. For example, Biostime announced a strategic partnership agreement with JD.COM for this purpose, having already sold its products on other retail sites such as Tmall. Other brands such as Mead Johnson, Karicare and Nutrilon were also actively pushed for on-line sales in Rebornne (USA) even announced that it would sell its infant formula entirely through the online channel in China in late 2013 a special case, but indicative of e-commerce growth prospects. Infant formula sold in traditional channels incur significant distribution costs, squeezing dairy processors margins and making online sales attractive, whilst it is also evident that more and more people are shopping on-line, making this refocusing by the companies inevitable. It has been pointed out that such e-commerce presents a challenge in terms of formula quality and safety. A representative of the National People s Congress (NPC) has suggested that it s urgent to establish a national traceability system for infant formula and to suspend online sales of infant formula until the government has established effective supervision in this channel, with only accredited processors allowed to sell online. This statement has aroused widespread concerns, as it is true that China lacks a means of supervising online sales of infant formula. According to AC Nielsen s report, domestic and multinational brands are in fierce competition, accounting for 46% and 54% of total sales respectively. The top 10 brands maintained rapid growth, and accounted for >85% of total sales. Among them, Friesland, Biostime and Nestlé maintained double-digit sales growth in However, affected by Fonterra s contamination scare and bribery scandal, Dumex saw its sales decline by 31%, while Abbott s topline on formula decreased by 3%. In December 2013, Abbott launched its Similac formula range on the e-commerce site Tmall.com, a move regarded as part of the company s recovery plans. Zhou Lingqing, AC Nielsen s Director of Customer Service in China, expects sales of infant formula industry to reach USD16.3 billion (RMB 100 billion) during The huge market potential will make competition between the various sales channels ever more intense. Governmental Direction Netherlands and China Get Closer in Dairy On 23 March, China and the Netherlands signed several key cooperative agreements in various agricultural sectors, including dairy. This is likely a win-win deal for the two countries, but may exert an effect on some other countries, notably New Zealand. A key part of the dairy agreement is a strategic collaboration to be jointly established between Yili, the largest dairy processor in China, and Wageningen University, one of Europe s leading universities. The Dutch government expressed the intention that its experts will help China increase milk production to 40 million tonnes in the coming years (vs. the 2013 level of million tonnes, which was down by 5.7% over 2012 after the exit of many small milk producers). President Xi suggested that China and the Netherlands should strengthen their cooperation not only in dairy but also in food safety amongst other areas, and stated that China welcomes increased Dutch dairy exports to China. These agreements are expected to impact China s dairy sector in several areas: Positive impacts: The Netherlands is expected to be the main beneficiary. Just one example: the Netherlands exported about 25,106 tonnes of infant formula to China in 2013, accounting for 20.5% and ranking 1 st. The cooperation will underpin this position of advantage over the coming years. Nor is this just as a supplier, as the Netherlands will participate in efforts to develop China s milk production. The insufficient milk supply has become an even tighter bottleneck for China s dairy industry development. If the Dutch dairying model works in China where there remain many small milk producers, this could prove a huge business opportunity for the Netherlands The dairy companies in the Netherlands and China who are directly involved will also come out as winners from the agreement. In China, Yili will be the main beneficiary. The company launched its R&D centre in the Netherlands in February one month 4

5 before President Xi s visit, this move is understood to have greatly impressed President Xi and Yili will be very well positioned as a result, beginning with the strategic cooperation in food security. On the Dutch industry side, FrieslandCampina is the likely beneficiary: on 24 March, Mr. Qiu, its president in China, confirmed its negotiations with some local dairy processors regarding possible investment as a means of strengthening its position in China. The company will also promote the Dutch dairy breeding model in China, focusing on food safety in milk supply Other Chinese companies with significant sourcing from the Netherlands will also benefit indirectly. For example Wahaha has imported its infant formula from the Netherlands since 2010, and can now take advantage of the government s policy direction and promotion to increase its sales Negative impacts: New Zealand and some EU countries may be affected by the agreement, especially in the infant formula sector. The Dutch industry may well increase its participation in the sector at the expense of its competitors in other countries which are also very focused on this subject, such as New Zealand and Ireland. This comes at an especially difficult time for New Zealand, whose infant formula export boom may well be affected by the recent audits of the MPI by the CNCA (Certification and Accreditation Administration of the People s Republic of China) If any company is to be impacted negatively by the arrangements it is surely Fonterra. It has built up an enviable position in China with strong export trade and activities across B2B, retail and foodservice channels as well as an emerging position in local milk supply via its dairy farms in Hebei. The growing Dutch involvement with so much to offer in collaboration on milk supply and dairy ingredients surely means that Fonterra will face an enhanced level of competition in the future The policy direction of the Chinese government and the growing investments of its industry at home and overseas are all good examples of risk mitigation: lots of interested parties seeking to avoid putting too many eggs in one basket. The situation provides them all with an opportunity, but how to seize the opportunity in a manner which proves commercially successful and, for the government, politically viable is a major challenge. Company Developments Yili Sets Up Overseas R&D Centre At the end of February Yili announced a cooperation with the Wageningen University and Research Center (WUR) in setting up an R&D centre in the Netherlands, a clear step forward for Yili in its internationalisation strategy. WUR is a collaboration between Wageningen University, the Stichting DLO Foundation, (which has close ties with the Dutch Ministry of Economic Affairs) and the Van Hall Larenstein University of Applied Sciences. The centre will focus on dairy farming, dairy product R&D and also food safety. Pan Gang, Yili s CEO, explained that the R&D centre will help the company to develop new products to meet market demand, an area which constitutes a huge challenge but also opportunity for Yili. The cooperation makes Europe the most important part of the group s R&D system. Yili has been increasingly active in its overseas activities: In January 2013 it announced an investment of USD176 million (RMB1.10 billion) to build an infant formula plant in New Zealand, with a capacity of 47,000 t/a In July 2013, it signed a cooperation memorandum and established a strategic partnership with Dairy Farmers of America In December 2013, it established a strategic partnership with Italian UHT and fresh cheese specialist Sterilgarda Alimenti These cooperations reflect these countries strong reputations in dairy technology and their industries track records in competitive and high quality dairy supply. Alongside the cooperation with WUR, they demonstrate that Yili s expansion focus has increasingly shifted to R&D. Chen Yu, director of the Dairy Association of China, said that Yili s move can not only make full use of global technologies and talents, but also improve the independent innovation capability of China s dairy industry itself, a likely strategic direction of China dairy processors in the future truly, China s dairy takeaway! There are signs that China s dairy processors have been paying more and more attention to R&D in recent years, increasing investment in their own R&D or establishing cooperation with foreign partners. Bright Dairy seems to do better than its competitors in this respect. A good example has been the UHT yoghurt which it launched early in 2009: this has performed well and was expected to achieve sales of USD484.2 million (RMB3 billion) in Almost 4 years later, Mengniu launched a similar product in mid 2013, and Yili followed suit in early Other domestic processors attach great importance to R&D, such as Feihe, which has cooperated with several international groups since 2010 (please see Vol.3 March Issue, p9). However, how to relate the R&D investment to their core competitiveness is still a challenge. Many multinationals remain in a production & sales phase in China it seems, providing an opportunity for domestic processors, which lay great emphasis on their products being suitable for Chinese consumers. Mead Johnson is an exception in this respect: it launched its R&D centre in Guangzhou early 5

6 in June 2010 (please see Dairy Products China News Vol.3 July Issue, p8), and this is believed to have played a significant part in expanding the group s business in China, where it leads ahead of Wyeth (with sales of RMB6.5 billion in 2013, compared with RMB6 billion for Wyeth). It is logical that, with the increasingly demand for dairy products in China, its dairy processors should make greater use of overseas dairy resources. A review of dairy sector IP shows China becoming more important, a real sign of change. As the international dairy industry has entered an increasingly globalised phase, there is a recognition in the Chinese industry that domestic dairy processors who adopt a go global strategy will be better placed in the future. It s likely that more and more of China s dairy processors will participate in overseas activities, with a focus on either cooperation in core functions or access to raw materials supply. Sanyuan to Expand Infant Formula Business On 1 March, Beijing Sanyuan Foods Co., Ltd. (Beijing Sanyuan) announced that it intends to raise funds of up to USD million (RMB4 billion) through a non-public offering of stock, with USD million (RMB1.5 billion) to go to establishing a formula production plant. The company intends to issue up to 613 million shares for Beijing Capital Agribusiness Group (CAG, Beijing Sanyuan s holding company), Shanghai Pingrun Investment Management Limited (Pingrun Investment) and Shanghai Fuxing Chuanghong Investment Partnership (Chuanghong Investment) at USD1.07 (RMB6.53) per share. CAG is a state-owned farming group founded in April 2009 by the State-owned Assets Supervision and Administration Commission of the People s Government of Beijing Municipality; it owns 64 state-owned companies (mainly in livestock breeding, food processing, biopharmaceuticals and logistics), 31 Sino-foreign JVs (including Beijing McDonald s Food Co., Ltd., Beijing KFC Co., Ltd., Beijing Poultry Breeding Co., Ltd., Beijing Sanyuan Sojitz Foods Logistics Co., Ltd., Beijing Shell Petroleum Co., Ltd., etc) and a few other companies such as Beijing Sanyuan. This investment takes it to being the controlling shareholder in Beijing Sanyuan with a 57.61% interest, whilst Pingrun Investment and Chuanghong Investment will each hold 20.45% stakes. The formula plant is to have a capacity of 50,000 t/a: it will produce a range of powdered milk formula including infant formula, fortified milk powders for middleaged people and sweetened milk powder, as well as having a supporting facility for cheese and demineralised whey powder. The remaining funds will be used as working capital. At present, Beijing Sanyuan s formula is manufactured by its subsidiary Hebei Sanyuan Food Co., Ltd. The plant at that site, which was originally Sanlu Group s, is relatively outdated, resulting in insufficient capacity. Beijing Sanyuan s intention is to expand its powders capacity significantly once completed. Lv Shuqin, its deputy general manager, revealed that its capacity of infant formula reached 5,000 t/a and its revenue was USD73.54 million (RMB450 million) in It s expected these figures will increase to 13,000 t/a and USD million (RMB1 billion) this year. However, Beijing Sanyuan still faces several difficulties, not least a lack of milk. A capacity of 50,000 t/a suggests a requirement for 600,000 tonnes of milk for supply, and perhaps 60,000 cows. Yet in fact, the company only owns 30,000 head of cows in Beijing. In addition to supplying milk for its existing products (liquid milk accounts for about 80% of its output), its milk supply is insufficient. Therefore, the key issue for the company is achieving an increased milk supply. It is supposed, by its own declaration, to plan to use the remaining funds as working capital, but some trade sources are expecting further acquisitions of other dairy processors, instead of the investment in the supply chain which is so clearly needed. A second challenge is that, as a regional brand of liquid milk, the company enjoys limited brand awareness. Brand building would seem to be key if it is to become a serious player in infant formula sector, where it faces intense competition between international and domestic brands. The company can in truth be viewed as something of an under-performer. Even though its products are considered to be high quality, its business performance has underwhelmed in recent years. Its net profit in 2010, 2011, and 2012 reached USD8.01 million (RMB 49 million), USD7.35 million (RMB44.95 million) and USD5.36 million (RMB32.80 million) respectively. However, the company is believed to have made a loss in the region of USD million (RMB180 million-rmb215 million) in

7 Want Want China Continues Dairy Growth On 11 March, Want Want China Holdings Limited (WWC) released its financial report for 2013, showing revenues of USD3.8 billion, a YoY increase of 13.7%; its net profit reached USD0.69 billion, up by 24.1%. Dairy products and beverages made up an increasing proportion of the business yet again, accounting for 52.4% of its total revenues vs. 50.9% in Its sales in this segment reached USD2 billion in 2013, up by 17% compared with Hot-Kid milk (a flavoured milk) is the company s star product, with sales up 17.7% to USD1.8 billion in 2013, compared with USD1.5 billion in Yet in fact this was below the company s expectation. The product is a recombined milk with milk content of 25-30%, and its production was affected by the shortage of milk powder in H Nevertheless, WWC sold about 7 billion units (cartons and cans) of Hot-kid milk in The company s sales of beverages increased by 19.1%, with strong performances from its O Pao fruit milk beverage and its lactobacillus beverage: these achieved YoY growth of 41.5% and 48.7% respectively. It also launched banana flavour modified milk in some regions in H2 2013, which did well, and is due to receive a lot of marketing support this year as a result. In addition, the company launched Galaxy flavoured yoghurt and PET bottled dairy products at the end of 2013 to meet the increasing demand. In 2014, WWC will focus on the launch of a series of products designed to boost its profitability, including dairy products and beverages, rice crackers and snack foods; a key intention is to widen its consumer base through a diversified branding strategy. Want Want China s capital expenditure is expected to be about USD458 million this year, from which 70% is to be allocated to dairy products and beverages. Even though WWC s revenue and net profit grew in 2013, revenue growth in each segment slowed down. In 2012, dairy products and beverages revenue increased by 22.6% and snack foods revenue rose by 14.8%. By contrast in 2013, the equivalent figures were 17% and 8.4% respectively. FIGURE 1: Total Revenue and Net Profit of Want Want China, Source: Want Want China FIGURE 2: Sales Mix of Want Want China, Source: Want Want China 7

8 Modern Dairy Performs Well in H On 20 March, dairy farming group China Modern Dairy Holdings Co., Ltd. (Modern Dairy) released its financial report for the first half of FY (financial year) 2014 (July- December 2013), showing the company s strong performance. Its revenue continued to rise, reaching USD310.7 million (RMB1.90 billion) in H1 FY 2014, up 74% over the same period of FY 2013 (RMB1.09 billion or USD173.9 million). Meanwhile, the company s net profit also demonstrated its strong performance: this hit USD53.4 million (RMB327 million), an increase of 83.7% over H1 FY The company attributed the strong performance to several factors: continuous improvement in milk yield per cow; growing sales of its own branded UHT milk; an increase in the sales volume and price of its raw milk, and finally effective control of its operating costs. Modern Dairy sold 372,647 tonnes of milk in H1 FY This comprised 354,347 tonnes of raw milk and 18,300 tonnes of UHT milk, figures up by 42.8% and 278.9% respectively vs. H1 FY The company s raw milk was mainly supplied to Mengniu (accounting for 75.7%) for the production of Deluxe Milk and other premium dairy products. The revenue from its UHT milk business increased to USD33.3 million (RMB204 million) in H1 FY 2014 from USD9.2 million (RMB56 million) in H1 FY Modern Dairy maintains its leading position in dairy farming. The financial report shows that it had 22 operating farms with 186,838 dairy cows. Under the background of the country s persistent supply shortage, the company will continue to expand its dairy farming business. In September 2013, it entered into agreements with Success Dairy II Limited to establish 2 JV companies to construct new dairy farms. In the future, Modern Dairy will actively seek opportunities for the development and construction of new dairy farms, and to improve the milk yields being achieved on its farms. The company set a goal to achieve production of 1 million tonnes of milk in Currently, the company has entered into cooperation agreements with a number of large dairy processors such as Nestlé, Yinqiao Dairy and New Hope Dairy. Meanwhile, in terms of downstream business, the company will expand its UHT milk business. It will further expand its sales network into most regions of China in 2014 in addition to the existing regions of eastern and northern China. FIGURE 3: Revenue of Modern Dairy, FY 2009-H1 FY 2014 Source: China Modern Dairy Holdings Co., Ltd. Note: Modern Dairy s financial year runs from July to June Chongqing Agriculture Investment to Strengthen Dairy Business in 2014 In March 2014, Chongqing Agriculture Investment Group Co., Ltd. (CAI) revealed its dairy development plan for the year, aiming to accelerate the growth of its dairy business. As the lead shareholder in Chongqing Tianyou Dairy Co., Ltd. (Tianyou Dairy), CAI intends to focus on milk production and overseas activities in 2014 to promote its subsidiary s development. In terms of milk production, CAI plans further cooperation with Israeli milk production specialist Afikim. The 2 parties will jointly establish a dairy farming university, including the creation of an information management website for dairy farms and setting up an expert veterinary team to develop dairy farming technology. In late 2011, CAI originally established a cooperation with Afikim to construct a dairy farm with 20,000 head. So far the 1 st phase of this project with 10,000 cows has been completed and put into production at end of In addition, CAI cooperated with Shaanxi Nongken Group Co., Ltd. in 2013, in order to build a dairy farm of 60,000 milk cows, with estimated supply of 60,000 t/a. The 1 st phase with 10,000 milk cows is be completed within 2014 and put into production in By 2015, CAI expects to draw supplies from a total of 70,000+ cows compared with 40,000 at present, so providing a firm foundation for Tianyou Dairy s entry into the infant formula market. (In September 2013, Tianyou Dairy announced its intention to enter infant formula through its subsidiary Yellow River Dairy Co., Ltd.) In addition to building up its milk production capabilities, CAI is also actively prospecting opportunities overseas, with rumoured plans to acquire a European dairy company and sell into the Chongqing market. Its subsidiary Tianyou Dairy is the largest dairy processor in Southwest China with a dairy products capacity of 500,000 t/a; it accounts for 70% of the dairy market in Chongqing. In 2013, it achieved revenues of USD340 million (RMB2.1 billion), up 16.7%. There are 8

9 plans for Tianyou Dairy to be listed within two years to fund its development and increase its brand awareness. The base in Chongqing is especially interesting in the context of the Chongqing-Xinjiang- Europe railway which now links it to the German port of Duisburg: last month President Xi visited Germany and after seeing a goods train arrive having done the full route, called on the two countries to work together to build a new Silk Road. Were any acquisitions to be made in Europe it would seem likely that these might be linked to this emerging supply link. Raw Milk Supply Farm Milk Price Falls Slightly in March March saw the first decline in China s farm milk price, which had been rising consistently through 2013 and into January-Febrary this year. The average price of raw milk was USD691/t (RMB4,230/t), down by 0.7% against February, albeit up by 23.7% YoY. Despite this easing of the price level, it is still expected to remain high in the next few months. The slight drop of raw milk price was mainly attributed to three factors: Firstly, the supply of raw milk increased. Large-scale dairy farms which were built in 2011 and 2012 have been put into operation by the end of 2013 or at the beginning of 2014, expanding milk supply. For example, Yantang launched its dairy farms in Zhanjiang, a prefecture-level city in the southwest of Guangdong Province, in January, gaining milk production expected to reach 8,000 t/yr; Mengniu s subsidiary Fuyuan Dairy launched its farms in Suqian, Saihan and Tuoxian with 20,000 cows in total in mid 2013, and another 5 are expected to star operating this year; Modern Dairy launched 2 dairy farms, expanding its herd from 159,000 in June 2012 to 186,838 by December 2013 Second, after the Spring Festival, weak demand for raw milk eased the tight supply, prompting a drop in price Third, imports of milk powder kept increasing. The import volume reached 159,072 tonnes in January 2014, a significant YoY growth of 68%. Furthermore, the decline in imported milk powder s price also played a part. In February 2014, the average market price of imported WMP was USD7,128/t, down by 5.8% compared with January Trade sources expect that the import price of WMP will decrease in the next few months, with milk production in New Zealand in the year 2014 to February up 6% compared with that of the previous year In Q2 2014, with milk production beginning to enter the peak season and weak demand for raw milk, the short supply situation will ease, resulting in a slight decrease in price. None of this alters the fundamental milk shortfall, however, so the price will remain high going forward despite this change. FIGURE 4: Average Price of Farm Milk in China, January 2013-March 2014 Source: CCM Note: These figures are an average which takes into account the small producers as well as the large-scale. Average price in March 2014 was calculated as of 18 March 9

10 New Products, Technology & Packaging Greatview Packaging Reports Good Results for 2013 Greatview Aseptic Packaging Co., Ltd. (Greatview), formerly known as Tralin Packaging Co., Ltd. (Tralin Pak), issued its 2013 financial report on 27 March. This showed the company s strong performance last year, but it sees its profitability under some threat in 2014 despite this. At present, Tetra Pak, Greatview and SIG Combibloc are the three main producers of aseptic packaging in China, accounting for an estimated 88% share of unit sales. Other smaller players include Skylong, though it is not a big player in the dairy/liquid sector. At present, Greatview only sells aseptic packs, with 250ml its key line. Its most important customers are Mengniu, Yili and Xiamen Huierkang Group. Greatview registered sales of USD354.2 million (RMB2,159.5 million) and net profit of USD52 million (RMB317.3 million) in 2013, up about 23.8% and 0.76% over that in the previous year respectively. The performance is good considering that the domestic dairy industry confronted great challenges in 2013 whilst the company faced fiercer competition from its competitors; however the figures are down on the previous two years for instance, in 2011 the company achieved YoY growth of 35.7% and 30.8% in sales and net profit. The increasing costs are one main reason for the poor profit growth. The company invested about USD259.2 million (RMB1,580.3 million) as sales costs, up 32.4% over that last year, reflecting the cost of raw materials and the operations of its EU factory as the company claims. The sales split into USD304.9 million (RMB1,869.0 million) from the Chinese market and USD49.3 million (RMB300.5 million) overseas, up 17.1% and 91.3% respectively over It s the 2 nd year in which the company has done better overseas than that in China, but undoubtedly the Chinese market is still its main focus: it built new product lines in the Shandong and Inner Mongolia plants in May 2013 and late 2013 respectively, for start-ups in early and late The breakdown of sales by segment was USD332.1 million (RMB2,024.9 million) to dairy companies and USD22.1 million (RMB134.6 million) to still drinks companies, respectively up by 23.9% and up 23.1% by over It is the first year that the company has recorded growth in the still drinks sector since 2010 (its sales have shrunk in the previous 2 years in this sector). In the foreseeable future though, Greatview will continue to depend on the liquid milk sector above all. Greatview expects to go on facing increasing costs as well as strong competition from its rivals, especially from Tetra Pak, with which the legal dispute begun in 2010 persists. The two rivals will continue to battle with each in the future, both in China and in the EU. One cause of concern will be that China s liquid milk market maybe slowing to some extent. Nielsen figures showed 10% value growth in sales of UHT milk last year, however according to the National Bureau of Statistics (NBS), local production of liquid milk (fresh/pasteurised + UHT milk) was million tonnes, up by only 7.01% over This growth rate is the lowest over the last decade, excluding the very slight rise in In that year, according to the NBS, liquid milk production was million tonnes, a volumes which was only up by 1.29% vs due to the melamine scandal. The limited growth in 2013 reflects last year s tight milk supply. However, some trade sources see the liquid milk category overall as being mature now in any case, making a slowing growth rate to be expected. For example, Mengniu put the liquid milk market size at 23 million tonnes in 2013, up 6.4% over that in 2012 so not growing as fast as liquid milk production. Imports (total HS0401, so mainly UHT but including a little fresh mainly from South Korea, a little ESL such as Pura from Australia and a little cream) were about 184,567 tonnes, compared with just 93,795 tonnes in A mature market will doubtless ensure that Greatview pays particular attention to other aseptic food categories which seem to offer strong potential, especially the UHT yoghurt segment, which has attracted launches by a number of leading dairies now. FIGURE 5: Greatview Packaging s Sales & Net Profit, , million USD Source: Greatview Packaging 10

11 News in Brief Royal Dairy Launches Sales Push in Yunnan Guangxi Royal Dairy Co., Ltd. (Royal Dairy) recently announced that it would start to sell its buffalo milk products in Yunnan Province in March, including Chunyang UHT yoghurt, Qingyang UHT milk under the Molafeierbrand and also its walnut milk (walnuts are valued in traditional Chinese medicine, and both Mengniu & Yili market walnut milk). The products are to be sold through local distributors, allowing the company to dedicate larger resources to marketing in the 1 st tier cities. The company also confirmed that its main marketing efforts will be concentrated on Guangxi and Yunnan this year. Beginning in 2011, Royal Dairy set up sales offices in key urban markets such as Beijing, Shanghai and Guangzhou. However the result of such investments in marketing promotion and expanding distribution was that the company s overall profitability was severely affected. Starting in 2013, Royal Dairy responded by gradually adjusting its strategy, closing the offices in 1 st tier cities and turning to distributors this revised approach did restore its profitability and doubtless provided a cautionary lesson for the company, showing its limitations as a small regional processor. Despite this, Royal Dairy had a good year in 2013, achieving sales of RMB989.2 million (USD163.5 million) and an operating profit of RMB35.7 million (USD6 million), up 31.15% & 57.09% respectively over Dumex Cuts Selected Infant Formula Prices On 4 March Danone s Dumex Baby Food business (Dumex) announced that it would cut the selling prices of its newlylaunched formula by 8-10%. It s reported that this is the first time that prices have been cut on newly-launched infant formula products in China in recent years. The products involved are Precima (maternal formula) and Precinutricare (infant formula) series, with prices reduced by 7.6% on average and in one case, by 17.9%. Precinutrlcare TM, stage 2 infant formula price: yuan/500g Product Precima/ Precinutricare Precima RMB / 900g Stage 1 precinutricare Stage 2 precinutricare Stage 3 precinutricare RMB / 500g RMB / 500g RMB98.89 / 500g Precinutrlcare TM, stage 3 infant formula price: yuan/500g Precigro RMB229 / 900g RMB / 500g RMB / 500g RMB / 500g Precima/ Precinutrare Price Cut vs. Precigro -17.9% -1.9% 0% -3.8% Source: Tmall.com Note: Dumex also cut the price of Precigro, as it won t produce this product in the future Generally speaking, of course, prices are heading in the other direction! For example, FrieslandCampina raised its prices on some Friso products (whose packaging has been updated) in February, up by 8-10%. The move by Dumex the number 3 brand in China s formula market, behind Mead Johnson and Wyeth appears designed to show the company s responsiveness to government policy initiatives, and also to restore its market position after the impact of Fonterra s contamination scare and Dumex s own bribery scandal. This is important as Beingmate has become increasingly focused on growth of late, whilst Abbott is offering more serious competition given its new local plant. At this stage, though, it seems unlikely that many other brands will follow with price reductions of their own. Precima TM: for pregnant mother, price /900g Precinutrlcare TM, stage 1 infant formula price: yuan/500g 11

12 Cheese Imports from New Zealand Exceed Trigger Level On 27 February the General Administration of Customs of China (GACC) imposed the most favoured nation (MFN) tariff of 12% on New Zealand cheese (HS codes: , and ) from the following day. This stepped up from the previous rate of 3.6%. GACC indicated that 5,250 tonnes of cheese had been imported from New Zealand by this point, exceeding this year s trigger level for the category of 4,824 tonnes. Similarly, as seen with milk powder, China s imports of New Zealand cheese rose from 6,233 tonnes in 2008 to 20,030 tonnes in 2013, an increase of 221% and a CAGR of 26.3%. The timing of this year s announcement is earlier than previous years, 27 February this year comparing with 4 March, No surprise that importers in Japan a key destination in recent times for cheese from Australasia have recently been complaining about being shorted by their Mozzarella suppliers in Australia and New Zealand! Infant Nutrition R&D Centre Established On 1 March a ceremony was held to mark the establishment of an infant nutrition R&D centre in Shijiazhuang (the city in Hebei province near Beijing where Sanlu was based up to the melamine scandal). The facility is the result of a joint investment between Shijiazhuang Junlebao Dairy Co. Ltd. (Junlebao Dairy) and the Chinese Nutrition Society ( and is designed to provide a firm technical foundation for Junlebao s infant formula. (CNS describes itself as a voluntary participation organisation; its draws funding from its members, donations, governmental subsidies etc.) Two months prior to this, in January, Junlebao Dairy signed an agreement with the government of Zhangjiakou (also in Hebei Province) for the construction of a dairy farm and infant formula production plant. The plant s construction is to start up in April and is scheduled for completion in August 2015, with a capacity of 30,000 t/yr. In addition to the initial farm next to the plant, 2 more dairy farms with 40,000 cows are planned for completion by Pengxin Acquires Synlait Farms On 5 March, New Zealand s Synlait Farms announced that its takeover by Shanghai Pengxin Group Co., Ltd. (Pengxin, a private company with businesses in diverse sectors such as real estate, mining and agriculture), has been approved by Chinese regulatory authorities. In October 2013 Pengxin launched a takeover bid for Synlait Farms of NZD87.5 million (about RMB440 million), or NZD2.1 per share. The deal was made by Pengxin s holding subsidiary, SFL Holdings Ltd. According to the announcement on 5 March, the bid price subsequently increased to NZD2.2 per share, giving a total bid value of RMB470 million. Pengxin has acquired 74% of Synlait Farms, the balance being held by two of the firm s founders, Juliet Maclean and John Penno. Synlait Farms owns 13 dairy farms in Canterbury, covering 4,000 hectares. Pengxin s purchases demonstrate its determination to build up its dairy capabilities in New Zealand. In November 2012 it invested RMB1 billion in purchasing 16 Crafar dairy farms in North Island, with an area of 8,000 hectares, so this takes its total to 12,000 hectares overall. At the end of 2012, Pengxin also set up a subsidiary, Milk New Zealand (Shanghai) Ltd., which cooperated with Miraka to source dairy products under the NuZealand brand (mainly UHT milk and milk powder). However whilst the company has launched its website, Chinese consumers are yet to be able to buy these products. Dairy Product Prices Ease in February According to data from the National Bureau of Statistics, the national consumer price index (CPI) rose by 2% in February compared with February 2013; food prices were up by 2.7% and dairy products prices rose by 11.5%. Compared with January 2014, the CPI rose by 0.5%, food prices by 1.7% and dairy products prices by 0.5%. The moderate rises were in line with reduced demand after the Spring Festival and a rise of just 0.7% month-on-month in the farm milk price in the same month, to USD696/t (RMB4,260/t). Heilongjiang to Build 100 Modern Dairy Farms On 12 March the Heilongjiang Animal Husbandry and Veterinary Bureau announced that the province would build 100 modern dairy farms in This seems very unlikely to be completed during this year, though, despite what it says. As the country s 2 nd largest milk production area, Heilongjiang has been putting great emphasis on promoting its large-scale dairy farming. In 2013, Heilongjiang s government invested USD32.68 million (RMB200 million) and attracted USD0.34 billion (RMB2.1 billion) of social funds in addition to start construction on 45 modern dairy farms (each with 1,200+ head). Against this plan, by the end of 2013, 17 modern farms had been completed and put into operation, with the intention being for the remainder to be in operation by September

13 Bright Dairy Denies Milk Adulteration On 13 March, Bright Dairy issued a statement on its website refuting the reported adulteration (watering down) of its raw milk: it stated that all the milk acquired by Nanjing Bright Dairy Co., Ltd. (in Nanjing City, Jiangsu Province) had been strictly inspected in accordance with the national standard and met the various required compositional indicators. The company indicated that it had reported these allegations to the police in order to protect its reputation. This came after several media reports on the alleged adulteration by the company s suppliers at a milk collection station in Nanjing. New Hope Dairy to Set Up New Plant It was reported on 11 March that New Hope Dairy had signed a contract with the government of Pixian County for setting up dairy plant in Chengdu City, the capital of Sichuan province, during the National People s Congress and the Chinese Political Consultative Conference. In this move demonstrating its intent to expand its dairy business in Southwest China, New Hope Dairy will invest USD93.14 million (RMB570 million) in total for the site, which is expected to achieve annual sales of USD million (RMB2 billion) when it reaches the designed capacity. The facility is to produce fresh milk, yoghurt and milk beverages. 13

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