CHINA HUISHAN DAIRY HOLDINGS COMPANY LIMITED. CLSA China Forum Workshop May 2014 HIGHLY RESTRICTED

Transcription

1 CHINA HUISHAN DAIRY HOLDINGS COMPANY LIMITED CLSA China Forum Workshop May 2014

2 Disclaimer This presentation has been prepared by China Huishan Dairy Holdings Company Limited ("Huishan" or the "Company") and is solely for the purpose of corporate communication and general reference only. The presentation is not intended as an invitation, offer, recommendation or solicitation for you to buy or sell securities or to engage in any investment activities whatsoever, or to form any basis of investment decision for any securities (whether or not in relation to the Company) in any jurisdiction. All such information should not be used or relied on without professional advice. The presentation is a brief summary in nature and do not purport to be a complete description of the Company, its business, its current or historical operating results or its future business prospects. This presentation material may contain forward-looking statements. These forward-looking statements are based on a number of assumptions about the future, some of which are beyond the Company s control. The Company does not undertake any obligation to update any information contained in this presentation (including but not limited to the forward-looking statements) to reflect events that occur or circumstances that arises after the date of this presentation. Potential investors should bear in mind that actual financial results may differ materially from the forward-looking statements contained herein. The information contained in this presentation is not verified by any independent third party. No warranty or representation of any kind, whether express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information contained herein. The information contained in this presentation should be interpreted under the prevailing circumstances. There will be no update of matters in the presentation to reflect any significant change in the development. The Company, its directors, management, employees, agents or advisers specifically disclaim all responsibilities in respect of any use or reliance of any information, whether financial or otherwise, contained in this presentation, and shall not be liable for any and all losses incurred (whether directly or indirectly, financial or otherwise) by any person in reliance on any information contained in this presentation. 1

3 Contents #1 What is happening in my industry? #2 What am I doing about it? #3 What is it going to cost me? #4 How am I going to make money? 2

4 Presenters Mr. Eddie So Chief Financial Officer Mr. Michael Chou Head of Corporate Finance 3

5 What is happening in my industry?

6 Rapidly growing China dairy market with tremendous potential Rising wealth and continued urbanization 53% Urbanization rate 63% e complemented by other secular tailwinds Rising health awareness Increasing demand for high-end products 1 Improved distribution network Per capita disposable income ( CAGR) 14% 15% Urban Households Rural Households Dairy products market by retail sales value (China), e Retail sales value (RMBbn) driving rapid growth in China s dairy sector but, recurring scandals relating to dairy products have eroded consumer confidence and increased scrutiny on dairy industry e 2015e 2016e 2017e 2018e Liquid milk Milk powder Other dairy products but per capita consumption is still low US 96.2 EU 84.6 Japan 58.0 China Per capita consumption of dairy products! Melamine-tainted IMF and liquid milk products! High levels of aflatoxins in liquid milk products! Unusual level of mercury content in IMF products? The competing economic interests among participants across critical segments of the dairy industry value chain is the principal cause of food safety issues in China s dairy industry! 5

7 Raw milk prices are expected to continue to rise Raw milk ASP continue to increase Fuelled by increasing gap between supply and demand Raw milk ASP (RMB/kg) 6.0 Huishan 5.5 Huishan Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 China avg YST CMD Huishan Source: Company data, Wind, Macquarie Research, November 2013 Raw milk supply and demand (million tonne) Notes: 1. Raw milk only represents cow milk and excludes other types of milk; 2. Raw milk supply is represented by annual raw milk production; 3. Raw milk demand is estimated based on dairy products production. Source: Raw milk supply from 2007 to 2012 is sourced from National Bureau of Statistics of China, Frost&Sullivan e 2014e 2015e 2016e 2017e Raw milk supply Raw milk demand Gap between supply and demand Beef price has been rising faster than raw milk Smaller farms slaughtered cows to sell beef Cumulative change (base = Mar 2009) 200% 180% 160% 140% 120% 100% 80% Mar-09 Feb-10 Jan-11 Dec-11 Nov-12 Oct-13 (Million farms) (% of total raw milk production) % 96% % 94% % 90% % 88% % 84% 86% % % % % Raw milk Source: National Bureau of Statistics, Macquarie Research, November 2013 Beef % of total raw milk production No of small farms (<1k head) Source: Euromonitor, Macquarie Research, November

8 Raw milk market in 2013 Raw milk production volume (China), Raw milk production volume (million tonnes) Annual growth rate % 30 5% 1.7% 2.2% 2.2% % 0% -5.6% 10-5% % Source: Frost & Sullivan Raw milk production volume Annual growth rate 7

9 Premiumization trend in dairy consumer products Premium liquid milk sales to rise above 20% Industry sales (RMB bn) % premium % % % % % 0 0% e 2014e 2015e 2016e 2017e Premium milk Regular milk Premium % Powder market to double in 4 years, led by premium Industry sales (RMB bn) e 2014e 2015e 2016e 2017e Premium milk Regular milk Premium % % premium 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% High-end milk brands driving premium growth Consumers willingness to pay a premium for quality for their children, particularly for the younger generation of Chinese parents (those that are born after 1980) Premium milk sales as a percentage of total liquid milk rose from 0.5% in 2005 to 15% by 2012 One-child policy further relaxed Euromonitor estimates the premium segment could further rise to 21% by 2017, implying a premium sales CAGR of 19%, far outpacing 8% for regular milk Government toughened policies and supervision on imported dairy products Source: National Bureau of Statistics, Euromonitor 8

10 Industry concentration Raw milk Ranking Company Raw milk production 2012 ('000 tonnes) 2012 market share Ranking Company Raw milk production 2013 ('000 tonnes) 2013 market share 1 Modern Dairy % 1 Modern Dairy % 2 Huishan Group % 2 Huishan Group % 3 Lvhe-Dairy % 3 Lvhe-Dairy % 4 Shenmu High-tech % 4 Shenmu High-tech % 5 Shanghai Dairy Group % 5 Yili % 6 Others 35, % 6 Others 33, % Total 37, % Total 35, % Despite rapid development in large scale dairy farming operation in China dairy farming industry remains fragmented Top 5 raw milk producers only account for approximately 5.2% of China s raw milk output in 2013, compared to 4.15% in

11 Industry concentration Liquid milk Liquid milk market concentration (China), 2012 Market share of top 5 players in liquid milk market (China), 2012 Liquid milk market concentration (China), 2013 Market share of top 5 players in liquid milk market (China), % 2.0% 2.0% 100% 2.4% 2.2% 9.5% 22.2% 10.6% 22.8% 80% Top % 80% Top % 60% 60% 20.3% 22.0% 40% 40% 20% Others 44.00% Mengniu Yili 20% Others 39.90% Huishan Mengniu Bright Yili Sanyuan Bright 0% JunleBao 0% JunleBao Source: Frost & Sullivan Source: Frost & Sullivan National Players Mengniu & Yili have approximately 45% of market share but limited growth Regional players like Huishan are growing fast 10

12 Industry concentration Milk powder Infant formula milk powder market concentration (China), 2012 Market share of top 5 players in infant milk powder market (China), 2012 Infant formula milk powder market concentration (China), 2013 Market share of top 5 players in infant formula milk powder market (China), % 7.6% 12.1% 100% 8.4% 10.1% 80% Top % 8.0% 80% Top % 8.7% 60% 60% 9.8% 9.9% 40% 9.5% 40% 9.5% 20% Others 52.90% Mead Johnson Beingmate Dumex 20% Others 53.40% Mead Johnson Wyeth Beingmate Wyeth Dumex 0% Yili 0% BiosTime Source: Frost & Sullivan Source: Frost & Sullivan Top five players have 48.6% market shake but regulatory changes may shake up the industry, releasing market share Brands controlling quality raw milk sources are best positioned to gain in market shake up 11

13 Regulation changes in milk powder industry June 2013 Ministry of Industry and Information Technology (MIIT) Application of new licenses June 2013 State Council Notice on Opinions of Further Strengthening Infant formula Quality Safety December 2013 China Food and Drug Administration View of production certificate to be completed before 31 May 2014 February 2014 MIIT Restructuring of infant formula industry By the end of 2018, cut industry participants down to 35, largescale infant formula with 5 billion Yuan annual turnover, top 10 domestic brand enterprises reaches up to more than 80% of market share New rules and regulations are much more demanding for source of milk Registration management for overseas production enterprises of infant formula from 1 May 2014, infant formula products from the unregistered overseas production enterprises are not allowed to be imported 12

14 What am I doing about it? What is it going to cost me? How am I going to make money?

15 Business overview Grass to glass Feeds growing and processing Largest commercial alfalfa fields in China (140,000 mu 1 of land, approximately the size of Hong Kong Island) Rapidly expanding plantation base. 300,000 mu of land for supplementary feeds Significant cost benefits and feeds with higher nutritional value Scaled plantations with fixed rents and strategically located in the Golden Corn Belt No.1 Market Share in Northeastern China Liquid milk Only major dairy company in China using solely self-produced raw milk for production #1 player and #1 brand satisfaction in Northeastern China Brand well known in Northeastern China for its quality and safety assurance Dairy cow farm Alfalfa/other feeds plantation Liquid milk/milk powder production facility Golden Corn Belt Second largest herd in China with 128,352 dairy cows by September dairy farms in operation and 12 under construction Industry leading milk yield Premium quality raw milk with high nutritional value Transportation cost savings from strategic layout of production base Suitable weather, particularly precipitation Yixian Zhangwu Faku Shenyang Unique Grass to Glass Business Model Fushun A China-based major IMF brand Only IMF brand in China using solely self-produced raw milk for production Only company in China with official approval for production and sales of D90 whey powder Milk powder facility GMP certified. In process of having all facilities GMP certified Dairy farming Milk powder and dairy ingredients Note: 1. 1 mu m 2 14

16 Feeds growing and processing Continue to secure upstream resources for expanding planation of alfalfa and supplementary feeds June 2013 Ministry of Agriculture of China ( 农业部 ) organized a national alfalfa conference at Huishan s alfalfa plantation field in Jinzhou, Liaoning August 2013 Huishan alfalfa awarded Premium rating and obtained the highest score in a competition held at China s Alfalfa Development Convention( 中国苜蓿发展大会 ) organized by China Animal Agriculture Association ( 中国畜牧协会 ) March 2014, a delegation from Ministry of Agriculture of China, led by Minister Han visited Huishan Huishan s unique vertically-integrated dairy business model received highly favorable remarks 15

17 Feeds growing and processing Continue to secure upstream resources for expanding planation of alfalfa and supplementary feeds 500 China s agricultural resources per capita is scarce 400 Population Cultivated land per capita 190 MIL Ha/Person 300 Australia Canada China 1, USA H H Alfalfa fields Supplementary feed fields Newly secured land Japan Source: World Bank,

18 Dairy farming Signed contracts to import 30,000 heifers over next 12 months with potential to upsize further Our dairy farming business has seen margin improvement over the past three years as we expanded in herd size leading us to form a strategy to speed up upstream development Consistent with our strategy to speed up development of upstream business, we have signed contracts with our supplier partners to import 30,000 heifers over next 12 months with potential to upsize even further 30,000 heads cost USD75.5 million (approximately USD2,550 per head) Dairy farming Year ended March Gross margin(%) Gross margin(%) Gross margin(%) Dairy farming Six months ended September Gross margin(%) Gross margin(%) Before elimination Before elimination Rapidly expanding herd size Premium quality raw milk tested by international and Chinese labs (Number of cows) <2,000 55,552 90,254 31, ,851 49, ,352 57, % 3.2% 2.8% 4.1% 3.8% 3.1% <400 <300 <200 18,584 36,968 59,033 62,962 71,312 NA NA <50 <100 <50 NA Mar 2011 Mar 2012 Mar 2013 Sep 2013 Calves and heifers Mikable cows Protein Content Fat Content Bacteria 000u/ml Somatic Cells 000u/ml Huishan Industry Peer<50<200 <2,000NA <50<250 <100<400EU Standard PRC National Standard 17

19 Liquid milk Generating large majority of our sales Enhancing liquid milk product mix Expanding retail network coverage Jersey Farm series( 杰茜牧场 ) Exclusive series of ultra-premium UHT products Protein level at 3.6% We have the largest Jersey cow herd in China Sharing Global Flavors( 全球甄享 ) A series of premium yoghurt products Developing differentiated products which leveraged on our industryleading upstream resources Enhancing product mix allows us to increase our ASP and improve our margin as we gain market share Retail network coverage as of Mar 31, 2013 Retail network coverage as of now 330 distributors and 341 supermarkets as at Sep 30, % growth rate from customer base as at Mar 31, 2013, approximately 100,000 households under a new initiative Freshness Delivery ( 新鲜送 ) Liquid milk segment Year ended March 31, Gross margin(%) Gross margin(%) Liquid milk segment Six months ended September 30, Gross margin(%) Gross margin(%) Before elimination Blended ASP(RMB per tonne) 6,631 6,935 Before elimination Blended ASP(RMB per tonne) 6,712 7,222 18

20 Milk powder and dairy ingredients Milk powder: Expanding distribution network Dairy ingredients: Launching new products D90 whey powder Non-dairy creamer Whole-milk powder IMF base powder Internally used Industrial customers Retail network coverage as of Mar 31, 2013 Retail network coverage as of now Increased to 207 distributors from only 69 as at Mar 31, 2013 A China-based major IMF brand Selected brand by China Dairy Industry Association Unique grass to glass business model: Most innovative, quality assurance Endorsement by China Dairy Industry Association Recognition, assistance & long-term benefits Winner in IMF industry consolidation process (cut down number of brands from to 50) 19

21 Brand building New Safety Power in China s Dairy Industry ( 中国乳业安全新力量 ) Advertisements on TV and other media platforms Sole title sponsor of reality programme Miracle Audition ( 奇迹梦工厂 ) Innovative advertising campaign featuring popular TV anchors Acting enthusiasts audition before a panel of popular actors and directors 20

22 Our strategies 1 Enhance distribution network and penetrate additional geographical end-markets beyond Northeastern China and expand industrial customer base 2 Expand upstream operations and resources to uphold highest standards of product safety and quality Most trusted Dairy brand in China 3 Continuously expand product portfolio and offer innovative products to improve profitability 4 Strengthen brand recognition across China and enhance consumer loyalty 21

23 Thank you!