China Mengniu Dairy

China Mengniu Dairy posts 751 million yuan loss as milk powder unit Yashili dents profits

Chief executive Lu Minfang sees China’s dairy market growing 3 to 4 per cent this year

PUBLISHED : Thursday, 30 March, 2017, 4:34pm
UPDATED : Thursday, 30 March, 2017, 10:46pm

China Mengniu Dairy, the country’s second largest dairy producer, posted a net loss of 751 million yuan (US$109 million) last year, hurt by intense competition with rivals and heavy losses from its baby milk powder subsidiary.

It represents a dramatic fall from the 2.4 billion yuan net profit the company reported in 2015.

Excluding Yashili, the company’s baby milk powder subsidiary, Mengniu’s net profit still dropped 27.6 per cent to 1.7 billion yuan from 2.3 billion yuan in 2015, the company said in a statement late on Wednesday. It equates to a loss of 19 fen per share for 2016, compared to earnings per share of 61 fen in 2015.

Mengniu said its performance was undermined by a “deterioration of operating performance” of Yashili, a one-time sale of inventory raw milk powder and “a significant loss” incurred by an associate company.

With the cost structure changing, it is likely that competitive landscape will ease in the future for the industry
Lu Minfang, chief executive, China Mengniu Dairy

Speaking at the firm’s annual results press conference in Hong Kong on Thursday, newly appointed chief executive Lu Minfang said he did not think Yashili would continue to hurt Mengniu that badly this year.

“I believe in 2017 we will see a significant improvement in Mengniu’s profits.” he said.

Mengniu acquired Yashili International Holdings in 2013 at a record price of HK$12.4 billion with the aim of expanding its milk powder segment. In 2016, Mengniu recognised a non-cash expense of 2.3 billion yuan to reflect a decrease in the value of the unit.

Yashili, also listed in Hong Kong, recorded an annual loss of 320 million yuan last year, with mainland parents still favouring foreign products because of concerns around the safety of locally produced baby formula.

The company saw its revenue drop by about 20 per cent to 2.2 billion yuan, while its gross profit also decreased by 26 per cent to 1 billion yuan.

Tainted by a 2008 scandal in Shijiazhuang in which baby milk powder was found to contain potentially harmful traces of melamine, China’s local firms have been fighting fiercely with imported brands that have accounted for nearly half of the nation’s total milk powder sales since then.

Yashili has been trying to position its brand more internationally so as to attract Chinese parents. Efforts to achieve this have included forming a joint venture with Mengniu in New Zealand in 2015 to produce premium quality infant formula for the domestic market.

Faced with intense competition from international brands and cross-the-border e-commerce merchants, Yashili saw revenue of its infant formula sector shrink 26.6 per cent to 1.4 billion yuan last year, according to a news release.

China’s dairy segment is fiercely competitive. A bitter marketing battle with other milk producers forced Mengniu to increase its operating expenses by 34.9 per cent to 18.8 billion yuan in 2016. Advertising and promotion costs rose 30.6 compared with the previous year.

“Competition among domestic dairy enterprises remained fierce,” Lu said. “However, with the cost structure changing, it is likely that competitive landscape will ease in the future for the industry.”

Mengniu expects the demand for domestic infant milk formula to improve after regulators tightened their supervision of Chinese dairy producers last year.

Lu predicted that China’s dairy market would grow 3 to 4 per cent this year, while raw milk prices should decrease slightly.

Mengniu shares rose 4.9 per cent to close at HK$15.9 on Thursday while Yashili remained unchanged at HK$1.5.

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