Cash-strapped Chinese dairies are selling and then renting back their cows

Collateralising biological assets such as cattle is helping some dairies raise needed funding

PUBLISHED : Thursday, 01 December, 2016, 7:15pm
UPDATED : Thursday, 01 December, 2016, 11:01pm

Amid a deeping cash shortage, Chinese dairy companies are pledging their cows as collateral to borrow money, and such “unconventional” financing will likely become even easier amid rebounding milk prices.

The idea of selling cattle, chicken or ducks to a lender and then leasing them back is rare, and risky. But funding shortfalls affecting Chinese agribusinesses are so prevalent over the last two years that some local governments have pressured banks to be more flexible.

This trend first became evident among small farm owners in northeastern China, an area suffering an economic malaise with rapidly deteriorating credit, only to see the country’s listed dairy giant this year also enter into cow-leasing deals worth millions of dollars.

China Huishan Dairy Co, which operates the most dairy farms in China, said on Sunday it plans to raise 750 million yuan through collateralising 40,000 of its cows -- about 20 per cent of its herd, while acknowledging that a similar scheme in April ended in failure.

“As far as I know, after we became the first public company to have done so, other dairy majors like China Modern Dairy are also likely to follow suit,” Ge Kun, executive director with Huishan, said.

The raw milk producer is based in Shenyang, the capital of Liaoning province, one of the most populous cities of northeastern China, where local banks turned reluctant to lend amid surging bankruptcies of state-owned industrials.

It is the second time Huishan has surprised investors by turning to its biological assets, that it estimates are worth 1.55 billion yuan, for five-year loans at an annualised interest rate of 6.2 per cent, according to filings to the Hong Kong Stock Exchange.

“It is a more convenient and quick way of financing, but not cheap,” Robin Yuen, an analyst with RHB Securities, said.

The annual interest rates of Huishan’s current outstanding long term loans range from 3.41 per cent to 8.88 per cent.

Industry insiders reckon dairy farm operators threatened by an imminent cash shortage are more inclined to resort to sale-leasebacks, especially at a time when Hong Kong’s lukewarm stock market eliminated prospects for them to raise money from equity investors.

Slumping milk prices as a result of a supply glut over the past few years have also made their funding environment even tougher.

Last year, a few state-owned banks in northeastern Heilongjiang province were ordered by local authorities to extend credit lines to farmers who pledged their cows as collateral, provided the living animals were covered by special insurance policies, documents seen by the Post showed.

“Both Huishan and Modern Dairy are pouring a huge sum of capital into new businesses, as they both are venturing into selling premium dairy products directly to consumers rather than operating solely as a raw milk supplier,” said Song Liang, an independent dairy analyst.

On Sunday, Huishan declared the lapse of the first finance lease agreement reached in April that would have seen it sell about 50,000 cows to a Guangdong lender for 1 billion yuan, and then lease them back.

“The failure is actually also related to what had happened in northeastern China,”said Ge, referring to media reports that painted an overly gloomy picture for the economy and credit profiles of companies in the ailing region.

“But we quickly found another lender based in Shenzhen’s Qianhai district to sign the latest deal,”she said.

With raw milk prices bouncing back, RHB’s Yuen said there was less need for the Chinese dairy producers to collateralise their cows for financing.

But for those raw milk producers who are burning cash to make a foray into new markets of high-end dairy products, the cattle leaseback may still be a favoured alternative against the backdrop of a decelerating credit situation in China.

“As milk prices are heading higher, their cows become more valuable, hence banks will feel more confident of lending them money,” Song said.

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