Huishan Dairy eyes easing in one-child law

Boost in demand for baby formula expected from likely policy change, the company says as it markets US$1.3b share offer to fund growth

PUBLISHED : Saturday, 14 September, 2013, 12:00am
UPDATED : Saturday, 14 September, 2013, 4:20am

China Huishan Dairy, which is marketing a share float to list on the Hong Kong stock market, aims to boost its dairy herd and expand production of milk products as it gears up for an easing of China's one-child policy, chief executive Yang Kai said.

The company, based in Shenyang, Liaoning province, runs vertically integrated operations in the milk supply chain, from cow breeding to the manufacture of milk products.

To increase consumer confidence in its products it imports heifers from Australia and uses alfalfa seed from North America as fodder, and breeds calves using imported frozen semen, Yang said at a press conference to market the share offer in Hong Kong on Thursday.

Huishan Dairy began to market its share offer to institutional investors on Monday last week, aiming to raise up to US$1.3 billion to finance its expansion. The offer is being promoted as the world's most populous country moves to end its decades-old one-child policy as the nation's population ages and a shortfall looms in working-age people.

It is understood that the offer has secured at least three cornerstone investors - Yili Group, Cofco Agricultural, and Norges Bank, which manages the Norwegian government's pension fund - which took up shares worth US$220 million, representing about a 10th of the entire IPO. The rest of the offer was reportedly fully subscribed on the first day.

The likely easing of the mainland's one-child policy should be positive for the infant formula market, Yang said last week.

The one-child policy has been in effect since 1979. But strong economic growth since then and a growing demographic imbalance which has seen the aged population rise and a decline in working-age people have now prompted policymakers in Beijing to consider adjusting the child limits.

Apart from an anticipation of change in birth policy, investors are counting on the firm benefiting from the rising wealth in the country's inner western regions and its massive urbanisation plan, following the first wave of prosperity in the coastal regions, including Guangdong, Fujian, and Zhejiang provinces.

Investors have bought shares in both China Mengniu Dairy and China Modern Dairy, the country's largest raw milk producer, betting that the explosive growth of the rising-middle class will create growth in the long-term consumption of milk products.

Mengniu Dairy bought a combined 26.92 per cent stake in Modern Dairy for US$419 million in May from United States private equity firm Kohlberg Kravis Roberts (KKR) and CDH Investments, making it one of the biggest deals in China's dairy market since the sector was plunged into a food safety scandal in 2008.

The bold move into China's struggling milk industry in 2008 made a handsome profit for KKR, which almost tripled the value of its initial investment in Modern Dairy.

Founded in 1951, Huishan Dairy has been looking to sell shares in Hong Kong for the past three years following the milk scandal on the mainland when melamine-tainted dairy products killed at least six infants and made thousands of babies ill.

Huishan Dairy's annual production of raw milk reached two million tonnes, and output of baby formula powder totalled 240,000 tonnes last year, the firm's website says.

The company owns 400,000 cows and runs six advanced manufacturing plants in Liaoning.

Huishan Dairy plans to sell 3.79 billion shares at an indicative price range of HK$2.28 to HK$2.67 each, translating into an expected price-earnings ratio of 14.5 to 17 times next year's forecast earnings.