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Mark O'Neill

WHEN YOU CAN buy stocks in mainland companies that make semiconductors or sports cars, why pick a firm that produces milk?

Hong Kong investors will have the choice next year, when a four-year-old company named Inner Mongolian Meng Niu Dairy Company plans to issue shares on the market.

Three foreign investment funds have already made their bet. They put 216 million yuan (HK$202 million) into the company in 2000, taking 32.7 per cent of the equity, and topped this up with a further US$35 million in September.

The three are Morgan Stanley, CGU-CDC China Capital Partners and CDH Investment.

A successful listing would give the three the opportunity to realise a quick and tidy profit on their investment.

Buying Meng Niu, which means Mongolian Bull, is a big bet on a company that was set up in 1999 with capital of 13 million yuan and has grown with remarkable speed to become the fourth-biggest dairy firm in China. Its sales target for this year is five billion yuan.

On November 18, Meng Niu astonished a crowded audience at an auction in Beijing by paying a record 310 million yuan for the rights to the first advertising spot after the evening news on national television next year, considered the prime spot in the whole broadcasting schedule.

'The price of milk is the same as mineral water but the technology and cost is much higher,' said Sun Xianhong, head of the company's planning department, as he explained why the firm paid such a high price. 'The dairy business depends on sales volume, and whether you can sell enough depends largely on brand loyalty.'

Meng Niu was particularly happy because it outbid Yi Li, another company from its home city of Hohhot, capital of Inner Mongolia, which ranks No2 in the dairy industry in China and for which Meng Niu's  chairman worked for 15 years before being fired.

Yi Li paid 210 million yuan for a television slot in the same sequence after the evening news but a few minutes after that of Meng Niu.

Next year, Meng Niu plans to increase sales 60 per cent to eight billion yuan, while the market as a whole is growing at only 10 per cent a year. That kind of projection is the argument for not buying Meng Niu - the company has grown too quickly, taken on too much debt and does not have the expertise to manage such growth. It is also too dependant on a single product line - fresh milk and other milk products.

Currently, the average Chinese consumes just 7kg of dairy products a year, against a global average of 104kg and 200kg in Europe. This 7kg is nearly all fresh milk and yoghurt.

Such low averages are a reason to buy Meng Niu if you believe that consumption will rise sharply -  but not if you believe that it takes longer than three to five years to change  century-long habits  and that a dairy industry needs a sophisticated system of storage, transport and refrigeration that does not yet exist in most parts of China.

Four days after the TV advertising auction in Beijing, French food giant Danone made an opposite bet: it spent 121 million yuan to increase its share of Shanghai-based Guangming Dairy, China's largest, from 3.85 per cent to 7.7 per cent.

'We have posted a profit rise of more than 30 per cent for the past six years,' said a Guangming spokesman. 'We have diversified across China with 60 per cent of our sales outside Shanghai, production bases in 20 provinces and sales in 31 regions and provinces. We have diversified into raising cattle and distribution systems.'

'Meng Niu is like a star that has risen quickly and will fall quickly,' he added.

Unfortunately, Hong Kong investors cannot buy Guangming shares directly. But they can buy Shanghai Industrial, one of Guangming's biggest shareholders. Or, if they have a cousin over the border, they can buy Guangming A shares, which listed on the Shanghai market in August 2002.

Jake van der Kamp is on holiday



Mongolian Bull could be a rough ride