Sunshine Insurance Group, one of the country’s leading insurers, had denied speculation it is planning a takeover of Inner Mongolia Yili Industrial, China’s largest dairy firm, after increasing its stake in the business. Trading in Yili Industrial was halted on Monday after the insurer increased its holding to become the third largest shareholder, fuelling concern of a potential hostile takeover bid, and drawing parallels to the China Vanke saga. Sunshine Insurance, through its property insurance unit, bought 5.67 million shares or an additional 0.99 per cent stake, according to a company filing to the Shanghai Stock Exchange on Sunday. With a combined 5 per cent holding in the company, the Beijing-based private insurer is now Yili Industrial’s third largest shareholder after controlling shareholder state-owned Hohhot Investment, which owns 8.8 per cent of the stake, and Hong Kong Securities Clearing, which controls 6.22 per cent, Wind data shows. Coming on the heels of the landmark takeover battle for the country’s biggest homebuilder Vanke, the announcement triggered further speculation of the start of a similar corporate tussle which could rock the country’s largest milk producer. Sunshine insisted in its filing the stake purchase was a “financial investment” intended to help the firm’s “future business development”. “We are not seeking to become Yili’s largest shareholder ... and Sunshine Insurance ’s property and life insurance arms, who currently hold Yili’s shares, are not going to accumulate the company’s holding over the coming 12 months,” Sunshine added in the statement on the Shanghai bourse. Analysts were not convinced, however. I can smell signs of a hostile takeover as Yili has a very fragmented shareholding structure with a low valuation and a steady trajectory of profit growth, which make it vulnerable to a hostile bid Shen Meng, executive director, Chanson Capital Vanke has been engaged in the country’s highest profile corporate ownership battle against Baoneng Group, a Shenzhen-based property-to-finance conglomerate, since late 2015. A quarter of its stake in Vanke is held by Foresea Life, a little-known insurance unit of Baoneng. “I can smell signs of a hostile takeover as Yili has a very fragmented shareholding structure with a low valuation and a steady trajectory of profit growth, which make it vulnerable to a hostile bid,” said Beijing-based Shen Meng, executive director of Chanson Capital, a boutique investment bank. “A potential takeover attempt, in this case, could be driven by a significant undervaluation of Yili’s shares in the capital markets, which could prompt investors to step in to chase higher returns,” he said. Song Liang, an independent dairy analyst, added that it was “still hard to say what Sunshine Insurance will do next, given that there is no clear legal bounding over its ‘12-month’ guarantee”. “Yili should be discussing with its controlling shareholder right now to sort out the issue.” Yili suspended its trading in Shanghai on Monday morning, citing a “possible material asset restructuring or private placement of shares”. Shen reckoned Yili might not be able to work out an effective solution anytime soon during the trading suspension period. “It remains unclear whether its state-owned controlling shareholder has enough cash at hand to boost its holding in response to the move, while a private placement of shares will only dilute Sunshine’s shares but cannot prop up its stock price.” Sunshine first surfaced as Yili’s fifth largest shareholder in the company’s annual report for the financial year 2015, listed as having a combined stake of 1.83 per cent, while its holding stood unchanged by the end of June 30 this year. Song said he considers Yili the most profitable dairy firm in China, adding the company had recently received a lot of “Buy” ratings from analysts, “therefore Sunshine may be obsessed with short-term returns it may yield”. To fend off any possible takeover by Sunshine, Shen suggested Yili might consider seeking M&A opportunities to lift its share price, which will make additional share purchases costlier. Reacting to the stake purchase, Pin An Securities analysts, led by Wen Xian, wrote in a note on Monday that the company’s valuation may begin to rise gradually, and predicted its price to double over the coming three years.