Mengniu in 1.6b yuan venture with Danone

Milk producer to sell yogurt products with French dairy giant

China Mengniu Dairy, the mainland's largest milk producer, is forming joint ventures with Paris-based Groupe Danone, the world's biggest yogurt maker, to sell yogurt products in China.

Total investment for the three ventures would be about 1.6 billion yuan, Mengniu said yesterday.

Hong Kong-listed Mengniu said it would hold 51 per cent of the ventures and Danone 49 per cent. Mengniu said it would finance the deals from internal resources.

Pierre Couderc, the president of Danone for the Asia-Pacific region, said Mengniu had a nationwide distribution and sales network.

Mengniu posted a better than expected 39 per cent jump in first-half net profit to 343.43 million yuan, as increased sales, especially of higher-margin products, more than compensated for rising raw material costs.

Sales rose 58.7 per cent to 7.55 billion yuan in the six months to June. About 6 per cent of total sales came from yogurt.

Shares of Mengniu, which were suspended yesterday and will resume trading today, have risen 168 per cent this year to HK$17.70.

Mengniu's share in the mainland milk market by volume, excluding milk beverages and yogurt, rose 3.1 percentage points to 31.7 per cent over the six months to June, according to an ACNielsen survey.

Demand for dairy products in China is expected to grow 12.8 per cent a year to 40 million tonnes by 2010, according to Netherlands-based Rabobank.

China's demand for dairy products has more than doubled during the past five years to 25 million tonnes last year, spurred by rising income, higher health awareness and expanding retail chains.

Analysts said Mengniu faced fierce competition and rising raw material prices were putting pressure on production costs. The company vies with Inner Mongolia Yili Industrial Group and Bright Dairy and Food in an US$8 billion Chinese industry dogged by price wars.

Competition was set to intensify with Shanghai-listed Inner Mongolia Yili planning to raise about US$200 million from a secondary listing in Hong Kong next year to fund expansion, market sources said. The expansion would be mainly in western and central China, including Xinjiang and Sichuan provinces.

Foreign milk-product makers also want a share of the China market.

'Danone has a very aggressive China strategy,' Bloomberg quoted Wu Rui, an analyst at Nomura Securities, as saying.

The partnership, while good for Mengniu, might hurt Danone's relationship with its Chinese partner of 15 years, Bright Dairy, the analyst said.

In April, Danone agreed to pay 358 million yuan to increase its stake in Shanghai-based Bright Dairy to 20.01 per cent from 11.55 per cent.

Bright Dairy was China's fourth-biggest dairy producer by sales last year.