Capital injection in Mengniu will boost production growth

Updated: 2009-07-08 07:17

By Joey Kwok(HK Edition)

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HONG KONG: The share sale by China Mengniu Dairy to China National Oils, Foodstuffs and Cereals Corp (COFCO) and Hopu Investment Management will provide strong capital support to the dairy company's future development, analysts said.

COFCO, the largest food importer and exporter on the mainland, and Hopu, a private equity fund, said on Monday that they will spend HK$6.12 billion to buy a 20 percent stake from Mengniu and its existing shareholders.

COFCO and Hopu will become the biggest stakeholders in the top mainland dairy company.

Mengniu, the largest liquid milk producer on the mainland, said in a statement that it would raise HK$3.058 billion from the share sale, which will be sold at HK$17.60 per share to a special purpose vehicle (SPV).

COFCO will hold 70 percent in the SPV, while Hopu will own 30 percent, Mengniu said.

Analysts expect the addition of COFCO and Hopu will bring benefits to Mengniu's business development, while scaling down the impact of the tainted milk scandal last year.

"Mengniu can stand to benefit from COFCO's domestic and overseas network in the agro-products and food sectors," Credit Suisse analyst Catherine Lim wrote in a note yesterday.

Lim said the added financial support, new partners in place and potential merger and acquisition deals support a stronger sales outlook ahead. Credit Suisse also raised Mengniu's target price to HK$19.60 from HK$9.10.

After being hit by the melamine-tainted milk scandal, earnings of the dairy company plunged into the red with a 948.6 million yuan net loss in 2008.

Marco Mak, head of research at Taifook Securities, said the share sale will ease the capital pressure of Mengniu.

"Mengniu has been focusing on strengthening its milk quality, after the tainted milk scandal last year," Mak said. "The new fund can support the company to buy ranches, as to better control its milk sources."

Mengniu's vice-president and chief executive Yang Wenjun said in June that the company's sales in the first five months of this year have bounced back to the 80 percent level of sales before the tainted milk incident in September 2008.

Sun Hung Kai Financial Group strategist Castor Pang believes that Mengniu's sales may gradually improve in the second half of the year.

"However, another important factor is to see whether the competition among mainland dairy companies still remains tense," Pang said. "The market share of Mengniu on the mainland will affect the future movement of its shares price."

Shares in Mengniu resumed trading in Hong Kong yesterday, rising 1.15 percent or HK$0.22 to close at HK$19.32.

(HK Edition 07/08/2009 page4)