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1 CCM Newsletter Dairy Products China NewsDecember 2011

Guaranteed Exclusive AnalysisVol. 4 Issue 12, 2011

Welcome to the December issue of Dairy Products China News.

This month we report on the latest data from CEMAC which assesses the state of China’s dairy industry as “cool”. This verdict seems to reflect wider recent evidence of China’s economic slowdown: GDP in Q3 grew by 9.1% “only”, the slowest rate of expansion in two years. Manufacturing output has contracted sharply and the government has done a policy U-turn by reducing banks’ reserve requirements.

Some multinationals are having a hard time – noting the Danone and Nestlé production curbs currently reported. Some of the key local players are also confronting some serious challenges of their own – not least Beingmate, as it seeks to convince on its future after the recent scandal which has surrounded it. Bright is pushing into premium formula but will it make a greater impact than Mengniu and Wahaha? Supply chain issues remain huge.

Nevertheless, we also show more evidence this month of how the leading Chinese dairy companies are continuing both to expand and to become more sophisticated in their product development activities. At the same time their marketing is becoming increasingly inventive. No doubt we can expect more of this in the future as China’s companies and government develop more focus around “soft skills” and “soft power”. With this in mind CCTV is now reportedly setting up offices in New York and Kenya, with bases planned for Europe, Latin America and the Middle East, increasing its overseas staff tenfold in a 5 year period. As China’s leading dairy players internationalise the country’s growing international “infrastructure” of this sort will no doubt play a helpful role.

Richard Field [email protected]

CCM International Limited17th Floor, Huihua Commercial & Trade Building,No.80 Xianlie Zhong Road, Guangzhou, 510070, P.R.China Tel: :+86-20-3761 6606Fax: +86 20 3761 6968E-mail: [email protected]

UK Head OfficeOrrani Consulting12 Lower Camden PlaceBath, BA1 5JJ, United KingdomTel: +44 (0) 1225 318 222Fax: +44 (0) 1225 430240

Publishers

Contents

◗ Headlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2◗ Market Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Dairy Industry Recovery Status in Q3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3◗ Governmental Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Government Strengthens Supervision of Infant Formula Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Changing Regulations on Functional Foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 New Design Code for Dairy Production Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5◗ Company Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Yili Adjusts Its Fund Raising Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Mengniu’s Potential Expansion in Yunnan? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Beijing Sanyuan Quickens Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Beingmate Raises Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Jiabao Milk to Expand in Yoghurt Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Junlebao Dairy’s Relocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10◗ Raw Milk Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Kedi Dairy to Launch New Dairy Farm Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Rapid Development of Milk Supply in Southern China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12◗ New Products, Technology & Packaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Yangguang Ruye Launches New Children’s Milk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Bright Dairy Introduces Super Premium Infant Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14


Headlines

Major Companies and Sites Mentioned in This Issue

◗ CEMAC issues a report demonstrating the recovery of China’s dairy industry during Q3

◗ The MOH issues a draft revised regulation on breastmilk substitutes, designed to replace the system in place since 1995

◗ Via the SFDA, the Chinese government increases its focus on regulating the country’s chaotic functional foods market, with measures expected to have a significant impact on the food industry

◗ On 24 November, the first draft of the Design Code for Dairy Product Plants is submitted to the Central Government for approval

◗ In mid November, Yili adjusts its approach by making its capital raising plan less ambitious in light of the market conditions

◗ On 2 November, Mengniu holds talks with Yunnan Province’s government, suggesting that the company intends to expand its capacity locally

◗ Beijing Sanyuan has been very active in recent months, developing its plans for involvement in the higher margin beverages market via the Taizinai purchase

◗ On 8 November, Beingmate announces a capital injection in its infant formula expansion project in Heilongjiang

◗ In late October, Jiabao Milk announces that it will build a new yoghurt factory in 2012

◗ On 11 November, Junlebao Dairy relocates its headquarters to Yongsheng Dairy, the group’s main yoghurt plant, suggesting that the company plans to intensify its focus on the yoghurt sector

◗ In early November, the new dairy farm project of Kedi Dairy is confirmed at the Henan Development & Reform Commission

◗ In November, a number of large-scale enterprises launch dairy farm projects, demonstrating the increasing competition in the raw milk market in southern China

◗ On 27 October, Yangguang Ruye launches a children’s milk – Guka – with marketing based on a popular cartoon character

◗ At a launch conference on 13 December, Bright Dairy confirms its move into the premium infant formula segment with product from Synlait Milk


A recent report jointly issued by the China Economic Monitoring and Analysis Centre (CEMAC, a subsidiary of the National Bureau of Statistics of China/NBSC) and the Economic Daily (a leading local newspaper) has documented the ongoing recovery of China’s dairy industry in Q3.

The report shows that the “Prosperity Index”, which is calculated from a variety of economic data on the domestic dairy industry’s performance, stood at 98.7 in Q3, up 0.3 over Q2. This index is compared with its standing of “100” in the base year of 2005 —when all the indexes were in the green zone (meaning that they were stable). The index has risen in each successive quarter this year.

CEMAC also has a specific “Warning Index”. This is based on 10 key sector economic indicators and represents the economic status of the dairy industry over 5 levels, being scored as follows: <60 = blue light zone (cold); 60-80 = light blue zone (cool); 80-120 = green zone (stable); 120-140 = yellow caution zone (hot); 140+ = red light zone (too hot). This index stood at 100 in Q3, up 3.3 over Q2, indicating the industry’s stable status.

However, not all the dairy industry’s indexes are in the green zone: its indexes for total profit (operating profit + others), ex-factory price and stocks are in the yellow caution zone, while for the output of dairy products, sales revenue and receivable accounts, the indexes are in the light blue zone.

It’s worth noting that the output of domestic dairy products has reached 6.437 million tonnes in Q3, up 17.3% over Q3 2010, whilst the domestic dairy industry achieved revenues of USD9.44 billion (RMB59.95 billion) in Q3, up 22.3% over Q3 2010. Such data would suggest that levels of output and sales are not “cool”, and in fact developed well in Q3.

However, the industry’s total profit of USD0.49 billion (RMB3.11 billion) in Q3 was up 16.7% over Q3 2010. This is positive but nevertheless rather muted compared with the figure of 76.2% for the growth rate in Q2. Moreover, CEMAC revealed that the average profit margin of the industry was only 5.2% in Q3, down 0.9% over Q2 and 0.7% lower than the average profit margin measured across all industries in Q3. On this basis, the profit index does seem “cool”.

Government policy (a “stochastic” factor, in the report’s terminology) is the main driver for the development of the dairy industry in Q3 according to CEMAC: notably the production license reapplication process, which had eliminated about 45% of dairy processors by March. The positive impact of the policies is judged to have added 172,000 tonnes to the dairy industry’s output in Q3 against what it would otherwise have been, and further output growth is anticipated in Q4. This in turn added USD152.68 million (RMB970 million) to sales over and above what would otherwise have been achieved. Undoubtedly, pricing also played an

important role – the average ex-factory price of dairy products in Q3 was 5.5% higher than in Q3 2010, and on a par with Q2, helping processors tackle the pressure from the increasing production costs – a key threat to the development of the industry in 2011.

Unfortunately, though unsurprisingly, dairy exports still remain at a low level. Although positive growth was seen in Q3, with dairy export sales of USD25.70 million (RMB163.26 million), up 15.4% over Q3 2010, this growth rate was much lower than the increase of 45% seen in Q2 (vs Q2 2010). This appears rather slow, especially compared with the booming dairy imports, of course. As this picture won’t change in the near future, it is fortunate that the local market provides the opportunity for domestic dairy processors to improve and promote the quality of their products and build their brands, albeit in the face of increasing completion from multinational dairy processors.

CEMAC believes that demand for dairy products in China will keep increasing in Q4 and 2012, and has suggested that the industry should focus on 4 areas: accelerating the construction of dairy farms, implementing policies to standardise the industry’s activities, strengthening the construction of the Enterprise Trust System, and better exploiting and developing the market through improved quality, building stronger brands, diversifying product mix, developing niche segments, etc.

Market DynamicsDairy Industry Recovery Status in Q3

Source: China Economic Monitoring and Analysis Centre

FIGURE 1: Chinese Dairy Industry’s Financial Performance, 2010 - Q3 2011


On 2 November the Ministry of Health (MOH) issued a draft version of its proposed Administrative Regulation of Breastmilk Substitutes (ARBS), in order to solicit opinions from the public: a period for receiving comment lasted for 33 days and closed on 4 December.

As a WHO member, China has committed to adhere to the International Code of Marketing of Breastmilk Substitutes (ICMBS) launched in 1981. In 1995, China launched its own regulation, the Administration of Sales of Breastmilk Substitutes (ASBS), in an effort to control practices in respect of marketing, not only for infant formula but also for baby foods and babycare products.

Compared with ASBS, the definition of breastmilk substitutes in ARBS is different: it focuses on food only, and includes dairy beverages or foods sold for babies aged up to 6 months. The requirements contained in the new regulation are stricter and have wider coverage: for example, the ASBS prohibits processors and sellers from promoting any breastmilk substitutes by supplying free instrumentation to health care institutions; it also prohibits the sending of product samples or discount price promotions. Conversely ARBS prohibits promotion by price cuts, sending gifts or samples, product exhibition and providing any promotional materials etc.; moreover, suppliers must not contact pregnant women, mothers or other family members in any way, including telephone, SMS, letter, e-mail, door-to-door selling, etc.

The new regulation also sets other requirements for health care institutions, industry associations, media and regional governments: for example, health care institutions cannot participate in any sales promotions for breastmilk substitutes, nor disclose any relevant information to suppliers. Meanwhile industry associations, media and regional governments are required to highlight the importance of breast feeding.

Despite the clear government encouragement of breast feeding embodied in the launch of this new regulation, many suppliers are known to have been promoting their stage 1 infant formula illegally in supermarkets and hospitals, a practice which was censured in 2 reports released by the Beijing Consumers Association in late December 2009 and Beijing Answer Marketing Consulting Ltd. in August 2010 respectively (please see Dairy Products China News Vol.3 February issue, p7 & October issue, p4). These reports suggested to the surprise of few – that the ASBS, despite (or perhaps because of) having been in place for 16 years – has been widely flouted. The new regulation is the follow-up to the government’s announcement that it intended to amend the ASBS early in 2008.

At present, both domestic and multinational infant formula processors have been taking positive and supportive attitudes: a source at one local processor took the view that multinational processors monopolise the marketing channels in the hospital, and that the new regulation can go some way to ensure fairer competition. Alternatively Wyeth sought the higher ground, commenting that because it has obeyed the ASBS in any case, the new regulation, whilst viewed positively, will have little impact on its operations.

However, there remain some defects in the new regulation, which may affect its effective implementation: for example, suppliers or health care institutes found to be in breach of the regulations face fines of only USD157-4,720 (RMB1,000-30,000) as punishment: this is at a similar level to the penalties in the ASBS, and many trade sources believe that such punishments are too light to achieve the required result.

Besides, many processors sell their stage 1 infant formula online, and the new regulation is geared to retailing and so fails to address this situation. A source from the Beijing Municipal Commission of Commerce indicates that it will make strong “requests” of the suppliers – in a similar way to how formula sales to supermarkets are handled.

Governmental DirectionGovernment Strengthens Supervision of Infant Formula Marketing

Changing Regulations on Functional FoodsAlong with the rapid development of China’s economy, the local functional food market has also grown strongly. This has now attracted the attention of the government as it seeks to standardise the industry and market better in a move which will have a significant impact on the industry.

The government has been particularly active in respect of such matters recently: on 3 November the State Food and Drug Administration (SFDA) established a Safety Expert Committee of Functional Foods & Cosmetics, and then on 6 November it was reported that the State Council had issued an announcement requiring regional governments to strengthen their daily supervision of the quality, labeling and advertising of functional foods, and speeding up the drafting of the supporting detailed regulations for functional foods. Its quite harshly-toned statement also warns that the government should

(though not yet “will”) establish a black list for those processors found to be providing false information in their applications for licenses as functional foods producers.

The two moves indicate that the government is now paying increasing attention to the country’s functional food industry. In fact it issued a draft version of the Supervision and Management Regulation of Functional Foods (SMRFF) early in May 2009. This is the key detailed regulation for functional foods, in accordance with the Food Safety Law and echoing many opinions from the industry – the formal version hasn’t been launched yet, though this new spurt of activity implies in the eyes of some sources that it may yet be launched before the end of 2011.

Earlier this year, on 1 August, the SFDA also issued a draft version of the Adjustment Programme of the Functional Scope of Functional


Foods, according to which, the types of recognised foods will be reduced to 18 from the 27 which have been in place for some time. The main principle of the Programme is that processors should conduct product tests on humans wherever possible in order to substantiate the claims advanced and to guarantee quality; if not, they have to provide abundant documentary evidence, scientific literature etc concerning their products.

Our previous projects in this area confirm that China’s functional food market is large and growing but highly confused, not least in definitional terms. There is no accurate data about market size, although according to Mr. Zhang, General Secretary from Guangdong Health Care Industry Association, the output value of the industry reached about USD15.75 billion (RMB100 billion) in 2010, with about 50% of total production capacity located in Guangdong. Some other data sources are even more optimistic, estimating sales of functional foods at USD31.5 billion (RMB200 billion) in 2010, with an annual growth rate of 15%+, and seeing potential for a market of USD157.5 billion (RMB1,000 billion) in the future!

The confusion in the market is the key reason why the related regulations, especially the SMRFF, have not been formally launched until now: a particularly chaotic area is functional food advertising, with many suppliers advertising their products incorrectly or even illegally – problems include exaggerating products’ functions, concocting new functions which the product doesn’t really have, expanding the scope of products’ claimed target audience or even misleading consumers into believing that their products can function as drugs, etc. As a result all such advertising content must now be approved by the provincial offices of the SDFA!

The impact will be widespread in this fragmented sector: there were reportedly about 1,600 functional food processors in China by 2010, amongst which those with a total investment value of USD15.75 million (RMB100 million) accounted for just 1.5% of the total. This compared with the figures of 41.4% and 12.5% for those processors with total investment value of USD15,750-157,500 (RMB100,000-1mn) and <USD15,750 (RMB100,000) respectively. Such data

suggests that most functional food processors are in small scale, and that many of them will be eliminated by the government’s stricter supervision.

On the other hand, the medium- and large-scale players in the market will benefit from the situation: for example, many investment houses are positive on the prospects for Guangdong By-health Biotechnology Co., Ltd. (By-health Biotechnology), the largest manufacturer in China’s dietary supplement (DS) market. Its flagship range of soy/dairy protein powders made up 6.2% of the company’s total revenues in 2010. The company listed successfully on the Growth Enterprise Market (GEM) of the Shenzhen Stock Exchange (SZSE) in December 2010 (please see Dairy Products China News Vol.4 January issue, p10). It has certainly performed excellently over the last 2 years: in Q1-Q3 it realised sales of USD75.09 million (RMB476.74 million) and a net profit of USD23.27 million (RMB147.74 million), up 90.2% and 103.2% respectively over the same period of 2010. Its future prospects appear very good.

Protein powders are strongly geared to “gifting” sales but are substantially under-marketed in China. The concentration of the sector may provide an opportunity for this to change due to the efforts of the majors such as By-health Biotechnology and Amway. However, as few Chinese consumers know exactly what protein powder is, the government will control the advertisement of functional food products strictly, based on the new announcement from the State Council, surely exerting a positive long term impact in the process.

Meanwhile, the government’s stricter supervision will also influence mainstream dairy processors: many of these apply for accreditation as functional foods on behalf for their products. This is especially the case for yoghurts, where functions such as regulating gastrointestinal function and improving digestion can prove eye-catching for consumers. How this will play out is interesting: it has been notable that often processors are liable to drop marketing communications strategies based on functionality once they have established themselves in the market successfully, so as to maximise their potential customer base.

On 24 November, China Light Industry (Wuhan) Design Co., Ltd. (China Design) revealed that the first draft of the Design Code for Dairy Production Plants (DCDPP) has been submitted to Ministry of Housing and Urban-Rural Development (MHURD). (At first sight this seems an odd department to get involved in such matters: it’s a relatively new central ministry established in 2008 and mainly responsible for construction works, and for formulating national standards on construction project. It originally authorized China Design to formulate the standard in 2008). If the draft receives official approval, it will be launched soon. At that time, all dairy plants will need to reapply for their licenses.

New Design Code for Dairy Production PlantsChina Design explains that the DCDPP project was initiated early in August 2008, with the draft being completed in June this year. It has been submitted to the Central Government and is in the phase of expert evaluation. The government may issue the draft version to solicit opinions from the public and the industry at first, and then issue the formal version.

Compared with the original code for dairy plants, the new version is stricter: China launched its first version of a DCDPP in September 1992, setting detailed requirements for the construction of dairy product plants and even milk collection stations. However, it was simply an industry

standard without being mandatory, and the 2008 melamine scandal proved that the original version didn’t work very well.

In a subsequent move much later, on 26 March 2010, the government launched 2 National Food Safety Standards of Good Manufacturing Practice for Milk Products and for Powdered Formulae for Infants and Young Children respectively. However although both were implemented on 1 December 2010, the requirements in these standards are approximate and achieved little in practice.

By contrast, the requirements in the new DCDPP are detailed, covering the overall layout, air conditioning, drainage system,


production environment and workers’ changing rooms etc. For example, the new version sets some specific requirements for infant formula plants: workers must wash their hands and change their work overalls twice to minimise the risk of pollutants entering the plants, once on entering the plant and then again before entering their designated work area. It requires that all the intersection angles amongst the walls or windows should be round, and window sills should be bevelled to 450, to make washing and disinfection as easy as possible. The new version is reported to be as strict as GMP for pharmaceutical companies, and in some cases even as strict as the standards for bio-pharmaceutical companies.

As the new version will be a national standard, if it passes the approval of the Central Government, all the dairy plants need to meet it, and adherence to it will be central to the granting of production licenses in the future. Like the earlier measures this year, this may raise and normalize standards across the industry. However, such requirements may increase production costs for dairy processors as well, similarly to the impact of the production license reapplication – a key factor causing dairy processors such as Bright Dairy and Yili to raise funds this year (please see the following article in this issue, Yili Adjusts Its Fund Raising Plan).

The implications for medium- and small-scale dairy processors may be grim, suggesting that some may face a similar fate to Beixue Dairy, which has encountered financial problems and been forced to sell one of its plants (please see Dairy Products Vol.4 October issue, p11). Yet again this change should benefit the majors and provide them with another opportunity for exapansion. Moreover stricter standards should play some role in helping to restore the battered consumer confidence over locally-produced dairy products, with a positive effect upon the wider market as a result.

Company DevelopmentsYili Adjusts Its Fund Raising PlanBack in late May Yili announced a plan to issue up to 218 million shares and raise up to USD1.076 billion (RMB7 billion) capital for its further development (please see Dairy Products China News, Vol.4, June issue, p12). However, the scale of such a fund-raising exercise and the relatively volatile environment of China’s stock market – especially regarding stocks of dairy processors – has pushed Yili to adjust its plan.

The company’s new announcement explains that the capital target is being reduced to up to USD0.78 billion (RMB5 billion), with the issue to involve up to 310 million additional shares. The investment planned for various dairy projects is being adjusted in accordance with the target sum.

Evidently, the new level of funds targeted has decreased by USD0.3 billion (RMB2 billion). Yili declared that the adjustment for is in accordance with the current situation of its dairy projects – most of these have gone well, and the company has the cash reserves to fund most of its current needs. According to its financial report issued in Q3, the company achieved sales of USD4.7 billion (RMB30.6 billion) in H1, and has USD846 million (RMB5,372 million) in its cash account, up 37% compared with December 2010.

It is noteworthy that the investment in yoghurt plants is to be cut by USD148 million (RMB940 million), while the company is increasing to USD81 million (RMB520 million) for its frozen drinks/ice cream projects, suggesting its confidence in that product category. Certainly its frozen drinks/ice cream business has been doing well, with sales of USD414 million (RMB 2,632 million) in H1, which is up 29.89% year on year: this now accounts for 30.1% of Yili’s total sales. The company has taken many actions to boost this side of its business recently – for example, enrolling as a member of the International Ice Cream Association in early November, making it the only Chinese processor to do so to date.

TABLE 1: Yili’s Revised Expansion Plan, November 2011

Projects Projects investment (Million USD)

Project locations Expected sales (Million USD)

Liquid milk 241 Hebei, Shandong, Ningxia, Gansu, Guangdong, etc. 840

Milk powder/formula 86 Heilongjiang 406

Frozen drinks/ice cream 90 Zhejiang, Shaanxi, etc. 142

Yoghurt 73 Jiangsu, Guangdong 197

Dairy farm 175 Inner Mongolia, Heilongjiang, Anhui, Hubei and Jiangsu, etc. 155

Cashflow 120 / /

Total 785 / 1,740Source: Yili


By contrast, Yili is relatively inactive in the yoghurt market, unlike its main rival Mengniu, so possibly it sees its key opportunities frozen drink/ice cream, as well as in UHT milk and formula powder.

The investment in the dairy farm project is almost the same as before, but the location will be changed from Jiangsu to Heilongjiang, possibly viewing this stronger dairying region as a better long term milk supply base. Yet in putting the focus back on Heilongjiang the company faces intense competition from rivals such as Nestlé, Wondersun Dairy and Mengniu, etc., as they also seek expansion there. The latest news is that Beingmate is accelerating its infant formula expansion in Heilongjiang (please see the following article in this issue, Beingmate Invests Capital for Infant formula).

Yili’s move, as well as Bright Dairy’s fund-raising in October (please see Dairy Products China News, Vol.4, October issue, p9), demonstrates how cash-intensive expansion in the industry is, with issuing additional shares a good option for the listed companies. The announcement of the change led to Yili’s closing stock price falling to USD3.47 (RMB22.01) on 17 November, down 5.3% against the level on 14 November. However, the price rebounded to USD3.62 (RMB22.96) on 25 November. Some investment analysts are attributing these fluctuations to rumours that Beingmate is planning to purchase dairy farms overseas. Nevertheless, it seems quite possible that the stocks of dairy companies will decrease again in the future, which would certainly impact Yili’s plan.

Mengniu’s Potential Expansion in Yunnan?On 2 November, the CEO of Mengniu, Mr Yang,is reported to have discussed the company’s investment in a dairy project in Qujing City with Yunnan Province’s government, indicating that it intends to expand its capacity locally.

The new project will be a dairy complex with a total investment of USD251 million (RMB1,600 million), and will include 4 farms (6,000 cows in all) and a plant to produce milk beverages, yoghurt, and ice cream with capacities of 700t/d, 400t/d and 300t/d respectively. Mengniu expects to realize annual sales of USD408 million (RMB2,600 million) after the plant achieves its designed capacity. At present, this project is still in negotiation and the exact production location has not been determined yet, but the intention is for a site in Qujing City.

The great potential of the local region as a dairy market and the province’s geographic location are likely to be the 2 key factors which attracted Mengniu to Yunnan. China’s main dairy consumption regions are principally located in the eastern coastal area, and the level of consumption in Yunnan is relatively small, but it’s obvious that the potential is significant. Mengniu rationalizes that Qujing has about 1 million people, so if 10% of these consume 200g liquid milk per day, the resulting consumption will be 200,000 kg per day – yet local supply is only 2,000 kg per day currently. The market opportunity is all the more interesting when it is considered that many other cities in Yunnan are in a similar situation to Qujing.

The province’s rather strategic location will also allow local dairy processors to sell into the neighboring provinces, especially Sichuan and Chongqing – the 2 main consumption regions in Southwest China – as well as enabling exports to Southeast Asia. Such moves are supported by the government: for example, the State Council released a policy in May, aiming to accelerate Yunnan’s economic development through preferential policies, infrastructure construction projects etc.

Yunnan’s buffalo milk supply could also provide a good opportunity for Mengniu: it is an important buffalo milk production province, ranking 2nd and only surpassed by Guangxi, and is home to 12% of the national buffalo herd. According to the 12th 5-Year Development Plan for the Livestock Industry issued in September, the government will strengthen support for the development of buffalo milk in southern China. This implies that both the Central Government and regional governments will provide many preferential policies for this aim, another area of opportunity for Mengniu (please see Dairy Product China News Vol.4 November issue, p11).

Mengniu is far from being the only dairy processor which seeks expansion in Yunnan: a good example is New Hope Dairy Co., Ltd. which took over Kunming Haizi Dairy Co., Ltd., and has quickened its expansion in Yunnan through acquiring local dairy companies. Another is Guangxi Royal Dairy Co., Ltd. which acquired a 55% stake in Yunnan Dali Laisier Dairy Co., Ltd. in June (please see Dairy Products China News, Vol.2, March issue, p8 & Vol.4, July issue, p10). New Hope Dairy’s good performance and other dairy processors’ moves in the province raise the bar for other large-scale dairy enterprises and have doubtless been a catalyst for Mengniu’s action.

Expanding raw milk supply in Yunnan is on Mengniu’s agenda. The company has previously declared that it will increase its investment in dairy farm construction to about USD520 million (RMB3,300 million) over the coming 5 years; it has invested USD109 million (RMB700 million) in H1 on farms, almost 80% of the USD141 million (RMB900 million) allocated for this purpose in 2011, according to the company’s financial report for H1. This puts Mengniu in a strong position: most other dairy processors lack such strong milk supply arrangements, and only 40% of the large-scale dairy processors have met the government requirements to be able to source 70% of their milk supplies from their own farms or through contracted large-scale suppliers by October, according to China’s Dairy Industry Association.


Beijing Sanyuan Foods Co., Ltd. (Beijing Sanyuan) has been very active recently, establishing new subsidiary companies to expand in the beverage market and finishing the acquisition of Hunan Taizinai Group (Taizinai Group) as it seeks to expand its business nationwide.

On 28 October it established 2 subsidiaries – a beverage production company and a beverage marketing company. This was effected in cooperation with partners which included BVI Co., Ltd. (a Taiwanese food company, with business mainly covering Taiwan, Guangdong and Fujian, etc.) and Yanjing Beer (Group) Co., Ltd. (a leading brewing group in China). Beijing Sanyuan will invest as follows:

• About USD15.73 million (RMB100million) in the new production company for a 30% interest (51% for BVI): it will produce beverages under the brands of Sanyuan, BVI and other co-brands

• About USD0.472 million (RMB3million) for a 30% stake in the new marketing company, compared with the figures of 28% and 10% for BVI and Yanjing Beer respectively

Later, on 9 November, Beijing Sanyuan and Macrolink Group (a private company established in 1990) together signed contracts with Taizinai Group in Beijing. According to the new announcement:

• Beijing Sanyuan and MacrolinkGroup will establish a new consortium to invest about USD58.99 million (RMB375 million) to acquire 100% of the shares of Hunan Taizinai (Group) Biotechnology Co., Ltd. (Hunan Taizinai; Beijing Sanyuan 60%, Macrolink Group 40%)

• Zhuzhou Runkun TechnologyDevelopment Co., Ltd. (Runkun Technology, a new wholly-owned subsidiary company of Macrolink Group set up for this acquisition) will invest USD53.48 million (RMB340 million) to acquire 100% of Zhuzhou Taizinai (Group) Biotechnology Co., Ltd. (Zhuzhou Taizinai) and 100% of Hunan Taizinai Group Supply & Marketing Co., Ltd. (Taizinai Supply & Marketing)

The contracts’ completion suggests that Beijing Sanyuan has finished the acquisition of Taizinai Group which was first announced in late August (please see Dairy Products China News Vol.4 October issue, p8). Beijing Sanyuan has committed that the headquarters will be located in Zhuzhou in the future, and that the business will still hire the original employees of Taizinai Group under the same conditions of their original posts (an important stipulation of the local government required for this acquisition to proceed).

This venture is driven above all by a quest for higher profitability. Higher production costs and the integration of Sanlu Group’s assets have meant that Beijing Sanyuan’s gross margin is not very high – only 21.2% in Q1-Q3. By contrast, the gross margins which can be achieved in beverages are higher. For instance, Huiyuan Juice – a leading local beverage producer – has performed poorly since ending the cooperation relationship with Coca-Cola, seeing its gross margin fall to 26.1% in H1 from 36.8% in H1 2010, but both are higher than the level being reached by Beijing Sanyuan (let alone the 60.8% achieve worldwide by Coca-Cola in Q2). Partnering with beverage

companies is no doubt intended to let some of this higher profitability rub off on Beijing Sanyuan.

Such cooperation should also help Beijing Sanyuan to roll out its business nationwide sooner than might otherwise be possible. Its business currently still mainly focuses on northern China, whereas its partners are focused especially on southern China, and doubtless looking to grow in the north around Beijing – a win-win deal, it is hoped.

What could possibly go wrong? Beijing Sanyuan may be making headlines but it still faces quite a challenge in dealing with the new businesses, as even the Sanlu Group assets remain to be fully integrated. Competition in the beverage market is also extremely intense, making it difficult for a newcomer to expand business. The best example of this is PepsiCo Inc. (PepsiCo): on 4 November the company announced a strategic alliance with Tingyi, a leading Taiwanese beverage group: a key factor behind this is that PepsiCo appears to be losing out in China’s carbonated soft drink market in spite of the increasing market demand! According to Euromonitor, PepsiCo’s share in China’s soft drink market decreased to 5.4% in 2011 from 5.9% in 2009. Moreover CBL, PepsiCo’s subsidiary with 24 bottling plants in China, made a loss of USD175.6 million after tax in its 2010 financial year. Hence, for Beijing Sanyuan, it is essential to figure out ways to deal with the market unfamiliarity and the competition facing its new business, making successful cooperation with its beverage partners key.

Beijing Sanyuan Quickens Expansion

Beingmate Raises CapitalOn 8 November, Zhejiang Beingmate Scientific-Industrial-Trade Share Co., Ltd. (Beingmate) announced its capital injection for the expansion of Heilongjiang Beingmate Dairy Co., Ltd. (Heilongjiang Beingmate).

Beingmate successfully listed in April and raised about USD94 million (RMB598 million) for its development – the infant formula project in Heilongjiang is just one part of this (please see Dairy Products China News Vol.4 April issue, p11, Beingmate Positive After IPO). It is predicted that the new production line will be come into operation in April 2013 with a capacity of 50,000 t/yr. The firm is one of Beingmate’s wholly-owned subsidiaries: it was established in 2005 and produces infant formula, SMP & WMP and other dairy products, allowing the Hangzhou-headquartered company to take advantage of the better milk supply in Heilongjiang.

At present the company is beginning to invest funds in its Heilongjiang project, which will be divided into several phases. The capital spend on the first stage will be USD12.6 million (RMB80 million), meaning that its subsidiary’s registered capital will be


increased from USD15 million (RMB100 million) to USD23 million (RMB 143 million), with USD10.3 million (RMB65.7 million) directed to its capital reserves to aid the company’s expansion in infant formula. To date Beingmate hasn’t released any further information about the next phase.

The expansion in Heilongjiang Beingmate’s registered capital should both enhance the company’s strength and improve its credit level. In order to boost the development of the local economy, the local government typically provides various preferential policies for local large-scale enterprises; the increase of registered capital will help Beingmate obtain these preferential policies more easily. According to Beingmate’s financial report in Q3, Heilongjiang Beingmate obtained USD5.5 million (RMB34.8 million) as non-operating income in Q1–Q3, up 149.28% over the same period of 2010, mainly thanks to the supporting funds from the local government.

The expansion could help Beingmate solve its insufficient production capacity in infant formula, and expand sales as a result. Beingmate achieved sales of USD535 million (RMB3,398 million) and net profit of USD42 million (RMB270 million) over Q1-Q3, up 22.63% and 2.96% respectively over the same period in 2010. This rather plain performance is attributed by the company to its production bottleneck.

Beingmate’s move may help provide some good news for Beingmate’s investors in the wake of the repayment scandal. In late September, Beingmate was forced to repay about USD9.26 million (RMB58.93 million) as Enterprise Income Tax (EIT), because it had allegedly provided misleading information in its (at the time of application, successful) bid to achieve accreditation as a High Technology Enterprise (please see Dairy Products China News Vol.4 November issue, p9, Beingmate Embroiled in Scandal).

However, the situation for Beingmate is still not very optimistic. The company’s closing stock price increased to USD4.79 (RMB30.40) on 29 November, up 18.8% over 18 November. Yet this seems to have been stimulated by a rumor that Beingmate would purchase dairy farms overseas – so possibly constituting a temporary uplift only. The company’s opening stock price stood at RMB27.35 on 13 December, and its inflow of funds was RMB10.31 million against an outflow of RMB16.52 million by noon that day, suggesting the investors remained unconvinced by Beingmate. By contrast, the stock prices of dairy processors such as Mengniu, Yili and Royal Dairy were all still on an upward trend up to 13 December.

Jiabao Milk to Expand in Yoghurt MarketIn late October, Ji’nan Jiabao Milk Co., Ltd. (Jiabao Milk) announced that it will build a new factory in 2012 to strengthen its competitiveness in the yoghurt market.

The factory will be located in Jiabao Industrial Park, Ji’nan City, Shandong Province. The total investment is about USD18 million (RMB120 million), and the site is to have a total capacity of 600 t/d.

Jiabao Milk is a subsidiary of Shandong Jiabao Group – a key national agricultural group which focuses on dairy feed, food processing, bio-pharmaceutical and trading business etc. It is a well-known dairy company locally, and was established in 1998. Its products span pasteurised and UHT milks, yoghurt and milk beverages, all mainly sold in Shandong.

Both pasteurised milk and yoghurt are key target sectors for Jiabao Ruye (as the company styles itself, using the pinyin meaning “dairy”). Yoghurts account for around 50% of Jiabao Milk’s product range at present, with the company putting a lot of effort into launching different varieties. A recent example is the premium European style yoghurt – Ou Sai Zhuang Yuang – launched in early July, which has performed well in the market to date.

The yoghurt market continues to develop strongly. According to the data from the Dairy Association of China, based on statistics from 36 key cities around the country, the average consumption and purchase amount of yoghurt are 2.37kg and USD2.11 (RMB13.42) per person in H1, up 3% and 13.3% respectively compared with the same period in 2010. This specific data is a little higher than the fully national urban level: for example, the average consumption of yoghurt in the 36 cities was 5kg per person in 2009, compared with the figure of 3.88kg for the urban consumers nationwide. Undoubtedly, the rising price is key to the higher average purchase amount and it also indicates

how the category has been trading up, giving businesses such as Jiabao Milk the confidence to invest in expanded capacity.

Jiabao Dairy has to face the fierce competition from other players of course. Mengniu’s liquid milk/yoghurt division made sales of USD354 million (RMB2,252 million) in H1, up 73.9% compared with the total revenue of USD194 million (RMB1,295 million) in the whole of 2010, and yoghurt accounts for 13.8% of the HI figure. One of Mengniu’s expansion moves in yoghurt has been a new yoghurt factory in Shandong (please see Dairy Products China News, Vol.3, December issue, p6). Other processors active in Shandong include both Yili and Beijing Sanyuan (please see Dairy Products China News, Vol.2, March issue, p6),

Jiabao Milk is a much smaller player than Mengniu or Yili, but has performed well in Shandong. The Dairy Association of Shandong notes that local consumers have shown a preference for pasteurised milk and yoghurt over UHT milk since 2009, which provides an opportunity for it, as a local dairy processor with its stronger local distribution capabilities. It is also helped by its 3 farms with a total of 10,000+ cows in Ji’nan, providing a solid foundation for Jiabao Milk’s development in “low temperature” milk products.

The entry of so many processors into the yoghurt business has made competition fierce, especially in the low-end yoghurt segment. Industry sources indicate that the average gross margin of low end yoghurt is about 20-30%, and sometimes even at break-even point, due to the tight prices required (note: the typical price of low-end yoghurt is USD0.16 (RMB1) per 100g cup). By contrast, the gross margin on premium yoghurt can reach as high as 100%. This has meant increasing launches of premium yoghurt (such as traditional yoghurt) over the last 2 years, and a premium segment estimated to be growing annually at 30%, so this is likely to be Jiabao Dairy’s focus.


Junlebao Dairy’s RelocationOn 11 November, Mengniu’s subsidiary Shijiazhuang Junlebao Dairy Co., Ltd. (Junlebao Dairy) has established its new headquarters in Shijiazhuang Yongsheng Dairy Co., Ltd. (Yongsheng Dairy). This is one of its own subsidiaries which it established by with an investment of USD43 million (RMB350 million) in 2006. It is located in the Hebei Luquan Green Island Torch Development Zone – one of the 32 provincial level industrial zones in Hebei which were approved by the local government in late 2008.

The main product of Yongsheng Dairy is yoghurt. It has a total capacity of 360,000 t/yr and a daily milk processing capacity of 600 t/d, allowing Junlebao Dairy to declare it as the largest yoghurt plant in the country. It is estimated to generate USD340 million (RMB2,160 million) in revenues each year for Junlebao Dairy. The plant also produces some innovative products: it launched a new product named Laojuezhuangyuan in June 2010, which blends the flavours of yoghurt and cheese. Later on 2 July 2011, Jiabao Dairy launched a similar product named Ousaizhuangyuan, advertising the product as a traditional yoghurt. It is sold in 2 varieties: plain flavour and another combining a yoghurt/soft cheese layer and a fruit coulis layer (Modern Dairy has a similar product called Modern Farming).

The relocation appears to be a sign of the group’s determination to accelerate its business expansion, especially in yoghurt. Junlebao Dairy has maintained its leading role in China’s developing yoghurt market in recent years: according to AC Nielsen, Junlebao Dairy took 14.5% share in the local yoghurt market in 2008, and it still retains this today, with sales of around 600 t/d, placing it behind Mengniu, Yili and Bright Dairy. This has permitted the company to increase its turnover by at least 10% annually from 2004 to 2008; it rose to USD161 million (RMB1.26 billion) in 2009 and then made a major jump to USD240 million (RMB 1,590 million) in 2010. This jump came after it ended the relationship with Sanlu Group (with which it had been a partner) in 2009, whilst the aftermath of the melamine scandal actually proved good for its (unaffected) business, especially in Hebei and the neighbouring provinces, where it benefited from a strong distribution network and the rapid development of the yoghurt category. Moreover, the Yongsheng Dairy was launched in mid-2010, which also supported its sales. Junlebao Dairy is also well-known for its innovation – for instance milk beverages with added Chinese dates, which it launched first, later to be followed by many other companies. The company has been active with new product launches over the last 2 years, also helping its growth in 2010. This is expected to be continued, with budgeted sales of USD314.2 million (RMB2 billion) in 2011.

Junlebao Dairy’s development fits well with Mengniu’s development strategy (please see Dairy Products China News, Vol.4, November issue, p6): different from Yili’s concentrating on UHT milk, formula powder and frozen drinks/ice cream, Mengniu pays more attention to yoghurt, and its focus here could well be a key reason for Yili to decrease its investment in yoghurt (please see the preceding article in this issue, Yili Adjusts Its Fund Raising Plan).

Aided by the strong performance of Junlebao Dairy, Mengniu has also done well in its yoghurt business overall. It achieved sales of USD2.92 billion (RMB18.57 billion) in H1: of this UHT milk (its core business historically) contributed USD1.54 billion (RMB9.79 billion), but sales of yoghurt have grown fast to USD354.64 million (RMB 2,252 million), up 73.9% over H1 2010 and accounting for 13.8% of total revenues in H1 2011.

Source: CCM International

Source: www.junlebaoruye.comNote: left = plain flavour; right = combined fruit coulis and yoghurt/soft cheese layers

PICTURE 1: Laojuezhuangyuan Product Packs

FIGURE 2: Junlebao Dairy Sales Trends, 2004-2010


In early November the new dairy farm project of Henan Kedi Dairy Co., Ltd. (Kedi Dairy) was registered in the Henan Development & Reform Commission, indicating that it has received official approval. Kedi Dairy is part of Kedi Food Group Co., Ltd. (Kedi Group) − a private joint-stock enterprise which was established in 1985.

The new dairy farm will be located in Kedi Dairy’s agricultural park, Henan Province, and involves a total investment of USD48 million (RMB307 million). The construction schedule runs from November 2011 to December 2012; when complete the farm is designed to house 10,000 cows and produce about 60,000 tonnes of milk annually.

Kedi Dairy is a well-known dairy company in Henan Province; it was built by the Agriculture Comprehensive Development Company of Henan’s Department of Finance and Kedi Group in 2005, with a registered capital of USD24 million (RMB205 million). These 2 companies hold 12.4% and 87.6% stakes in Kedi Dairy respectively. (The company accepted an investment by the Shanghai Beyond Fund, a private equity group, earlier this year.) Kedi Dairy produces pasteurised milk, UHT milk, yoghurt, milk beverages and fruit beverages; the UHT and pasteurised milk make up the bulk of sales and most of the products are sold in the local market and in neighbouring provinces such as Shandong, Anhui and Suzhou.

Kedi Dairy’s products are based on milk sourced from Henan Kedi Biological Engineering Co., Ltd. (Kedi Biological), another subsidiary of Kedi Group which focuses on dairying with around 30,000 cows at present. This resource has proved a solid base for Kedi Dairy during the last few years, but the available supply has struggled to keep pace with rising demand as the company has done well in the wake of the 2008 melamine scandal. That had a serious impact on Henan Huahuaniu Group − once the largest dairy processor in Henan and the partner of Sanlu Group. The dairy re-licensing process has also provided an opportunity for Kedi Dairy: on

completion in March, the number of dairy enterprises in Henan permitted to operate had declined to 23 from 44 at the end of 2010, and 87 before the melamine scandal in 2008, so leaving more market share for the remaining local processors.

Kedi Dairy has been able to expand into the province’s 1st- and 2nd-tier cities from the 3rd- and 4th-tier cities which had been its main area of activity. This led to rather stellar results: the company’s turnover of USD1.35 million (RMB10 million) in 2007 spiralled to USD88.75 million (RMB 600 million) in 2010, and a final figure of USD157.48 million (RMB1,000 million) seems possible for 2011.

Kedi Dairy is battling with some fierce competition provided by processors from other provinces attracted by wht Henan has to offer for dairying investors. For example, Mengniu had invested in building a dairy plant in Henan in 2003, and Yili later established a subsidiary in 2006 − Henan Yili Dairy Co., Ltd., which cooperates with Henan Yuanyuan Dairy Group Co., Ltd. In 2010 Henan Tianyi Bio-technology Co., Ltd. and Australia’s Sustainable Soils and Farms (SSF) set up a JV to produce organic infant formula locally (please see Dairy Products China News Vol.3 September issue, p5, SSF Enters Formula Market).

However Kedi Dairy is just the type of business story which Henan’s government is keen to encourage as a means of boosting the development of local dairy farming. Henan is an important dairy production province in China: it has 505,000 cows producing 2.81 million tonnes in 2009; other milk production takes this to 3.01 million tonnes, according to the data from the Dairy Association of China. The province has set a milk production target of 10 million tonnes by 2020, and has also implemented a range of measures to fulfill this objective, such as providing preferential policies for the construction of large-scale dairy farms (100+ cows) and a genetic subsidy programme. (Please see Dairy Products China News Vol.4 March issue, p11, Henan Government Promotes Local Livestock Sector.) The strong raw milk supply and such concerted support from the local government will be key to Henan’s development of dairy farming locally, and provides a good background for Kedi Dairy’s expansion.

Raw Milk SupplyKedi Dairy to Launch New Dairy Farm Project

PICTURE 2: Kedi Dairy’s Main Products

Source: www.kedigroup.com.cn


In November a number of large-scale companies launched dairy farm projects, suggesting that competition in the raw milk market in southern China is becoming more intense. Key examples are Guangdong Wenshi Food (Group) Co., Ltd. (Wenshi Food) and Shanghai Dairy Group; in the past, most companies focused on development in northern China.

On 15 November, Wenshi Food signed a contract with Guangxi Zhongshan Fenghe Agriculture & Animal Husbandry Development Co., Ltd. (Fenghe Agriculture & Animal Husbandry Development) to build a new dairy farm in Guangxi Zhuang Autonomous Region. The total investment for Wenshi Food’s new dairy farm is about USD31 million (RMB200 million), and the site will hold up to 10,000 cows. The 1st stage of the project started up last month and when finished the farm will be able to take 5,000 cows and provide up to 15,000 milk t/yr.

This is possible due to the strong demand for raw milk in Guangdong. Wenshi Food is a local animal husbandry company located in Yunfu City, with activities in dairy, pig and poultry farming, bio-pharmaceuticals and food processing. Its output of dairy products at one of its subsidiaries is quite minor, as its key focus is on providing milk to local dairy processors to produce premium liquid milk. It has about 8,000 milk cows in Dinghu and Yingde cities in Guangdong Province at present, with a combined milk production of about 80 t/d. The company’s new move follows its recent dairy farm project with 10,000+ cows in Yangshan County, Guangdong Province, suggesting that the company is targeting the raw milk market in Guangdong and Guangxi, 2 difficult but nevertheless promising dairy regions. There is limited land availability and less governmental support in eastern Guangdong, the most developed region in China, while a contrary situation exists in western Guangdong and Guangxi, which makes them both attractive for Guangdong-based companies such as Yantang Dairy and Wenshi Food looking to build farms. Fujian, located to the north of Guangdong, also plays an important role in supplying milk into Guangdong province.

Another dairy farming project involves Shanghai Dairy Group cooperating with Wuhan Kailong Group (Kailong Group, a diverse business group based in Wuhan). On 16 November these 2 companies signed a cooperation contract to build a dairy farm in Wuhan City, Hubei Province. The total investment is USD15 million (RMB100 million), with USD12 million (RMB80 million) for the 1st stage which is expected to be completed at the end of 2012, providing milk production of 10,000 tonnes per year.

Bright Dairy is one of Shanghai Dairy Group’s subsidiaries, and most of Shanghai Dairy Group’s raw milk is provided to Bright Dairy, so it is the likely beneficiary of this investment. Like Wenshi Food, Shanghai Dairy Group is also an animal husbandry company, but with some slight differences: its business covers dairy and pig farming, processing and sale of pork products, selling dairy machinery and producing organic milk under the brand Zhenyuan. Shanghai Dairy Group is the biggest dairying business in Shanghai, with 24 large-scale

Rapid Development of Milk Supply in Southern Chinadairy farms breeding 35,000 cows in total (these are not all in Shanghai, with some located in its surrounding areas, such as Anhui, Jiangsu).

Kailong Group will also benefit from the increased milk supply resulting from this move. It entered a JV in 2007 with the Japanese company Kyushu Dairy Co. Ltd. to establish Wuhan Kyushu Nyugyo Dairy Co., Ltd. (please see Dairy Products China News, Vol 3, August issue, p11, Kyushu Nyugyo Expands Business in China). This JV is involved in producing dairy products for the local market as well as in separate activities such as ecotourism. Given its location in southern China, Hubei is a promising place to invest in dairying: according to the data from the Dairy Association of China, its milk production was 283,000 tonnes in 2009 whereas its market demand for raw milk was about 827,000 tonnes, suggesting a major gap in supplying the local dairy industry, which has been developing rapidly in recent years.

The government continues to support the development of large-scale dairy farms through related policies, particularly the 12th Five-Year Plan (2011-2015) which it issued in September. A number of regional governments in southern China have followed suit: in Hubei the local government plans to enlarge the number of cows to 100,000 and produce 300,000 t/yr of milk by the close of the Plan period. None of this would be taking place without the growing market for dairy products of course; moreover, the growth of the leading players in exploiting the reduced number of operators this year offers a serious opportunity for the dairying companies’ expansion.

PICTURE 3: Dairy Products of Wuhan Kyushu Dairy

Source: www.baidu.com


New Products, Technology & PackagingYangguang Ruye Launches New Children’s MilkOn 27 October, Jiangxi Yangguang Ruye Corporation Limited (Yangguang Ruye) launched the Guka brand of children’s milk at a conference in Nanchang City, Jiangxi Province, a product introduction supported with the promotional device of a cartoon character.

The product sells to the trade at USD8 (RMB52) per case of 12 cartons, each 200ml, and is produced using milk from the company’s own dairy farms. At present, Guka is only available in the supermarkets in Jiangxi Province.

Guka is the first children’s milk product for Yangguang Ruye. The company is a private enterprise located in Nanchang City, Jiangxi Province, with its main businesses involving dairy farming and processing, developing real estate and managing hotels & restaurants. The dairy range includes pasteurised milk, yoghurt, milk beverages etc, and most of the company’s products are sold locally under the brand Tian Tian Yang Guang – this literally means “sunshine will turn up everyday” – and is a strong milk brand in the province.

Yangguang Ruye claims that Guka is fortified with elements such as prebiotics, single-celled algae DHA and zinc-glycine chelate to enhance children’s growth and development. The product is reported to be produced in cooperation with Jiangxi Nanda Sino-German Food Engineering Centre – this was established by the governments of Jiangxi Nanchang and Germany as a centre for advanced teaching, R&D, scientific consulting and training on food technology.

The name of the new product, Guka, comes from the children’s TV cartoon “Daqi and Tonghua Town”, produced by Hangzhou Bofei Cartoon Co. Ltd. The cartoon is a fairy tale, mainly centred on the importance of drinking milk: it is playing in 12 TV channels in Jiangxi at present, and will roll out to other provinces’ TV channels in the near future.

This cooperation between the dairy processor and the cartoon company follows both Bright Dairy and Yili separately cooperating with Disney in 2010. The potential success of such promotional strategies based around cartoon images is evident. For instance Yili used the cartoon image of Doraemon on its QQxing childrens milk packs: Doraemon is a well-known character in the cartoon of the same name which was created in Japan in 1975 and introduced into China in 1991, since when it has remained popular from in China. The company subsequently signed a strategic cooperation contract with Disney from 2011 to 2015, adding the cartoon image of Mickey Mouse on the QQxing pack. Both of these cartoon characters have proven very popular, developing huge fan bases. Yangguang Ruye will be aiming for similar results from its move.

However, far fewer people are familiar with “Daqi and Tonghua Town” and many are likely quite unaware of the new cartoon character, Guka, especially as it is only seen on the TV channels in Jiangxi at present. The impact may therefore be rather less spectacular, despite the theoretical power of this promotional approach.

The children’s milk market has been booming in recent years, and AC Nielsen reported that sales of children’s milk grew by 56% in 2009 vs only 2% for standard liquid milk. Besides Yangguang Ruye, Mengniu, Yili and Beijing Sanyuan all launched children’s milk products in 2008, 2009 and 2011 respectively, and these launches have performed conspicuously well. For example, Yili’s sales of QQxing rose by 63% in Q3!

Yangguang Ruye is targeting the increasingly significant category made up of parents who have become more and more focused on their (usually only) child’s nutritional intakes. This has become a significant area of contention between Mengniu and Yili though, especially in their goal of exploiting the dairy market in the 3rd and 4th tier cities, making life harder and harder for the regional processors who seek a slice of the action.

This is well demonstrated in Guangxi: here Mengniu, Yili, Wahaha and Want Want Group have all increased their penetration in the 3rd and 4th tier cities in what is far from being a traditional dairy consumption region in China, with children’s milk the primary product (please see Dairy Products China News Vol.4 September issue, p9). The situation is similar in Jiangxi, and the launch of Guka − as the first such brand launched by a Jiangxi-based dairy processor – will doubtless draw a significant counteroffensive by some of the majors.

PICTURE 4: Yangguang Ruye’s New Product Release Conference / Cases of Guka

Source: www.jxcn.cn


Bright Dairy Co., Ltd. (Bright Dairy) is in the process of introducing a formula produced by its New Zealand-based subsidiary, Synlait Milk Limited (Synlait Milk), a move very much in line with its development strategy. Produced at Synlait’s new plant Dunsandel, south of Christchurch, this is Bright’s first premium infant formula and was the subject of new product launch conference on 13 December. It will sell under the brand of Pure Canterbury, and is intended for fully nationwide distribution through supermarkets, franchise shops, etc.

The new product targets the super premium infant formula segment, retailing at about USD62.96+ (RMB400+) per 900g. In 2009, the term premium formula tended to mean those formulas priced at RMB150+ per 900g, but price levels have risen. This has reflected various factors: certainly the increasing living standards of many local consumers, but also the increasing attention being paid by consumers – and so, increasingly, suppliers – to food safety, meaning that many will pay more for multinational brands even though their incomes remain limited. In 2010 sources often viewed the market in terms of 4 segments: low end at <RMB100, mainstream at RMB101-200, premium at RMB201-300 and super premium at RMB301+. These price breaks are still about right. It has been notable that more and more and more domestic companies have launched infant formula with higher prices; by contrast, the leading multinationals such as Dumex and Mead Johnson have tended to focus on keeping their mainstream products around RMB200, often giving them some price advantage.

Undoubtedly, premium and super premium infant formula products have enjoyed a good development after the 2008 melamine scandal, and many processors benefit from such market situations, such as Biostime, Ausnutria and Beingmate, etc.

The primary example is Biostime. The company achieved a turnover of USD134.1 million and a net profit of USD30.2 million in H1, up 74.9% and 67.6% over H1 2010. Though Biostime’s turnover is far lower than that of Beingmate (USD2.4 billion), its net profit is slightly higher than that of Beingmate (USD30.1 million). Yet Biostime launched its infant formula in July 2008, much later than Beingmate did. (Please refer to Dairy Products China News Vol.4, November Issue, p9.)

Both Biostime and Beingmate target the premium and super premium infant formula segments, but with different business models. Biostime concentrates on the super premium segment, and the company claims to have taken 44% and 7.4% market shares in the super premium and premium segments respectively in H1. It promotes itself as an international company to attract consumers. It seems an effective marketing technique, and Bright Dairy’s new move of course highlights its raw milk source in New Zealand as a means of positioning itself in the super premium segment.

As a company with a good reputation amongst consumers, Bright Dairy is expected to do well in the super premium segment: some analysts are estimating that it will make sales of USD157.4 million (RMB1 billion) from the new product in 2012.

The company’s recent moves fit in well with its development strategy: Mr. Guo, President of Bright Dairy, highlighted infant formula, UHT milk and pasteurised milk as its three core dairy businesses as early as 2009, and it has made tangible progress in this direction since then, of which the new move is just the continuance.

However, Bright Dairy remains rather challenged in achieving the required distribution network, which is different

to what it has needed in its past focus on liquid milk in East China. This is suggested by the cases of Mengniu and Wahaha. Both have strong national distribution networks for their liquid milk and beverages respectively, and both are targetting the infant formula market. Yet both have struggled to make significant progress to date, reflecting the difficulty in expanding infant formula for newcomers, no matter how successful their past track records are. By contrast, Biostime was well known in baby supplements before it launched its infant formula, and has been able to take advantage of a better adapted distribution network as a result.

Other issues may yet threaten the success of Bright Dairy’s new product: on 1 November, it was reported that consumers in Shanghai – the company’s base which accounts for 30% of its total sales – complained that they hadn’t received the pasteurised milk that they ordered. Bright Dairy cited various reasons such problems in logistics and the timings of deliveries, although trade sources indicate that the true reason was that transportation workers had quit their jobs due to low wages and high pressure working conditions. Later on 16 November, the company announced higher prices on some products, up 3%.

it seems likely that increasing costs have been making life very difficult in pasteurised milk – the core business for Bright Dairy. Entering the premium infant formula business will require significant investment in marketing and the construction of a distribution network, so the timing may not be great. Conversely, the company’s announcement in October of its plan to raise USD223 million (RMB1,420 million) now looks increasingly well-timed! (Please refer to Dairy Products China News Vol.4 November Issue, p9.)

Bright Dairy Introduces Super Premium Infant Formula


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