August 28, 2013

China's Liaoning Huishan to raise US$1 billion in Hong Kong IPO

Jamie Zhou, analyst at Macquarie, said China had been in the grip of a second dairy revolution since the government launched a programme to strengthen food safety, eliminate smaller, weaker processing companies and promote large-scale industrial dairy farming. Smaller farmers are being forced to exit the industry as their milk yields are too low to be economically viable in spite of rising prices.

"Their accelerated exits are making an even stronger case for developing scaled dairy farms, yet scaled operators only accounted for 16% of total raw milk," Zhou wrote in a recent note.

Chinese dairy producers have been fighting to regain consumer trust after a scandal over contaminated baby milk in 2008. China Mengniu Dairy, one of the big Hong Kong-listed Chinese dairy groups along with China Modern Dairy, was hit hard by the scandal. It has been rebuilding its reputation through deals including a joint venture to make yoghurt with Danone of France.

This month Fonterra, the farmers' collective that controls most of New Zealand's dairy industry, was forced to recall milk powder from China after it found bacteria in some of its products that could cause botulism.

This was a boon to Chinese dairy groups - both Mengniu and China Modern's shares rose sharply in the days after the first recall was announced, though they have settled back to their earlier levels.

Huishan is entering a stock market where its peers have done well over the past year - China Modern shares are up 15.5% while Mengniu's are up more than 30%. Both have outperformed the Hang Seng index, which is up 10.5% over the period.