November 18, 2011

 

 

Raw milk producer China Modern Dairy Holdings Ltd, which supplies most of its milk to top Chinese dairy product maker Mengniu Dairy Co Ltd, said that it will steadily add dairy farms to meet rapid demand, and reduce cattle imports to cut costs.

 

Modern Dairy, in which KKR & Co LP holds an about 24% stake, planned to operate 20 dairy farms by June 2012, up from 16 now, with dairy cattle to exceed 150,000 in fiscal year ending June 2012, Chairman Deng Jiuqiang said Thursday (Nov 17).

 

The company aimed to have 30 farms by 2015, each with 10,000-40,000 cattle, Modern Dairy President Gao Lina said.

 

Modern Dairy had 110,000 cattle at the end of June and aims to cut dairy cattle imports over coming years to cut costs and improve margins, said Deng.

 

"We will start reducing cow imports by 2013, and definitely will not need to import cows by 2015," he said.

 

Modern Dairy spends up to RMB660 million (US$104 million) to import 25,000 to 30,000 cattle per year from countries including Australia and New Zealand, representing about a third of China's total dairy cattle imports.

 

As the company builds more farms and its cows reproduce, reliance on imports would naturally decline, Deng said.

 

China's dairy market remains in its infancy, with consumption of dairy products growing an annual compound rate of 20%, a stark contrast to US and European markets where demand has been shrinking in the past decade.

 

Deng said demand for high quality milk would increase rapidly, especially in the wake of a massive industry scandal in 2008, when melamine-tainted milk powder was blamed for the deaths of at least six children.

 

The scandal, which hit the country's major dairy product makers including Mengniu, Bright Dairy & Food Co Ltd and Inner Mongolia Yili Industrial Group Co Ltd, also left many people ill with kidney problems and other complications.

 

"The China market is not facing a shortage of milk, but a shortage of good quality milk," Deng said. "As people's incomes increase, demand for high quality milk will grow rapidly."

 

The company's farms are mostly located in eastern and northeastern provinces such as Anhui, close to downstream dairy processing plants and feedstock supply sources.

 

China Modern Dairy recorded a total revenue of RMB1.1 billion (US$173 million) for year ended June, up 89%. Net profit jumped 127% to RMB243.9 million (US$38 million).

 

Shares of the company, which listed in November last year, closed down 1% on Thursday, giving it a market value of HKD9.3 billion (US$1.2 billion). The stock has lost about a quarter of its value so far this year, compared with a 18% fall in the Hang Seng Index.