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Chinese Dairy Giant Mengniu Consolidates Cheese Business

China 17.06.2024
Source: The DairyNews
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On the evening of June 12, Shanghai-based Miaoke Landuo Food Technology Co., Ltd. (600882.SH, referred to as "Miaoke Landuo") announced that it would acquire 100% equity in Inner Mongolia Mengniu Cheese Co., Ltd. (referred to as "Mengniu Cheese") from its controlling shareholder, Inner Mongolia Mengniu Dairy (Group) Co., Ltd. (referred to as "Mengniu"), for 448 million yuan in cash.
Chinese Dairy Giant Mengniu Consolidates Cheese Business
Both Miaoke Landuo and Mengniu Cheese are subsidiaries of Mengniu. This adjustment represents Mengniu's restructuring of its cheese business segment, consolidating the cheese operations under the listed company Miaoke Landuo to resolve issues of internal competition. Miaoke Landuo stated that this move aims to leverage the advantages of both entities, enhance quality and efficiency, and promote coordinated development, ultimately boosting the listed company's profitability and core competitiveness.

According to Miaoke Landuo's disclosure, Mengniu Cheese's annual revenue exceeds 1.2 billion yuan but remains loss-making. The transaction did not bolster Miaoke Landuo's stock price, which fell on June 13, with a market value of 6.815 billion yuan.

Notably, Miaoke Landuo was once a "star stock" in the dairy industry, with significant performance growth driving its stock price above 80 yuan per share in May 2021. Since 2020, Mengniu has repeatedly acquired Miaoke Landuo shares at high valuations. Now, this decision has resulted in a paper loss for Mengniu, and the investment return is under market scrutiny.

The roots of this acquisition trace back to 2021. In July 2021, after Miaoke Landuo issued private shares to Mengniu, Mengniu became its controlling shareholder. Due to overlapping and competitive businesses, Mengniu promised to inject its cheese operations, including related raw material trade, into Miaoke Landuo within two years. This commitment was later extended to be fulfilled by July 9 of this year, with shareholder approval.

As per Miaoke Landuo's announcement, as of December 31, 2023, the audited book value of Mengniu Cheese's consolidated balance sheet stood at 438 million yuan. Including government subsidies and other factors, the transaction price was set at 448 million yuan. Miaoke Landuo stated it would use its own or self-raised funds for the acquisition, without directly or indirectly using raised funds.

Established in December 2018, Mengniu Cheese currently operates two wholly-owned subsidiaries engaged in cheese production: Tianjin Aishireen Dairy Products Co., Ltd. and Aishireen Dairy Products Import and Export Co., Ltd. According to the announcement, Mengniu Cheese's revenue in 2023 was 1.273 billion yuan, with a net loss attributable to the parent company of 3.373 million yuan. In the first quarter of 2024, it reported revenue of 211 million yuan and a net loss of 2.952 million yuan.

In 2023, Miaoke Landuo's revenue was 4.049 billion yuan, a year-on-year decline of 16.16%, with net profit at 63.4395 million yuan, down 53.9%. In the first quarter of 2024, revenue was 950 million yuan, a year-on-year decrease of 7.14%, with net profit at 41.2975 million yuan, a year-on-year increase of 70.63%.

Miaoke Landuo's focus on cheese coincided with a hot segment in the dairy industry. After specializing in cheese, the company experienced rapid growth. In 2020, its revenue was 2.847 billion yuan, up 63.2% year-on-year, with net profit rising 208.16% to 59.258 million yuan. In 2021, revenue and net profit increased by 57.31% and 160.6%, respectively.

The remarkable performance of Miaoke Landuo and its cheese segment attracted Mengniu's attention, leading to multiple rounds of acquisition starting in early 2020.

Mengniu's acquisition of Miaoke Landuo was conducted in several phases: In January 2020, Mengniu first invested 287 million yuan to acquire 5% of Miaoke Landuo at 14 yuan per share. Subsequently, Mengniu increased its stake through various means, including private placements and centralized bidding, at progressively higher prices. For instance, in December 2020, Mengniu invested 3 billion yuan to purchase Miaoke Landuo shares at 29.71 yuan per share; by October 2022, the purchase price had risen to 30.92 yuan per share.

As Mengniu continued its acquisitions, Miaoke Landuo's stock price soared, reaching 84.5 yuan per share in May 2021, with a market value exceeding 40 billion yuan. However, the current market value of Miaoke Landuo has since shrunk to around 6.8 billion yuan, with its stock price significantly lower than during Mengniu's various acquisitions. This has led to external skepticism and challenges regarding the large investments Mengniu made in Miaoke Landuo.

Song Liang, head of the expert group of the China Dairy Industry Alliance, believes Mengniu's investment in Miaoke Landuo is strategically significant. At the time of the acquisition, Mengniu was expanding its business landscape into areas like raw milk and infant formula, including acquiring Modern Dairy and Australian formula brand Bellamy's. Post-acquisition, Mengniu gained a first-mover advantage in the cheese segment. Mengniu's management has repeatedly expressed optimism about the cheese business segment.

Cheese, often called "milk gold" due to its high protein and calcium content, represents a high-end form of dairy products, typically made from ten pounds of milk to produce one pound of cheese. Given its high gross profit margin, the cheese sector has attracted numerous enterprises, particularly with the rise of children's cheese stick products, creating new growth points for companies like Yili and Mengniu and nurturing new brands like Dr. Cheese and Miaofei.

However, rapid development has also led to price wars and increased raw material costs, negatively impacting company profits.

An executive from a cheese company in East China told the Economic Observer that the cheese market faces another variable: due to cost constraints, cheese is priced higher than other dairy products, and consumer eating habits are not yet fully developed. When consumer spending becomes more cautious, the cheese market faces challenges. As a result, many cheese companies, after years of rapid growth, are now at a crossroads, seeking new points of leverage beyond the cheese stick product.

Song Liang stated that with the integration of Mengniu's cheese business into Miaoke Landuo, resource sharing can be achieved, such as using Mengniu's raw materials instead of importing from companies like Fonterra. He believes that companies should develop cheese products more suited to Chinese consumer dietary habits and seek growth by expanding into baking and food service markets.

Beyond the cheese business, Mengniu is also undergoing other internal adjustments. In July 2023, Mengniu privatized the publicly listed infant formula company Yashili and rebranded its products under the "Mengniu" trademark.

"By packaging the cheese business into Miaoke Landuo, Mengniu is making more concrete adjustments to its business segments, aiming to create a concentrated resource platform for each category," Song Liang concluded.
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