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Hold the foam

4 October 2013 By Ethan Bilby

Foamy figures about the popularity of drinking milk in China have lifted share prices of domestic milk producers and fuelled one of the biggest mainland initial public offerings of the year, Huishan Dairy’s $1.3 billion debut last week. China’s market potential is large, but the rate of growth may be leaner than advertised by milk industry bulls.

China’s dairy sector is booming almost five years after a powdered milk scandal gutted stock prices. Shares in milk producer Yili Group rose by 60 percent over the summer. Rival Bright Dairy & Food is up almost 65 percent. The gains reflect investor excitement that some $32 billion of yoghurt, infant formula and drinks will be sold this year, according to Euromonitor estimates, and rising.

Indeed, Huishan Dairy, which started trading in Hong Kong last week, expects average annual growth in dairy to be nearly 15 percent annually until 2017. The company sees rising wealth and a corresponding increase in health consciousness among Chinese consumers as drivers for more milk-product sales.

But while economic growth means customers have more money, there is no accounting for taste. Dairy plays almost no role in traditional Chinese cuisine. Huishan cites low per capita milk-drinking relative to the United States as a target for growth potential. Yet just because Americans drink more milk (roughly 5 times more in 2012) does not mean Chinese consumers will.

Sales growth in dairy products is expected to slow, from 11 percent this year to 7 percent in 2014, according to Euromonitor. True, some products, like powdered milk formula, are growing faster and capturing higher valuations as a result. For instance, market leader Yili trades at 32 times earnings, up from 25 times in 2012. Demand for formula is also fuelling deals like KKR’s plan to build farms with China Modern Dairy.

Still, investors should be wary. China’s stated plan to favor champions in the formula sector, perhaps not surprising after the scandals a few years ago, could distort the market. Even without the heavy hand of the state involved, assuming high growth from every Chinese dairy will inevitably lead to spoilt shareholder dreams.


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