Behind the raw milk suppliers' listing frenzy, hidden concerns are gradually emerging
Under the lure of capital, upstream enterprises in the dairy industry are also eyeing listed company platforms one after another, using the relaunch of the New Third Board to embark on a capital journey. A Beijing Business Today reporter found through statistics that, including Zhongding United Husbandry Co., Ltd., which officially listed on the New Third Board on December 10, multiple upstream enterprises that make their living from raw milk supply joined the ranks of listed companies in the second half of the year. Although they have gained a listing platform, the fact that their main business of raw milk supply is simple and low-profit and that they rely heavily on a single major customer has also planted uncertain hidden risks for corporate profitability.
Supply-demand gap spawns listing momentum
Against the backdrop of still-strong domestic demand for dairy products and continued optimism about industry development, fresh milk suppliers at the upstream end of the dairy industry have begun stirring into action to list on the capital market, preparing to grab a share of the industry dividend. A Beijing Business Today reporter found through statistics that in July of this year, Knight Dairy, whose main businesses are pasture cultivation, cattle farm operation and fresh milk supply, listed on the New Third Board; later, at the end of September, Ningxia Huifengyuan Husbandry Co., Ltd. also published a public transfer prospectus on the New Third Board, and this company also made its fortune by raising dairy cows and selling fresh milk; on December 10, another company that rose rapidly through breeding and fresh milk supply, Zhongding Husbandry, also became a member of New Third Board listed companies. Add to that Shangling Husbandry, Junhua Agriculture and Animal Husbandry, Shengmu, Modern Husbandry and other enterprises that listed last year and even earlier, and the listed company team of raw milk suppliers is constantly expanding.
As for the motivation behind these enterprises' listings, dairy expert Wang Dingmian analyzed that the purpose is to obtain more convenient financing channels and expand scale, while the prospect that the industry has room for growth serves as the listing endorsement for these enterprises. Zhongding Husbandry explicitly stated in its public transfer prospectus that in recent years, China's raw milk market has consistently been in a state of supply falling short of demand, and the gap between supply and demand has been increasing year by year. According to the introduction, in 2015 the national raw milk supply-demand gap was 20.4%, and it is expected to reach 22.1% by 2017.
In addition, according to information from Wind, the revenue of China's dairy product industry grew from 62.519 billion yuan in 2004 to 328.773 billion yuan in 2014. An increase in dairy product sales will inevitably drive an increase in demand for raw milk. This will further stimulate the development of China's raw milk market, which also provides market space for enterprises that make their living by selling raw milk.
Dual unstable factors plant risks
⟦NL> However, although a relatively large gap has appeared between demand for and supply of raw milk, can this gap necessarily be filled by the enterprises mentioned above? In response, many people in the dairy industry expressed doubt. "Opportunities certainly exist, but high-quality and low-priced foreign milk sources as well as the ups and downs of domestic raw milk prices have become unstable factors hindering the development of these enterprises," said Wang Dingmian.
First, the abolition of EU milk quotas and the conclusion of free trade agreements between China and multiple countries have made it possible for international dairy enterprises to fill the gap in domestic dairy demand. According to the forecast of the International Dairy Farmers' Alliance, international milk prices will enter a downward channel over the next five years. By contrast, because of high human, material and feed costs, domestic milk prices do not have a competitive advantage, so highly competitive international dairy products will deal a shock to China's dairy farming industry in the future. Wang Dingmian continued that, in addition to price advantages, the safety of foreign milk sources has also attracted large domestic dairy enterprises to expand overseas one after another, which has also eroded most of the way out for domestic fresh milk supply enterprises.
Second, because the overall market of domestic breeding enterprises has not yet entered a mature stage of development, the roller-coaster changes between "milk shortage" and "milk surplus" often play out, leaving breeding enterprises constantly facing risks that are difficult to control. Just at the end of last year, due to a sudden surge in milk source supply, many enterprises were swept into the "milk dumping turmoil" and suffered heavy losses.
Taking Zhongding Husbandry's financial data as an example, in 2013 the company's full-year operating revenue was 7.88 million yuan, and in 2014 it increased to 140 million yuan. The company's net profit turned from a loss in 2013 to a profit. In the view of industry insiders, the profit in 2014 was related to the "post-milk-shortage effect" of 2013. "Large enterprises have stronger risk resistance, so if they catch a good year, these enterprises' profits will be guaranteed. Of course, this is also related to the expansion of Zhongding Husbandry's breeding scale and fresh milk production. With large scale plus a good year, revenue is guaranteed; conversely, it is hard to say that the enterprise's revenue will be stable," said Wang Dingmian.
Single customer determines seeking another way out
For small and medium-sized pastures, the impact brought by the contradiction between milk prices and supply and demand will be more direct, while for enterprises such as Zhongding Husbandry and Knight Dairy that have a certain scale and a certain stable customer base, risk controllability is also higher. However, every family has its own difficult scripture to recite. With scale comes productivity, but the stable customer source that small pastures dream of cannot create a business that yields huge profits from one source.
A Beijing Business Today reporter found upon review that these listed raw milk suppliers share a common feature, namely strong customer concentration, and many enterprises were even founded by former employees of large dairy companies such as Mengniu. In other words, these enterprises had already found downstream customers at the time of their establishment. Taking Knight Dairy as an example, its public transfer prospectus mentioned that the company has a certain dependence on its largest customer, Mengniu Dairy. From January to June 2015 and from January to June 2014, sales revenue to Mengniu Dairy accounted for 36.03% and 48.99% of operating revenue respectively; similarly, revenue from sales to Mengniu accounted for 59.15% of Zhongding Husbandry's operating revenue in 2014; in addition, Ningxia Huifengyuan's major customer is Yili, and almost all of the company's products were sold to Yili.
Many industry insiders pointed out that a stable major customer is often a double-edged sword. While ensuring product sales channels, it also plants risks. The major customer tightly grips the lifeblood of these suppliers, and once an accident occurs, the consequences would be unimaginable. Large dairy enterprises, by contrast, have many suppliers, so losing one will not bring great losses.
Recently, news spread that Zhongding Husbandry and Mengniu had some friction over milk collection volume and price, thereby affecting cooperation between the two sides.
In fact, raw milk suppliers including Zhongding Husbandry have also realized the risks brought by heavy dependence on major customers. Previously, Zhongding Husbandry President Sun Guoqiang told a Beijing Business Today reporter that the profits from breeding and raw milk supply are meager and the risks are relatively large, so the company is planning to seek response methods by exploring downstream product business segments. This is also the approach of the established raw milk supplier Modern Husbandry.
Wang Dingmian further stated that under the major policy environment in which the state encourages downstream dairy enterprises to possess milk source bases, the survival space for single breeding enterprises is becoming narrower and narrower. Their way out is either to be swallowed by large dairy product manufacturing enterprises and become a milk source base, or to develop downstream and deploy across the entire industrial chain. Therefore, listing is only the first step in these enterprises' capital accumulation. Next, these enterprises will certainly stage more merger and acquisition dramas or turn to the stage of product terminals.