KKR bets on rising Chinese demand for premium chicken

This is the premise for KKR's acquisition of an 18% stake in Fujian Sunner Development for approximately $400 million, which was completed on May 18. The funding will go towards the construction of new farming facilities on sites that have already been identified, according to a source familiar with the deal.

The company wants to increase production volume by 30% this year and then more than double its current production capacity to 750 million head of white-feather chicken by 2019. White-feather chicken can be bred in about 40 days, whereas the yellow-feather variety that predominate in China's smaller farms take longer to breed, which makes the meat production process less efficient.

Shenzhen-listed Sunner is already China's largest breeder, processor and supplier of chicken products, providing fresh and frozen meat to customers in the fast food and food manufacturing industries as well as the wholesale markets. It is one of five local-market direct suppliers - and the only Chinese supplier - to McDonald's.

However, its market share is estimated to be only 4-5% whereas the leading player in the US has 30%. Large-scale farms supply 95% of chicken in the US, but just 30% in China.

This potential for consolidation is expected to give the company significant room for growth when coupled with rising protein consumption. Chicken is the fastest-growing protein source in China - it is cheaper than the alternatives - but accounts for only about 17% of total meat consumption, compared to nearly 40% in Taiwan and Hong Kong.

Sunner is also said to be the only fully vertically-integrated company in the industry. It has breeding facilities for chickens and day-old chicks are raised by farmers operating under long-term contracts. Feed comes from mills owned by Sunner and the 40-day-old chicks are brought back for slaughtering and processing in the company's plants.

Vertical integration is seen as essential to minimizing the risk of disease, which is rife in China's poultry industry. "Chicken is a particularly difficult business and I am not sure we would invest in any chicken company in China other than Sunner," Julian Wolhardt, partner and co-head of KKR's Greater China private equity team, told AVCJ last year. "Sunner is truly the exception because it is the only chicken producer in the country that is fully integrated."

Guangming Fu, chairman of Sunner, said in a statement that he values KKR's previous experience in the agriculture and food safety space. Last year the PE firm teamed up with Baring Private Equity Asia, Hopu Investments and Boyu Capital to pay $270 million for a 70% stake in COFCO Meat, a subsidiary of China's state-owned COFCO Group, to develop hog farms and meat processing plants.

However, the food safety thesis originated with a 2008 investment alongside CDH Investments in China Modern Dairy. The idea was to create a milk-producing outfit that operated to global standards. A substantial stake in the business was sold to China Mengniu Dairy in 2013 and the PE firms completed their exit last year. KKR, CDH and Modern Dairy have also set up a greenfield farming joint venture.

Another common feature between the Modern Dairy and Fujian Sunner investments is the creation of consumer-focused branded businesses to complement core supply operations. Modern Dairy's brands launched three years ago and are projected to be worth RMB1.5 billion ($242 million) this year. Sunner is only just getting started in this area, but expectations are strong, particularly as it tends to be more profitable than business-to-business supply.

"The first group you have to convert in terms of buying safe chicken is the institutional guys - McDonald's, KFC. The next layer is the other restaurants and the food manufacturers. After that it is the consumers," the source added.

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• Topics
• Expansion
• PIPEs
• Greater China
• Consumer
• Growth capital
• PIPE
• China
• Consumer
• KKR