Hopu sees slim return on Mengniu investment

When China Mengniu Dairy admitted late last year that high levels of a toxin that can lead to liver cancer had been identified in products before they could reach the shop shelves, it was a PR and IR disaster. Between December 26 and December 30, the Hong Kong-listed company's stock plunged more than 31%. Even now, it remains down 24.6% on a six-month basis.

However, Denmark's Arla Foods offered the Chinese company a vote of confidence, paying DKK1.7 billion ($289 million) for a 6% stake. A joint venture (JV) partner of Mengniu since 2005, Arla may also have calculated that, as proved to be the case a year or so after the 2008 dairy crisis, a market-leading company in a high-growth, consumer-oriented industry wouldn't stay in the doldrums forever.

The investment also facilitated the exit of Hopu Investment Management, which paid HK$6.12 billion ($790 million) for a 20% stake in Mengniu in 2009, alongside state-owned grain trader COFCO Group. At that time the Chinese company was still in recovery mode and trading at a more than 20% discount to its pre-crisis levels.

Hopu Master Fund I, a $2.5 billion vehicle established in 2008 that counts Temasek Holdings and Goldman Sachs among the investors, contributed $236 million to the transaction. Hopu, which promised so much when it was established, disbanded in late 2010 amid reports that founders Richard Ong and Fenglei Fang couldn't get along. The fund is now in divestment mode.

Under the latest transaction, Hopu will transfer Arla Foods its 30% stake in COFCO Dairy, which in turn holds approximately 19.66% of the total issued shares of Mengniu. The $289 million exit - which indicates an average selling price at HK$21.6 per piece - has netted a skinny return of $53 million for Hopu's three-year investment.

"If Mengniu doesn't introduce a high quality partner like Arla, its share price will still be under pressure because consumers still have concerns of its product quality.," Charlie Chen, head of China consumer coverage at BNP Paribus, tells AVCJ. "Even if Hopu does not exit now, there is no guarantee it can achieve better returns in the near future."

Arla, however, remains bullish about its own prospects. The Danish dairy firm's China turnover came to DKK700 million last year and it expects this figure to rise five-fold by 2016. Mengniu is its primary distribution channel and the JV will be folded into the Chinese company. Arla also plans to help Mengniu introduce international standards in quality control.

"With the growth rates that are driving the country forwards, it is crucial for Arla to gain a solid foothold in the Chinese market," says Arla Foods' CEO Peder Tuborgh.

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• Topics
• Greater China
• Consumer
• Exits
• Trade sale
• China
• Consumer
• Hopu Investment Management