Ascendent to exit China dairy player through $240m trade sale

The private equity firm acquired a 45% interest for RMB300 million in 2014 from local retailer Xinhua Department Store, which had deemed the asset non-core. In May, New Hope Dairy – a subsidiary of Chinese diversified food conglomerate New Hope Group – agreed to buy 60% of Ningxia Harmony for just over RMB1 billion, according to a filing. This comprised 27% from Ascendent and 33% from Wenzhong Zhang, the majority shareholder.

New Hope will acquire the outstanding 40% by year-end. Based on the terms of the first tranche of the sale, Ascendent stands to receive approximately RMB770 million in total, which suggests a return of around 2.5x. The private equity firm made the investment from its debut fund, which closed at $365 million in 2012. Fund III is currently in deployment, having closed at just over $1 billion in late 2019.

Xinhua Harmony was established in 2007 as a joint venture between the Ningxia Hui Autonomous Region government and Xinhua Department Store. The latter remains the company’s single largest customer. The key component part of the business, dairy products manufacturer Ningxia Xiajin Dairy Group, is nearly 30 years old. Ningxia Harmony entered the animal husbandry space in 2010 – creating its own milk supply – and now has nearly 12,000 head of cattle.

Ningxia Harmony makes most of its money from the sale of dairy products and milk-based beverages. Revenue came to RMB1.38 billion in the first 11 months of 2019 while net profit was RMB109.9 million. In 2018, revenue reached RMB1.48 billion, up from RMB1.36 billion the previous year. Over the same period, net profit fell from RMB80 million to RMB78.3 million.

New Hope Dairy is a significantly larger operation with revenue and net profit of RMB4.9 billion and RMB242.7 million, respectively, in 2018. It has 20 directly owned farms, 12 affiliated farms, and 12 dairy processing facilities nationwide. The brand portfolio spans fresh milk, milk and yogurt-type products made through ultra-high temperature (UHT) processing, traditional yogurt, and what is claimed to be the first fresh cheese produced in China.

The deal is essentially a consolidation play, intended to help New Hope Dairy compete more effectively against larger peers such as Yili Group, China Mengniu Dairy, and Shanghai Bright Dairy.

"The acquisition of Harmony sets a critical footprint in our expansion strategy to grow into the northwest of China. In particular, its renowned Xiajin brand, unique strength in vertical integrated capacity and distribution network, as well as its high-quality upstream resources, will provide us with a strong foundation for continued growth," said Gang Xi, chairman of New Hope Dairy, in a statement.

The company also aims to capitalize on industry growth. According to government statistics, China’s liquid milk and dairy products industry expanded by 32% in 2011-2018, reaching RMB339.9 billion. Liquid milk production has increased while milk powder output has fallen, suggesting a shift towards premium products. Between 2009 and 2016, per capita liquid milk consumption rose from 8.8 kilograms to 20.3 kg, but per capita consumption of overall dairy products is still one-third the global average.

Expectations of continued growth – plus the success KKR and CDH Investments enjoyed with China Modern Dairy – drew many private equity investors into the industry. Nearly $900 million was committed to dairy farming assets in 2013-2015, while the broader dairy products space received $1.1 billion, according to AVCJ Research.

However, those with exposure to upstream milk production – as opposed to downstream dairy products – were caught out by global demand-supply shifts that resulted in milk being sold more cheaply on the international market than in China, prompting domestic processors to eschew local supplies for imported milk powder. Global prices have since stabilized, but they haven’t returned to 2014 levels. Farmers were getting RMB3.83 per kg in late 2019, down from RMB4.20 per kg in 2014.

There have been some successful exits in recent years, with Proterra more than doubling its money on dairy farm operator AustAsia in 2018 through a sale to Singapore’s Japfa. On the dairy products side, Morgan Stanley Private Equity Asia listed China Feihe in Hong Kong last December after delisting the business in the US in 2013. It invested $50 million and was sitting on a position worth $2.3 billion as of January.

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• Topics
• Greater China
• Trade sale
• Consumer
• China
• Agriculture
• Ascendent Capital