PE-backed China Youran Dairy loses ground after $643m HK IPO

The company sold 715.4 million shares for HK$6.98 apiece, representing the bottom end of the indicative range, according to a filing. Cornerstone investors contributed $50 million to the offering. The stock opened at HK$6.28 on June 18 and closed at HK$6.15, a 12% deficit to the IPO price. The company now has a market capitalization of approximately HK$23 billion.

PAG made a partial exit through the offering, taking approximately HK$1.55 billion off the table and reducing its shareholding from 42.89% to 31.46%. However, the private equity firm subscribed to $330 million in convertible notes last November, which would take its interest back up to 40.07%. The overall issue was worth $460 million, with Bain Capital Credit, among the other investors, putting in $75 million.

Founded in 1984, Youran was a wholly-owned dairy farming subsidiary of Yili, China’s largest dairy products brand. Yili’s initial agreement, signed in 2014, was with Yunfeng Capital and CITIC Private Equity, but the deal didn’t go through.

PAG came in a year later, with a similar-sized check – it acquired 60% for RMB2.1 billion ($325 million) and extra conditions: Yili agreed to purchase all the joint venture’s fresh dairy products, and the JV in turn guaranteed Yili at least 70% of its production volume. PAG also had a put option and sold a 19% holding for RMB665 million in early 2016. It contributed RMB934 million in 2019 as part of a wider share issue.

Youran claims to be China’s largest raw milk supplier, accounting for 2.9% of the national market by herd size and 4.5% by volume in 2020. Yili was responsible for 95.8% of raw milk revenue that year. The company operates 67 dairy farms with 307,195 head of cattle. A further eight farms are under construction. Its farming operation was boosted – and a dairy breeding competency was added – in 2019 with the acquisition of Mongolia Saikexing Breeding & Biotechnology Group (SKX).

Youran is also China’s leading supplier of animal feed and forage grass, and provides ancillary farming support services, veterinary drugs, and animal husbandry equipment. In 2020, nearly two-thirds of its feed and forage grass revenue came from customers that supply raw milk to Yili.

Overall revenue came to RMB11.8 billion in 2020, up from RMB7.67 billion the previous year. There was a roughly 60-40 split between raw milk and other products and services. Over the same period, net profit rose from RMB801.9 million to RMB1.54 billion.

The success KKR and CDH Investments enjoyed with China Modern Dairy drew a lot of private equity investment into dairy farming in 2013-2015. However, those with exposure to upstream milk production – as opposed to downstream dairy products – were caught out by falling global milk prices, which prompted domestic processors to rely more heavily on imports.

Youran notes in its IPO prospectus that China’s raw milk supply dropped from 31.8 million tons in 2015 to 30.4 million tons in 2017 as price decreases forced many small-scale dairy farms out of the market. However, industry consolidation saw it recover to 34.4 million tons last year. Prices also stabilized at the local and global levels, but they haven’t returned to 2014 levels.

Supply is projected to reach 41.5 million tons by 2025, while demand will hit 62.5 million tons, up from 53 million tons in 2020.

Several other dairy farming investments have achieved positive outcomes in recent years, notably exits for Ascendent Capital Partners and Proterra from Ningxia Harmony Dairy Development and AustAsia, respectively. New capital is also entering the space, with DCP Capital Partners and KKR recently backing Adopt A Cow, a vertically integrated business that leverages internet technology to market and sell products directly to consumers.

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• Topics
• Greater China
• Industrials
• Consumer
• IPO
• China
• Agriculture
• PAG