Here’s a simple formula: More babies means more milk.
And with the relaxation of China’s one-child policy, the next generation of newborns are expected to come from smaller cities.
Infant formula maker Biostime International (01112.HK) could not have picked a better time to buy rival Changsha Yingke Nutrition. The deal, worth 350 million yuan (US$57.8 million), closed last week.
The acquisition strengthens Biostime’s foothold in lower-tier cities, a strategy Hong Kong Economic Journal columnist Dai Zhao thinks is workable.
Infant formula milk is already a huge industry in mainland China. With certain restrictions lifted on families having more than one child if either parent has no siblings, the market could explode with a baby boom.
Now, having babies comes down to affordability, experts say. Families in smaller cities tend to have the means for it more than their big-city cousins.
Biostime’s move into lower-tier cities makes perfect sense. The company sources its milk from Denmark and France but it’s not seen as a big foreign brand in the mainland. However, it benefits from competitive prices and rigid quality control — two of the main concerns of Chinese parents.
In snapping up Yingke, Biostime paid a 65.7 percent premium which will begin to pay off once Yingke starts production after the deal is completed, Dai says.
Yingke produces between 30,000 and 50,000 tons of formula milk powder a year. Dai says Yingke can shorten supply times by producing milk powder locally.
The company’s milk powder business has been going from strength to strength. That fits perfectly with Biostime, whose main revenue earner is milk powder. In 2013, sales of milk power accounted for 81.6 percent of revenue in the first half, up 53.6 percent from the previous year.
Biostime has a vast distribution network including more than 11,000 VIP specialty stores for baby products and 4,382 supermarkets. Baby formula is sold on Mama100.com which has more than 1.73 million active members.
In addition, Biostime works with a third-party payment firm, allowing members to order and pay for products on mobile devices.
Small wonder Biostime’s receivables are close to zero.
– Contact the writer at [email protected]