China’s A shares continued to fall back Thursday. The Shanghai Composite Index dropped 3.7 percent, and Shenzhen’s Growth Enterprise Market slid 6.3 percent.
Investors should be careful with high-valuation stocks that might suffer from a sell-off, and they should accumulate some industry leaders with attractive valuations as well as good fundamentals and good growth potential.
For example, Inner Mongolia Yili Industrial Group (600887.CN) is expected to post growth in earnings per share of 30 percent this year and 18 percent next year, equivalent to a price-earnings ratio of 21.7 times and 18.4 times, respectively.
The company has announced its plan to acquire Guiyang Sanny Dairy.
Established in 2001, Sanny Diary, the largest dairy firm in Guizhou province, has more than 20,000 milk cows in Guiyang.
Its daily sales volume is over 600,000 units, and it has several good brands in local markets.
At the end of last year, Sanny had net assets of 255 million yuan (US$41 million).
Sales revenue was 531 million yuan. Net profit was 10.16 million yuan.
The acquisition will help Yili expand its presence in the southwest despite the limited boost to earnings.
The government has been pushing to restructure the domestic dairy industry since 2008 and outlined a three-phase consolidation plan in June last year.
The government will attempt to an understanding of the situation in the industry in the first phase and streamline the number of dairy firms to 87 through consolidation in the second phase.
By December, it is envisaged that the top 10 players will control up to 65 percent of the market.
The number of domestic players will be further cut to 50 by the end of 2018, when the top 10 will control 80 percent of the market.
Yili has ventured into plant protein beverages and lactic acid bacteria beverages to enhance growth.
Sales of Ambrosia, its room-temperature yogurt launched in April, have already surpassed those of Just Yoghurt — from rival China Mengniu Dairy Co. Ltd. (02319.HK) – which hit the market more than six months earlier.
And the market demand for Yili’s walnut milk is also very robust.
Also, the dairy market is on track to expand its global presence.
Yili has set up a baby milk powder plant in New Zealand and cooperated on imported milk with Italy’s Sterilgarda Alimenti S.p.A.
In addition, it signed a deal with US milk cooperative Dairy Farmers of America to build an 80,000-tonne milk powder plant in Kansas.
The joint venture has a registered capital of US$100 million, with Yili holding a 30 percent stake.
Yili has announced an ambitious plan to become the one of the world’s top five dairy firms and transform itself into a 10 billion yuan health food giant by 2020.
It’s the player in the dairy sector that shows the most promise to become a full-scale food heavyweight.
Yili is likely to expand into other health food sectors, such as juice, supplements and vegetable proteins.
Its gross profit margin is likely to be boosted by sharp falls in the price of raw milk.
In the first quarter of the year, net profit attributable to the firm’s owners grew 20 percent from the same period last yearto 1.3 billion yuan.
This article appeared in the Hong Kong Economic Journal on June 19.
Translation by Julie Zhu
[Chinese version 中文版]
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