The case that made headlines around the world.
Reproduced with permission from Smart Investor
THE MELAMINE scandal has hit the Chinese dairy industry hard and the Chinese government is now taking steps to reverse the effects of the debacle. On December 9, it announced a four-month food safety drive to restore consumer confidence in Chinese-made food products.
These measures include inspecting food and additive makers to curb the use of excessive or illegal chemicals in the manufacturing process.
While a number of manufacturers reel from the strict measures that the government has implemented, China Milk, a Chinese dairy company, was given the green light by a qualified independent factory as it maintains a melamine-free track record.
Based in Heilongjiang province, the company specialises in producing raw milk, pedigree bull semen and pedigree dairy cow embryos and is a major player of its kind in China.
It was also nominated as the sole supplier of milk products for the Heilongjiang government and its associates. As fellow milk companies affected by the melamine fiasco reassess the contents of their milk products, China Milk will have a head start.
It intends to leverage on its melamine-free reputation. And with the recently-launched food
safety drive, it believes this is the right time to implement the next step downstream.
Operations have commenced at the company’s new milk processing plant to produce its very own milk-based beverages, which are marketed under its new Yinluo brand.
Located in Daqing province, the plant can process about 50 to 80 tonnes of raw milk a day, which adds up to 100,000 tonnes a year.
Yinluo currently has a range of flavoured milk beverages and yoghurt drinks, with ice-cream to be included later.
CEO Liu Hailong
The company has more than 21,000 Australian and Canadian Holstein cows, a breed which can yield the most milk. “It really goes back to the raw milk, which we have total control of already. For the other guys, they have to test the raw milk from all their raw milk suppliers,” adds Liu Hailong, chief executive officer of China Milk.
He refers to how the food safety drive conducted by the government may affect margins of China Milk’s competitors, especially those implicated in the melamine scandal.
Besides leveraging on its endorsement from the Heilongjiang government, Mr Liu hopes tomarket Yinluo by tying in with renowned events, such as sporting events and conferences. “We will try to be a supplier for the events as well. That will really give you the publicity,” says Mr Liu, citing that Yili, another Chinese milk producer, was the main supplier for the Beijing Olympics.
Mr Liu also intends to leverage on China Milk’s quality control on the upstream and manufacture processed milk products for other Chinese dairy companies. “With the existing milk processing capacity, we are not just using it for our own milk branding,” he says.
According to a December 3 report, DMG Research has issued China Milk with a “buy”rating. The brokerage firm’s research team commented that the food safety drive will benefit the company as it has “extremely high quality standards and supervision at every stage of the value chain”.
“In our view, we believe that the Chinese government should base quality standards using China Milk as an example,” says the report.
China Milk's new milk processing plant processes 50-80 tonnes of raw milk a day.
Sales of pedigree bull semen
Net profit rose 8.4 per cent to RMB 108.3 million, on the back of a 25.1 per cent revenue growth to RMB 165.9 million. This was due to a larger herd size, increased production and elevated raw milk prices, which have doubled compared to a year ago.
China Milk reported a high demand for its bull semen and cow embryos, due to “the shortageof good quality dairy cows in China and the Canadian pedigree nature of its bull semen and embryos”. These products are used mainly in cattle genetics to improve the milk yield of cows and to fertilise dairy cows for raw milk production.
For 2Q09, 1,533,000 straws of pedigree bull semen and 9,259 straws of cow embryos were produced, of which 1,535,000 and 7,450 were sold, respectively. The number of bull semen straws sold includes stocks from previous quarters. The remaining bull semen and embryos were used for internal consumption.
Mr Choi adds that there is currently no need to export bull semen and cow embryos. “We have actually a big enough domestic demand to deal with,” he says.
Research and development
In terms of research and development (R&D), Mr Choi says most of the emphasis is on genetics.“In this industry, either the upstream or the milk products industry, you don’t see a lot of research and development,” he highlights, referring to progress within the feed mixture, breeding and milk products range. “The only one thing that is not mature is the cloning technology,” he adds.
To bring the cloning technology up to speed, China Milk collaborates with scientific institutions – the Agricultural University of China is one of them. “We don’t do our own cloning R&D. It will be lengthy and costly to do,” Mr Choi says. Cloning enables efficiency in cow reproduction as there is no need for fertilization by bull semen or artificial insemination.
China Milk specialises in producing raw milk, pedigree bull semen and pedigree dairy cow embryos.
“Let’s say you can clone a cow which is very productive in terms of quality and quantity. You only need one breed of cow and you can leverage on that,” he says. As of 2005, 31 embryos have been cloned and successfully implanted in China Milk’s pedigree cows.
Mr Choi believes that in about ten years, the cloning technology will improve dramatically. But as of now, such a method is still inconsistent and glitches have to be ironed out. “The basic technology is not maturing yet…if the technology is completed, we still have to sort out the ethical problems. If you look at genetically modified products, a lot of people are rejecting such ideas at the moment,” he notes.
For China Milk, the component that runs up the highest cost is feed. This trend is inevitable,says Mr Choi. “Even if your cow is not productive, they have to eat. If not, they die. So it really is about the management of costs,” he says, referring to minimising overhead expenses.
“Feed costs have been rising for the past two or three years. If you are not able to grow yourfeed, or grow most of them, you’re actually getting constraints. The market is selling 10 per cent more and you have to factor in the 10 per cent extra cost,” Mr Choi adds.
China Milk currently buys 25 per cent of feed from external sources, with the rest derived from its own feedstock. Besides cloning technology, R&D also developed a way to convert liquid cow manure into biodegradable and environmentally-friendly organic fertiliser. Since 2002, China Milk has been using its own fertiliser to grow feed and also selling it to other dairy farms.
Restoring confidence
“In the past, milk companies focus on building their brand. They don’t pay much attention to raw milk supply,” says Mr Liu. “Milk companies are taking a big blow to their brand names and business. They are actually very eager to rebuild consumer confidence as well. Just by these two efforts in there, it is really a good start to begin rebuilding consumer confidence,” Mr Liu highlights, adding that the Chinese are now realising the importance of drinking milk.
“If you look at the 1.3 billion-population in China, this is not something that anyone would take lightly. At the end of the day we are talking about a big market,” he stresses.
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