Mengniu completes its acquisition of Shengmu High Tech Dairy, owning 51 percent of the shares 06-05-2019

On May 20, China Shengmu announced that Mengniu has completed acquiring China Shengmu Organic Milk Limited, a subsidiary under Inner Mongolia Shengmu High-Tech Dairy Limited. , and as a result holds 51% interest in Inner Mongolia Shengmu High-Tech Dairy. At present, Mengniu has officially taken over the equity of the liquid dairy business in China Shengmu Organic Milk, leaving the company itself to concentrate on its cow-breeding business.

Mengniu becomes the biggest organic milk enterprise in China

Having suffered a constant deficit for two years, China Shengmu eventually sold its equity of downstream dairy business, the trademark included.  Mengniu will own all equity of China Shengmu’s downstream dairy business, while China Shengmu will hold 100% interest in its upstream breeding business. Meanwhile, in order to alleviate China Shengmu’s difficulty in cash flows, Mengniu will provide a loan of RMB130 million for China Shengmu as a financial support.

Holding the controlling interest in Shengmu High-Tech Dairy with RMB303 million, Mengniu ascends to the largest organic milk enterprise in China. Besides, the acquisition enables Mengniu to indirectly possess the upstream high-quality organic milk source of China Shengmu.

Upon the acquisition, China Shengmu has transferred the business chain of its downstream dairy products as well as the relevant equity to Mengniu. Not only is this beneficial to the further development of Mengniu, such as improvement in raw milk of high quality, and layouts of organic milk source, but it also helps promote Mengniu’s organic dairy business to a new level. In the meanwhile, it enables Mengniu to fulfil the synergy of supply chain management. Besides, Mengniu’s distribution network of downstream products can also help China Shengmu expand the organic dairy products in a faster way.

Shengmu High-Tech Dairy’s deficit of RMB 126 million to drag down Mengniu’s net profit by 21%

Previously on December 24, 2018, China Shengmu already announced to sell its 51% of the controlling interest in Shengmu High-Tech Dairy to Mengniu at the cost of RMB303 million. The premise was that China Shengmu should transfer its business chain of downstream dairy products and relevant equity to Shengmu High-Tech Dairy, in order to complete the whole business chain and equity of the company, as well as to produce and distribute organic dairy products. After the completion of transfer above, China Shengmu would only maintain the breeding business. Until now it takes totally five months for the three parties to complete the final equity deal.

As the annual report of China Shengmu shows, Shengmu High-Tech Dairy earned an annual revenue of RMB846 million in 2017 but the one in 2018 only reached RMB722 million, a decrease by 14.6%. Compared with the net profit loss of RMB105 million in 2017, the one in 2018 got to RMB126 million, a drop by 120%.

Based on Shengmu High-Tech Dairy’s financial data of 2018, it is predicted that after the business combination, Mengniu will suffer from a deduction of RMB643 million in the net profit, while the net profit of Mengniu in 2018 totalled to RMB3.05 billion. Hence, Shengmu High-Tech Dairy is likely to drag down Mengniu’s net profit by about 21%.

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