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China Modern Dairy Considers Paying First Dividend Next Year

China Modern Dairy Holdings Ltd., the nation’s largest raw-milk producer, will consider paying its first dividend next year as it expands dairy output and boosts profit margins, its deputy chairman said.

The Maanshan, Anhui-based company has also been approached by potential strategic investors looking to tap growing milk demand in the country, Deputy Chairman Gao Lina said in a Nov. 29 interview in Anhui, without providing details.

Producers such as Modern Dairy and New Zealand’s Fonterra Cooperative Group Ltd. are looking to increase their presence in the world’s most populous nation as rising incomes boost milk demand. Modern Dairy this year signed an agreement to form two joint ventures with a company part-owned by KKR & Co. to build two dairy farms with as many as 10,000 cows over two years as the partners invest a combined $140 million in the next 18 months.

“Milk demand will continue to outstrip supply and we will keep investing and growing even as rivals expand,” Gao said.

Modern Dairy’s shares are up 98 percent to HK$4.21 in Hong Kong this year. The benchmark Hang Seng Index is up 5.4 percent. The company supplies its main customer, China Mengniu Dairy Co., with unpasteurized milk.

Strategic Investors

The company has been approached by overseas investors keen to tap the growth potential of China’s agricultural industry, Gao said, declining to elaborate as the need and best format for such investment is still being discussed.

“China is a big agricultural story, the trend now is the shift from traditional agricultural methods to modern ones,” she said. “The government is very supportive of this shift, and the process throws up good investment opportunities.”

Strategic investors may provide the financial boost to help China Modern, which started operations in 2005 and runs 22 large-scale cow farms, expand faster, Gao said. It currently builds about two new farms a year.

“If we want to grow in the long term, one to two new farms may not be enough to satisfy demand,” she said.

Milk sales at Modern Dairy rose 48 percent to 2.48 billion yuan ($407 million) last fiscal year, according to the company. About 84 percent of its milk is sold to Mengniu, China’s biggest milk company.

Strong Dairy Players

China has been working to strengthen its domestic dairy industry and regain consumer confidence after a melamine scandal in 2008 killed at least six infants.

Authorities have drafted a plan to create three to five large milk-powder companies with more than 5 billion yuan in annual sales by the end of 2018, the China Securities Journal reported on Aug. 16.

Mengniu is Modern’s biggest shareholder after agreeing to buy 26.9 percent of Modern Dairy for HK$3.18 billion ($410 million) in May this year to gain greater control of milk supplies.

Raw milk prices, which have risen about 20 percent this year due to a shortage of supply, will probably rise at a more normal pace of less than 10 percent next year, Gao said. Modern Dairy’s own prices will see a rise of less than 10 percent next year, she said.

Modern Dairy plans to purchase 6,000 cows next year as it aims to reach an annual output of 1 million tons of milk in 2015, Gao said. Any boost to milk demand from China’s recent relaxation of the one-child policy may only come in the second half of next year, she said.

Couples can have two children if either parent is an only child, the Chinese Communist Party said in a statement on Nov. 15, easing the rule which required that of both parents. Modern Dairy is also planning to introduce a new yogurt product and expand the distribution of its retail milk product across China next year, she said.

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