Fonterra Moving in on China Milk Market New Zealand Dairy Buys San Lu Stake BUSINESS ASIA By Bloomberg

By Gavin Evans

Fonterra Cooperative Group, the world’s biggest dairy products exporter, said Thursday it had agreed to buy 43 percent of China’s Shijiazhuang San Lu Group for $107 million to increase distribution in a market that is doubling every five years.

San Lu, based in the province of Hebei, is China’s biggest milk- powder producer and accounts for 5 percent of the nation’s liquid milk and 9 percent of its yogurt sales, Fonterra’s chief financial officer, Guy Cowan, said at a media conference in Auckland.

Demand for dairy products is surging in China, the world’s most populous country, as incomes rise and a Western-style diet becomes more popular.

For Fonterra, which first entered the Chinese market 20 years ago and is the largest importer of milk powder, the new venture will let it expand into consumer products and get nationwide distribution.

“The alliance will help San Lu upgrade its leadership in the milk powder manufacturing industry,” said Zhao Jinhou, an analyst at Shenyin Wanguo Research & Consulting in Shanghai. “By owning a production factory in China, Fonterra is closer to the market.”

San Lu competes with companies that include Bright Dairy & Food, which is 11.6 percent owned by Groupe Danone, the world’s largest yogurt maker, and Hong Kong-listed China Mengniu Dairy, the nation’s biggest liquid milk supplier. China’s wholesale dairy market is valued at about $9 billion, Fonterra said.

San Lu is owned by Shijiazhuang Dairy Group, which collects 3,000 metric tons of milk daily from 40,000 farmers and is forecast to have sales of about $925 million this year. Fonterra is buying a stake in a processing and distribution business which has sales of about $370 million and operates in more than 600 Chinese cities, the Auckland-based company said.

Fonterra annual sales in China are now about 200 million New Zealand dollars, or $140 million, mainly from milk powder and food ingredients. Its sales are mostly in the major cities on China’s eastern seaboard.

The venture with San Lu will complement existing sales, and may enable the companies to share distribution channels, Fonterra’s Cowan said. In the long term, milk powder imports will become a niche part of the market as China’s fresh milk industry develops, he said.

“China’s dairy consumption has been expanding at a rapid rate,” Fonterra’s chief executive, Andrew Ferrier said at a press conference in Beijing.

“There is still a lot of potential with per-head dairy consumption in China’s urban centers currently less than half that of Japan, Korea and Taiwan,” he said. “In rural areas, consumption is only around 10 percent of the average for Asia.”

The venture will focus on manufacturing, marketing and distribution of consumer products throughout mainland China, Fonterra said.

It will pursue a public listing of its shares at a later date to help fund its ongoing expansion, Cowan said. He declined to give any profit forecasts for the venture.

Sales last year for San Lu Group rose 14 percent to 6 billion yuan, or $742 million, and pretax profit gained 20 percent to 553 million yuan, the company said on its Web site.

It is forecasting sales of 16 billion yuan in 2007 and pretax profit of 1.1 billion yuan, on sales of 130,000 tons of milk powder and 1.8 million tons of liquid milk.

China has an estimated 200 million middle-class consumers, according to figures in a Fonterra statement.