Fonterra has expressed disappointment at an earnings downgrade by Beingmate Baby & Child Food Co., with the Chinese infant-formula business in which the New Zealand group is an investor potentially expected to book a loss of as much as twice the amount previously announced.
The New Zealand dairy giant has an 18.8% stake in Beingmate, which is now predicting a full-year loss in the 12 months to 31 December of CNY800m to CNY1bn (US$125m-156m), compared to CNY350m-500m, according to a statement dated today (22 January).
Four directors in Beingmate, including two designated by Fonterra, have also “expressed reservations relating to some aspects of Beingmate’s financial management and reporting practices”, the New Zealand firm said.
The statement read: “As an investor in Beingmate, we are extremely disappointed by this announcement and the on-going performance of the company. We are seeking more information on the forecast downgrade in addition to receiving Beingmate’s full-year financial statements.
“We will consider the financial implications on our investment for the purposes of our upcoming interim financial results.”
Fonterra said it had “total confidence in the judgement” of Johan Priem and Christina Zhu as its designated directors and “that their actions are in the best interests of Beingmate and all of its shareholders”.
China is one of Fonterra’s biggest global markets, contributing NZD3.4bn (US$2.47bn) in sales revenue in fiscal 2017, along with NZD200m in normalised earnings.
A Fonterra spokesperson told just-food that China recently introduced a change in regulations for infant formula to improve product safety and quality, whereby all companies were required to apply for registration of their brands with effect from January.
Fonterra’s statement went on to say: “The Chinese market is growing rapidly and within five years, forecast demand for infant and baby dairy products will be more than the total for other global markets, so the potential remains.
“Despite Beingmate’s recent performance, the strategic rationale for our broader partnership with Beingmate still stands. We are disappointed that Beingmate is not maximising the opportunity created by the early registration of its 51 formulations under the new registration rules.”
Beingmate’s chief financial officer and deputy general manager Shen Lijun quit the company in May, in what was said to be for personal reasons.
The company booked a loss of CNY798m in 2016, with profits hit by a counterfeiting racket and ongoing upheaval in the Chinese formula sector. The result compared to a profit of CNY103.6m in 2015. Beingmate also ran up an operating loss of CNY659.7m in 2016, versus operating income of CNY75.5m in the prior 12 months.
Before those earnings results were announced, the company informed the Shenzhen Stock Exchange of the negative impact from revelations its infant formula was being counterfeited. A group of underground factories was uncovered that had been making fake infant formula under brands including Beingmate and Abbott , which is owned by US healthcare company Abbott Laboratories.