Blog: Katy AskewHave shares in Chinese infant formula firm Huishan Dairy turned sour?

Katy Askew | 27 September 2013

Investors in China Huishan Dairy Holdings Co could be left feeling a little sour today (27 September), after the dairy firm's debut on the Hong Kong stock exchange saw shares close down on their IPO price.

Shares closed at HK$2.58 after their first day of trading. The group's fully-subscruibed IPO had been priced at $2.67.

The slide could simply be a reflection of dampening investor sentiment in Hong Kong. Overall, the Hang Seng Index closed up a sluggish 0.35%.

However, it could also suggest deeper concerns about Huishan's ability to navigate the turbulent waters of the Chinese dairy market.

In its prospectus, the company hinted it expects to benefit from government steps to encourage good practice in the dairy supply chain, including tax benefits and grants to promote safety standards. "Companies with complete control over their raw milk sources and stringent safety and quality assurance measures, such as Huishan Group, are expected to benefit from the implementation of such policy," the company predicted in its IPO filing. 

However, subsequent reports in state media detailing plans to provide Chinese dairy makers with a state-backed financial boost of around CNY30bn (US$4.9bn) failed to mention Huishan.

According to official state publication the China Business Journal, the country's largest dairy firms, including Yili Industrial Group, Feihe International, Heilongjiang Wondersun Dairy Co Ltd and China Mengniu Dairy, will benefit from government subsidies, funding from China Development Bank and beneficial tax rates

The prospect of Huishan's competitors receiving support from Beijing, leaving the company out in the cold, could certainly provide investors with some cause to feel less bulllish.

Nevertheless, in many ways Huishan still looks a safe long-term bet. The company's "grass to glass" proposition provides it with full control over the supply chain. As a result, it has managed to sidestep the safety scares that have plagued the Chinese dairy industry in recent years. It is also able to communicate a strong message to Chinese consumers, a market where the national obsession is food safety. 

Moreover, Huishan plans to use the proceeds from the IPO to strengthen its integrated model further still. The company plans to open 45 new dairy farms and build a new milk powder processing plant.

If Huishan can deliver on this promise, even in the face of stiffening competition in the market, it is well-placed to benefit from the rising appetite for dairy in China.

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