News Analysis: Accelerate its expansion in the Chinese dairy market
What’s new?

  • Japfa’s 75%-owned subsidiary, AustAsia, which operates the group’s dairy business in China has entered into a Share Purchase Agreement with Fonterra Tangshan Dairy Farm (HK) Limited and Abbott Overseas Luxembourg S.A.R.L. to acquire the entire issued capital of Falcon Dairy Holdings Limited (Falcon).
  • Falcon holds 100% of the registered capital of Pure Source Dairy Farm Company Limited which owned two dairy farms in Shandong, China with a total capacity of approximately 16,000 heads of cattle. In addition to the two established dairy farms, this transaction also includes two additional sites of land in Shandong that can be developed in the future. 
  • Transaction value is considered to be about US$123.4m, which will be funded through bank financing facility up to US$130m.
  • This acquisition will help AustAsia to expand its production capacity in a shorter time  compared  with  building  new  farms  from  scratch, as well as to take advantage of the current favourable raw milk price environment due to the supply shortage in the Chinese market.
  • Falcon’s farms are also a good fit to AustAsia as (i) their design and construction are similar to AustAsia’s standard, and (ii) they are strategically located in Shandong Province, close to most of AustAsia’s farms, which will lead to operational synergies and ability to share the infrastructure.
  • Completion of the transaction is expected to take place on or about 30 June 2021.

Our view: 

  • We are positive on this acquisition as this will accelerate Japfa’s presence in China as independent raw milk producer in shorter time and more efficient way than building new farms from scratch. The process of securing land until the cows start milking usually takes about 3-4 years, and the cost of building one farm with 10,000 heads of cattle is about US$90-95m. By acquiring Falcon at about replacement cost we think is fair as it gives AustAsia additional two established dairy farms with a total of 16,000 head of cattle which are already milking right away. This acquisition will significantly reduce the expansion capacity lead time compared to building new farms from scratch. 
  • Immediate impact to the Japfa’s earnings would be immaterial for the short-term period given Falcon actually still booked some losses due to poor management from previous owners. That said, Japfa is optimistic that with its experience as the leading independent raw milk producer with the highest milk yield in China, it will able to turn around the two Falcon’s dairy farms to become profitable in one year or at least by the end of 2022.
  • We are retaining our forecasts for now, given the relatively small contribution of this transaction to Japfa’s earnings (at just c.4%). We maintain our BUY call and TP of S$1.03.