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Feihe to milk more profits with huge capex

By Ding Qingfen (China Daily)
Updated: 2009-09-01 08:05

Infant formula maker Feihe Dairy Industry is investing 5 billion yuan over the next five years to boost its milk output capacity, its chairman told China Daily.

The New York Stock Exchange listed firm intends to set up eight large-scale pastures and 1,000-odd small-scale pastures as part of the plan to increase its total milk output to around 1.6 million tons.

The eight large pastures that are expected to come up in the next five years would have a capacity of 10,000 milk cows each, while the 1,000 small pastures would be able to house 1,000 milk cows each.

The combined output from all the pastures is expected to be around 1.6 million tons.

The relatively unknown Feihe has for long been plagued by an acute output crunch. It has only three large pastures in Heilongjiang province with an annual output capacity of 300,000 tons.

"The three pastures can only contribute to 40 percent of our output volume every year," said Leng Youbin, chairman, Feihe Dairy.

Leng Youbin

That has left the Heilongjiang-based company, also called American Dairy, relying largely on external supplies from individual farmers to cater to its requirements.

Leng, however, exuded confidence when he said the expansion would help vault the company into the top run of infant formula makers in the country.

Unlike other dairy firms, Feihe does not have cash problems and reported fairly good performance for the first half. "Money is not a constraint for us and we are fully committed for the expansion plans," said Leng.

On Aug 18, Feihe was listed on the high-growth board Arca, and transferred to the New York Stock Exchange in June, the first Chinese firm to be listed on the main board.

The company had earlier raised funds worth $63 million from US private equity firm Sequoia Capital. It was also one of the few firms that were left unscathed in last year's melamine scandal. In contrast to its peers, the company bucked the trend and registered sales of $193 million in 2008, and during the first half of this year, its sales surged by 258 percent to $150 million.

That has largely been possible due to the strong commitment on quality, said Leng.

According to a recent ACNielsen survey, Feihe had a 7.3 percent market share in the infant formula market during the first half of the year.

But with demand for milk powder slated to grow substantially in the next few years, the company really had to pull up its socks to catch with foreign manufacturers who dominate the infant formula market.

Related readings:  China's dairy farmers getting over tainted milk scandal  Dairy firms recover from milk scandals  China closes thousands of milk collection stations  Check sterilized milk drinks

According to a report by China Investment Consulting, the Chinese infant formula market is expected to grow at a scorching pace from 2009 to 2012 with a market size of around 30 billion yuan. By 2010 China is also expected to become the largest high-end infant formula market.

After the expansion, Feihe intends to utilize most of the milk collected for infant formula manufacture, and subsequently double its market share to 15 percent in the next five years.

Feihe, however, still has a major hurdle to cross before it settles down among the top dairy firms. The unknown company's sales network has largely been strong in second- and third-tier cities located in north, northeast and central China. "In these cities, Feihe's image as a high-end brand is strengthening. However, in big cities, we still have a long way to go to narrow the gap with international brands," Leng said.

Foreign infant formula brands such as Abbott and Dumex have gained strong recognition among the urban populace in Beijing and Shanghai, especially after the melamine scandal.

"They were dumping products in the market at low prices to cash in on the demand," Leng said.

But with the Ministry of Commerce deciding to set up a license mechanism for imported dairy products, some kind of normalcy is expected to return to the market, said experts.

Feihe has 80,000 sales outlets in China, with most of them in Henan, Shandong, Hebei and Heilongjiang provinces. During the second half the company plans to concentrate on bigger cities and add another 20,000 sales outlets," Leng said.

It will also step up brand building efforts by spending more on advertisements and on other communication modes.

"We will deploy 2 percent of the sales proceeds for such activities," the chairman said.