Beingmate woes a worry for Fonterra - analyst

Christina Zhu in Fonterra's Shanghai food technology centre. Photo / Christoper Adams

Fonterra should be concerned about the financial woes facing its Chinese partner, Beingmate Baby & Child, an analyst says.

But the New Zealand dairy giant says it remains confident in the long-term outlook for the Hangzhou-based infant formula maker.

Beingmate warned investors this month it was anticipating a first half loss of up to 230 million yuan ($48.7m), compared with a previous forecast for a profit of up to 100m yuan ($21.2m).

In a market update, the Shenzhen-listed company blamed the downgrade on a fake infant formula scandal, as well as "industry disorder" in the fast-changing Chinese baby milk sector and new regulation including a requirement for brands to be registered with the China Food and Drug Administration.

Nine people were arrested in China in April after more than 22,000 cans of counterfeit infant formula were found being sold under the brands of Beingmate and Abbot Laboratories.

Fonterra invested about $754m last year for an 18.8 per cent stake in Beingmate.

The tie-up with the Chinese firm, which operates four plants and 80,000 retail outlets across China, includes a distribution deal for Fonterra's Anmum infant formula brand and a joint venture manufacturing operation in Australia.

The New Zealand dairy giant is a latecomer to China's branded baby milk market, having only launched Anmum there in 2013, and is making a big push in that space.

Trace Research director Andrew Zhu said the reasons Beingmate gave for the expected first-half loss were challenges shared by many of its competitors in Asia's biggest economy.

"However not all of them are expecting financial losses like Beingmate," said Zhu, whose firm specialises in researching the Chinese market.

He said Beingmate's profit downgrade had shaken Chinese investors' confidence in the company.

"Fonterra should certainly be worried," he said.

Lukas Paravicini, Fonterra's chief financial officer, said the first half forecast was a "responsible signal to the market" and the co-operative was waiting to see the detailed half-year results.

"Fonterra's partnership with Beingmate is part of our long-term business in China and we remain confident in this," Paravicini said.

He said the company was continuing to see good growth in Anmum sales in the Chinese market.

"The infant formula market in China remains strong and in the last 12 months to May, infant formula sales into China were up 47 per cent compared to the same period last year," Paravicini said.

Beingmate reported a more than 50 per cent lift in 2015 annual profit, to 104m yuan ($22m), although the bottom-line result was reportedly boosted by government subsidies.

Zhu said a "buy one get one free" promotion run by Beingmate with its Chinese distributors towards the end of 2015 might have bolstered its sales numbers for that year.

Fonterra's managing director for Greater China, Christina Zhu, told the Business Herald in May that Beingmate's financial performance was where Fonterra stood to gain the most value from the partnership, rather than through the Anmum distribution deal alone.

"The bigger benefit for Fonterra comes from making sure Beingmate is really successful in this marketplace and Anmum is part of that," she said.

Beingmate shares have slumped by almost 17 per cent since June 12 to open at 12.14 yuan on the Shenzhen exchange today.

Fonterra bought into the company at 18 yuan a share.