Farmers watching Beingmate, China Farms performance

In his annual report to Fonterra farmers, Coull noted that its overall China investment is significant: at least $1.5 billion dollars in Beingmate, China Farms and the consumer brands and foodservice businesses.

He says while returns have increased, mostly via the growth of foodservice (EBIT $209m last financial year), Beingmate and China Farms are still struggling.

“There is significant value yet to be realised in our China Farms business and our investment in Beingmate relative to the capital employed,” he says.

Coull notes that Fonterra’s strategic partnership with Beingmate extends beyond direct investment, sitting as part of a larger, profitable Greater China business.

“However, when looked at as a standalone investment the performance and return on our 18.8%, $756m initial investment has been poor and the related stock market issues somewhat concerning as

Beingmate navigates its way through regulatory reform.”

Fonterra bought Beingmate shares in March 2015, valued at RMB18.3/share; on July 31 this year the shares were valued at RMB 11.97/share.

For the 2017 financial year, Fonterra’s investment in Beingmate took a $37m impairment charge, reducing its value to $617m.

Coull says the $35m impairment “while disappointing, was considered fair by the council’s independent financial advisors”.

“While the council remains concerned with the recent events, the significant potential Beingmate holds has yet to be realised and unlocking this needs to be a focus.”

He also notes headwinds affecting most Fonterra competitors in China and negative effects on most companies because of the downturn. However the numbers looking forward, as evidenced by consumption trends, suggest a positive long-term outlook.

“As signalled last year, participants in the China market have been positioning themselves for the new government regulations due to come into effect on January 1, 2018, focussed on traceability for infant formula products.

“Many of the headwinds faced are a direct result of entities not approved to continue in this market ridding themselves of stock that [will be] effectively worthless when the new regulations are implemented.

“Beingmate has not been immune to this and was impacted in sales and profitability; however it was among the first companies to receive regulatory approval and should be well positioned.”

Coull says Fonterra’s board and management have consistently believed new regulations in the Chinese market in January 2018 should signal the beginning of a turnaround in this investment relative to the wider China strategy.

“The council is maintaining a watching brief and having regular discussions with the board on this topic. Given the significant capital invested, your council, while supportive of the strategy, is in the short term looking to see evidence of a positive turnaround in this business and in the long term a significant return on our investment.”

Greater China doing well

- Volumes of 5.5 billion LMEs – 24% of total volumes across the co-op

- China consumer and foodservice operations continue growing and profitable, including a normalised EBIT increase of 60% to $209 million -- 18% of normalised EBIT across the co-op

- China foodservice drives large volume growth and consumer category expansion

- Anchor now the number-one imported UHT milk in the online Chinese market.