Fundamental Analysis of China Mengniu Dairy Co. Limited

Analysis Summary

[pic 1][pic 2]

Industry Overview

China’s diary industry has developed substantially over the past 15 years as consumers become more aware about the nutritional benefits of diary. Diary product sales volume reached 26.4 million tons in 2014 compared with 0.779 million tons in 2000. There is significant growth potential for domestic dairy enterprises since per capita liquid milk consumption in the country was 15.9kg in 2012, which was much lower than the amount for developed countries. [pic 3]

Figure 2: China Dairy Product Sales Volume

Figure 3: Per Capita Liquid Milk Consumption

Furthermore, urban residents purchased more diary products than rural residents due to the income gap, which presents high demand potential from rural markets.[pic 4]

Competitive Analysis

1. High market share

Despite hundreds of diary companies in China, only few of them possess the ability of large-scale production, such as Mengniu, Yili and Bright diary, comprising a combined market share of 60%. Moreover, dairy crisis in 2008 has pushed out smaller enterprises out of the market.

Figure 4: Liquid Milk Market Breakdown

2. Distinctive integration strategy  [pic 5]

Danone is the second largest strategic shareholder of Mengniu and holds 9.9% of its shares. The joint-equity company operated by Mengniu and Danone managed to represent the largest chilled dairy market share in China due to its combination of superior quality management technique and product innovation competence of Danone with the brand influence and the extensive sales networks of Mengniu.

Through cooperation with Arla Foods, the international Denmark-based food cooperative, Mengniu acquired the opportunity to improve its innovation and operating capabilities by introducing world-leading dairy industry knowledge and production technology of Arla Foods.