Financial support from Mengniu to change Junhua Agriculture’s destiny 10-21-2019

On October 10, Ningxia Junhua Crescent Lake Agricultural Technology Co., Ltd. (Junhua Agriculture) made an announcement that Mengniu will provide no more than USD 14.12 million (RMB 100 million) for Junhua Agriculture in order to build a standardized ranch with 3,000-5,000 cows. Apart from that, Mengniu intends to acquire Junhua Agriculture by means of debt-for-equity swaps or equity participation according to its strategic development plan.


Junhua Agriculture: cooperation with Mengniu to have positive impact on business performance

It is reported that the support and the decision of acquisition come from a cooperation agreement among Mengniu, Junhua Agriculture and COFCO (COFCO Tunhe Sugar Co.,Ltd.). According to the agreement, Mengniu will have a profound cooperation with Junhua Agriculture in the aspects of purchase and sale. Besides, Mengniu will offer relevant financial support to Junhua Agriculture based on its development. The cumulative total will be not more than USD 14.12 million (RMB 100 million). For a further development Mengniu plans to acquire Junhua Agriculture in the near future.

It is also demonstrated in the agreement that after the corporate reorganization, Junhua Agriculture will build a new standardized ranch with a large scale of around 3,000 to 5,000 cows for the cooperation with Mengniu.

Junhua Agriculture expressed that the cooperation agreement plays an important role in accelerating the development of the company. With the advantages from one another, the three parties are believed to become stronger in terms of resources, strategic level and competitiveness. Most importantly, the change will make a great difference to the business performance in a positive way.


Junhua Agriculture has been suffering poor profits and even deficits lately

Junhua Agriculture is a ranch company with independent operation. However, Mengniu has been the biggest client of the company. According to some data, as the first big client of Junhua Agriculture, Mengniu Dairy Yinchuan Co., Ltd. has spent USD 9,490,000 million (RMB 67,210,000) on the purchase of raw milk from Junhua Agriculture, accounting for 58.94% of the company’s overall revenue. In contrast, raw milk at the value of USD 5,147,000 (RMB 36,450,000) has been purchased by Ningxia Mengniu Dairy Products Co., Ltd., which represents 31.97% of Junhua Agriculture’s overall revenue. As the subsidiaries of Mengniu, these two buyers have a total purchase amount accounting for 90.91% of the overall revenue of Junhua Agriculture.

However, due to a downturn in the Chinese raw milk industry, Junhua Agriculture has been confronted with poor profits or even deficits. According to data of market intelligence firm CCM, since 2015 the company’s profits have been dropping. In 2017 a loss of more than USD 28.2 thousand (RMB 200 thousand) occurred in the company. What’s worse, the company had a great deficit of over USD 3.4 million (RMB 24 million) in 2018.

Therefore, Mengniu’s move is not only seen as a benefit that can help Junhua Agriculture get through the difficulty in current business, but also regarded as an opportunity to get sustainable supply of raw milk for Mengniu. 


Market insiders: Mengniu prepares for more high-quality raw milk in the long run

 Mengniu’s move of acquiring a company with a 2-year deficit has caught some market insiders’ eye. From the point of their views, this move is beneficial to Mengniu’s long term development. With a larger scale and better performance of the company, Mengniu is in an increasing demand for raw milk as a guarantee of production. Especially the production of low-temperature fresh milk and low-temperature yogurt, which are the strength of Mengniu, requires a corresponding ranch around the factory. For Mengniu, a sustainable supply is a key to its long term development. Hence, Mengniu’s move is planning on the future.

For more information about China’s dairy market, please have a look at our monthly newsletter Dairy Products China News.

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