China Mengniu Dairy has been forced to provide a letter of support to banks financing Bellamy’s Organic, after writing down the value of its local infant formula business by $1 billion over the last year alone.
Mengniu is one of China’s largest dairy producers and acquired Bellamy’s, which has been listed on the ASX, for $1.5 billion in 2019. Mengniu has been a major investor in Australia’s dairy industry for more than a decade, buying into another infant formula maker, Victoria’s Burra Foods, in 2016.
Documents filed with the corporate regulator show Bellamy’s lost money in the last two years. In the 12 months to December 31, the company posted a $922 million loss after a $1.03 billion impairment in its value.
The accounts for Bright Treasure, Bellamy’s parent company, show a $47 million loss one year earlier, for 2023. The accounts lodged last week outline that Mengniu provided a letter of support, indicating it would support the Australian business, to HSBC and ANZ. The banks have lent $60 million to Bellamy’s.
The big losses at Bellamy’s will add to Mengniu’s headaches in Australia. In April, the company hired McGrathNicol to sell Western Australia’s Brownes Dairy after calling in a $200 million loan to the milk and cheese producer.
Earlier this year, Mengniu, which did not respond to requests for comment, told investors in Hong Kong, where it is listed, that impairments and poor sales would hurt its earnings. Profits, it said, would fall about 50 million yuan ($11 million) to 250 million yuan, down from 4.8 billion yuan one year earlier.
It said in the March filing that there was an “imbalance between supply and demand in raw milk and lower-than-expected consumer demand”. A sluggish economy has pushed down demand for expensive dairy products, forcing some importers to consider how to broaden the markets they service.
Mengniu has previously attempted to acquire other Australian food businesses. In 2020, it was blocked by the Foreign Investment Review Board from proceeding with a proposed $600 million purchase of Lion Dairy and Drinks, owner of BigM, Dairy Farmers and Pura, even after the Australian Competition and Consumer Commission approved the deal.
Bega Foods ended up buying the Lion business.
Bellamy’s began in the early 2000s in Longford, a town near Launceston in Tasmania. Products began to appear on supermarket shelves in 2003, and the Bellamy family sold four years later when the company and its assets were acquired by Tasmanian Pure Foods. Bellamy’s was floated in 2014 at $1 per share. Mengniu acquired the business at $13.25 per share five years later.
Other Chinese companies have tried to unsuccessfully run Australian dairy businesses. Billionaire businessman Xianfeng Lu acquired Van Diemen’s Land Company in 2016 for $280 million. At the time, it was the largest dairy operation in the country with a herd of 17,890 cows. By last year, he had sold off the last part of the company’s sprawling Woolnorth station.
Bellamy’s is not the only local producer to have been affected by poor infant formula sales. Last year, a2 Milk warned revenues would grow at just half the pace expected by investors over the year, which it blamed on supply issues. The company’s market share in China has grown to 7.3 per cent, and it is expanding its products for children and seniors, to move beyond a shrinking infant formula category.
In a note, Rabobank analyst Michael Harvey said there were signs of concern for dairy demand globally, with “several concerning factors evident”.
“These include near record-low consumer confidence in the United States, troubling indicators of economic struggles in China and declining sales data from restaurants and consumer packaged goods companies across many regions,” he said, although he added dairy prices in Australia had risen.
“We anticipate downside risks emerging for global dairy commodity prices in the second half of the year, driven by expanding supply and demand uncertainty,” he said. “However, rather than a sharp downturn, we expect a recalibration from recent multi-year highs – a natural correction following a period of strong performance.”
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