Check on China: Milk a proverbial cash cow?

With more and more of China’s 1.3 billion population drinking milk every day, it’s tempting to think that China’s dairy industry is the next boom sector.

On the surface, profits look like a sure bet for the country’s dairy industry: milk consumption is estimated to be growing at a rate of 15% to 20% a year, with per capita consumption of urban residents around 22.54 kilograms (kg), according to the Dairy Association of China, compared to an annual world dairy consumption per capita of 100 kg. Of that total, liquid milk and yogurt accounted for 97.77% of the demand, with the rest in milk powder. To meet this surging demand, China has been ramping up its milk production capacity, increasing it at an annual average of 14.6% over the last 10 years. For 2006, Chinese milk output reached 32 million tons, making China the world’s third largest producer, following India and the United States.

The shear thought that so many Chinese are consuming dairy products could easily drive investors to pour their money into the segment with the expectation that there really exists a proverbial cash cow. However, the business as of late has been going through some tough times as a result of rising commodity prices and over supply.

The sector’s initial boom made some companies rich with the industry’s total revenues last year reaching over $7.5 billion. The leader has been China Mengniu Dairy Co. Ltd. (PINK: CIADF), which controls one-third of the Chinese liquid milk market—more than the combined market share of its two closest competitors: Yili Inner Mongolia Industrial Group Co. and Bright Dairy & Food Co. China Mengniu Dairy manufactures a plethora of dairy products, ranging from milk to yoghurt to ice cream and powdered milk.

According to its 2006 financial statements, Mengniu’s net income grew by a phenomenal 59% from 2005 to reach $727.4 million. The U.S. shares of the company (Mengniu is also listed in Hong Kong) are currently selling at $4.40 a share, above their 52-week low of $1.79 on Oct. 6, 2006. Other profitable U.S.-listed players include China Dairy Group Ltd. (PINK: CHDFF) whose stock is currently selling at $0.32 a share. Last year, the firm posted a net income of $13.3 million, a 7.8% growth from 2005.

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