Caixin
May 20, 2019 08:14 PM
BUSINESS & TECH

In Depth: Is China’s Former Baby Formula Leader Back From the Brink?

* Although Beingmate’s stock was branded as being at risk of delisting in April 2018, it managed lose the designation a year later by turning a profit

* Nonetheless, it still faces questions about its management. Despite being a public company, Beingmate is still run like family business

(Beijing) — The immediate threat of delisting is no longer hanging over Beingmate’s head, but it’s too soon to crack open the champagne.

Though the baby-formula maker was finally taken off the Shenzhen Stock Exchange’s delisting watchlist in April, it has a lot of work ahead if it wants to convince investors it has a formula for long-term success.

Beingmate Baby & Child Food Co. Ltd. was once lauded as China’s top dairy stock, market watchers said. But it has been dragged by problems that include distribution chaos, murky information disclosure and a feud with its No. 2 stakeholder, New Zealand’s Fonterra Co-operative Group Ltd.

While it made it back into the black last year, observers say that may have been more due to government largesse and asset sales than improving fundamentals.

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Sector scandals

The Zhejiang province-based Beingmate is one of the top domestic dairy producers in China, the world’s biggest market for infant formula. Founded in 1999 by child care expert Sam Xie, it went public in 2011 and was the sector’s leader in 2013, when it made a net profit of 721 million yuan ($104.76 million).

Unlike many of its rivals, it was unscathed by the 2008 scandal in which the industrial chemical melamine was found in many Chinese infant formula products. It resulted in the death of six babies and hundreds of thousands of others fell ill.

Dozens of Chinese dairy companies were found to be selling products tainted with the chemical, forcing millions of parents to abandon the local industry in favor of overseas producers.

However, trust in Beingmate’s products was dented in 2016, when it was discovered that counterfeiting ring was selling cheap — but safe — infant formula in the branded containers of well-known brands including Beingmate, once again triggering a national round of inspections into the sector. The company denied any involvement.

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Special treatment

That scandal, plus growing competition in a crowded market — firm founder Xie described the industry as being saturated with “thousands of instant formula brands” in a recent interview with Caixin — played a role in the company’s descent into the red in 2016, for the first time since its initial public offering (IPO) in 2011.

It reported a net loss of over 780 million yuan in 2016, which widened to 1.1 billion yuan the following year.

Its stock was given the “special treatment” tag by the bourse in April 2018, which meant it was considered to be at risk of delisting from the exchange. Stocks get this tag if they suffer two straight years of losses, have unusual financial conditions or have been fined for regulatory violations.

But it wasn’t only external factors that have hurt Beingmate’s profitability.

Despite being a public company, Beingmate is still run like family business, with all the nepotism that entails, market watchers said. Many of Xie’s relatives — including his wife, nieces and uncles — have held key positions at the company.

One person close to Fonterra said Xie’s relatives have sold Beingmate products through unauthorized channels, resulting in unfair competition and pricing chaos.

Its murky financial disclosures have also shaken investor confidence.

Over the past four years, Beingmate has received at least 20 queries from the stock exchange asking it to clarify its information disclosures. Beingmate has also downgraded its earnings forecasts seven times since 2013 — most drastically in January 2018, when it forecast a loss of as much as 1 billion yuan, more than double the loss it had forecast in October.

The day after that disclosure, Fonterra said it was “extremely disappointed” by the announcement.

Fonterra also said “four Beingmate directors, including the two directors designated by Fonterra, have expressed reservations relating to some aspects of Beingmate’s financial management and reporting practices.”

Fonterra paid $553 million for 18.8% of Beingmate in 2015. Since that purchase, the value of its stake has dropped by around 60% as Beingmate’s share price has declined — from 18 yuan to around 7 yuan currently.

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Beingmate baby formula sits on display at a supermarket in Haikou, South China’s Hainan province. Photo: VCG

Public showdown

Xie argues that Fonterra’s involvement has held the company back.

“Fonterra has the best dairy sources and this was what we needed the most when it came to us (to buy a stake),” he told Caixin. “Some early investors in our IPO wanted to cash out at the same time, so it was good to let Fonterra come on board.”

Xie complained Fonterra “always says no to our decisions, such as when we requested financing from the local government. It’s afraid we will become state-owned.”

In any case, Beingmate brought in state-owned Great Wall Asset Management Co. Ltd. as a financial backer in December. The introduction of state capital would “protect the company's long-term strategic development and value realization, help improve corporate governance and achieve transformation,” it said.

Great Wall is one of four national asset management companies created almost two decades ago to help cushion the impact of the Asian financial crisis by taking bad loans off the books of China’s largest banks.

Xie’s role at the company has also been a point of contention.

Xie became Beijingmate’s chairman in early 2018 after quitting the role for health reasons after the 2011 IPO. He also intended to become the company’s general manager.

A Fonterra source said that while the company agreed to Xie moving back into the chairmanship, it thought that the general manager job was better left to a professional.

It seems the New Zealand firm won out. Last year, it appointed an outsider it found through a headhunter as the new general manager. It also reshuffled management and laid off more than 1,000 people — mostly salespersons.

Real turnaround?

Things seemed to turn around for Beingmate in 2018.

In April, the company said its audited 2018 net profit attributable to shareholders and equity attributable to shareholders as of Dec. 31 each turned positive to 41.11 million yuan and 1.82 billion yuan, respectively. This was the catalyst for the exchange dropping the special treatment tag.

Some analysts, however, said the earnings turnaround was driven by state support and a string of asset sales. Beingmate sold 100% of a wholly-owned subsidiary for nearly 45 million yuan, and received over 100 million yuan in subsidies from the government last year.

Fonterra has said it would review its poorly performing investment in Beingmate along with other assets in China.

On March 22, Zhu Xiaojing, Fonterra’s head of China operations, stepped down from Beingmate’s board, prompting speculation Fonterra is loosening its oversight of Beingmate.

“This maybe a sign that Fonterra is letting go of Beingmate, bit by bit,” said a source with knowledge of the matter.

Tang Ziyi contributed to this report.

Contact reporter Jason Tan (jasontan@caixin.com)

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