FrieslandCampina receives an exciting turn of events from China

FrieslandCampina unexpectedly has to deal with an exciting turn of events from the Chinese market. Huishan Dairy, with which FrieslandCampina has a joint venture, appears to have failed to fulfill a number of obligations. 

The Chinese market has a number of great potential for the sale of dairy, but at the same time it also has an opaque financial market. In recent years, one question seems to keep popping up: 'How sustainable is the Chinese financial system?'

In addition, banks and companies are becoming increasingly entangled because shareholders have interests in both banks and companies. This is one of the reasons for dairies to work with a partner. In addition, the culture surrounding doing business in the Netherlands is very different. The Chinese partner is therefore indispensable.

FrieslandCampina is in the middle of it
Dairy group FrieslandCampina now appears to be in the middle of this stalemate. This was initially done through Huishan Dairy's partner. 

In April 2015, the two companies joined the joint venture Friesland Huishan† The companies jointly produce and sell infant nutrition. Due to financial mismanagement, the Chinese company is now eerily close to the abyss. That became clear on Friday, March 24, when the price of the shares collapsed.

4 billion dollars gone 
Shares of 60-year-old Huishan were among the most stable in Hong Kong a week ago. On March 24, however, things went horribly wrong. Shares fell 85 percent in one hour. That was equivalent to a capital destruction of 4 billion dollars.

The Chinese company manages the most number of dairy farmers in China. This was one of the reasons for the steady decline in profits in recent years. The oversupply on the world market resulted in low milk prices with all the associated consequences. Unfortunately, this has not been able to curb Huishan's urge to invest. These investments were mainly driven by loans. Cows were sometimes even used as collateral.

Chinese banks in trouble
The problem with this situation is bigger than you think. When this company falls, it will take some Chinese banks with it. In any case, there is one bank that already feels the hot breath on its neck, namely Jiutai. That bank, Huishan's second lender, recorded the largest drop in share prices since its inception in one day.

Caixin estimates that the bank still has a $ 266 million loan outstanding. The Ping An Bank has even lent $300 million to Huishan. The collateral was 25 percent of the shares in Huishan.

What are the consequences for FrieslandCampina? 
The companies work together through a joint venture. The dairy processor had already indicated that it would take action when necessary. In this way it wants to protect its own activities. The government of Liaoning, where Huishan is located, is an important party in this. The government has already indicated that it will help Huishan. The government wants to ensure that the interest that still has to be paid on the loans can still be paid. The government hopes to strengthen the company's financial position within a month.

Wife major shareholder disappeared
The company claims, succinctly put, that chairman and major shareholder Yang Kai has not used money to invest in real estate. It is confirmed that Yang's wife, who maintains contacts with the banks, has not had any contact with the company since March 21. At that point, Yang found out about the debts.

Yang is now going to sell the shares and the Liaoning government is investing $13 million in the company through land purchases. In this way, the company must again receive sufficient resources. The major shareholder managed to expand from 52 percent to 73 percent of the shares by lending money to the company against shares from his package. 

More than just the future of a company
This is about much more than the future of a company, many dairy farmers and a collaboration with a Dutch company. It is about the future of Liaoning Province. The reputation of the Chinese government in the financial market is also at stake. The question, of course, remains how Yang and his wife were able to evaporate so many millions of dollars. 

Also read, exclusively for subscribers of Milk & Feed Pro, this story: FrieslandCampina announces April guaranteed price† Not a subscriber yet? Click here for the possibilities.

Herman van den Pol

Herma van den Pol has been with us since 2011 Boerenbusiness and has developed over the years into a market expert Milk & Feed. In addition, she can be seen weekly in the market flash about the dairy market.

h.vandenpol@boerenbusiness. Nl

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