Finally, some good news in China’s dairy industry. France’s Danone (BN.EPA) will increase its stake in China Mengniu Dairy (2319.HKG) to 9.9%, up from the 4% it bought last May via a joint venture with China’s state-backed Cofco Dairy Investment. Danone will put up US$665 million for the additional share of China’s biggest dairy company in a market that accounts for 6% of the French firm’s global sales. Danone, along with several other foreign dairy brands, had it rough in China in 2013. The National Development and Reform Commission, a regulator, fined Danone millions for fixing the price of baby formula. China’s dairy industry has been rocked by food-safety scandals for years, with one in 2008 leading to the death of six toddlers. The buy should be a win for both companies, Tracy Dan, an equities analyst at First Shanghai, said on Thursday from Shenzhen. “Danone hasn’t done that well here with yogurt but it will be able to use some of Mengniu’s channels in this effort,” she said. The French company should also help Mengniu with securing the quality of its supply chain. Mengniu shares rallied on the announcement. For investors looking for a longer China play, Mengniu is on the menu.
Baidu sets its eyes on the silver screen
Never afraid to follow in the footsteps of major Western tech firms, Chinese internet giant Baidu (BIDU.NASDAQ) is moving into the film production business. The firm will finance a new Los Angeles-based film production venture called Aquamen Entertainment, its first foray into content production. It has also announced its first feature film – a US$40 million 3D animated film called Kong, based on the classic Chinese novel, Journey to the West. Baidu has already invested heavily in online film and TV distribution channels, last year buying video service PPS and acquiring iQiyi in 2012. Demand for online content in China surging amid an explosion in smartphone ownership. “With good video content, Baidu could improve traffic volume to stimulate advertising revenue growth,” said Ricky Lai, a Hong Kong-based analyst with Guotai Junan International Holdings. The company has struggled into the fiercely competitive Chinese mobile internet market. Lai has a “buy” rating on Baidu.
Some Chinese auto firms need to be driven off the road
China saw another month of “record” high auto sales in January, state media trumpeted this week. Records are easy to break in a fast-growing emerging market where base figures are low. Just one additional car needs to be sold in February for a new high to be set. China’s car market has big growth potential: Tens of millions of people want and need autos. But the route this growth will take is unpredictable. Exhibit A: January’s data showed 7.4% more passenger car sold than the same time last year; December saw a 21% increase year-on-year. Have people stopped buying? Hardly. In this case, seasonal factors were at work. It is time to be careful where to park your money in the China auto play. Some local brands are looking at risk, and might need to be driven out of investors’ portfolios. Analysts at UOB Kay Hian advise ditching Geely (0175.HKG) and Great Wall Motor (2333.HKG, 601633.SHA). “The two companies are losing market share in their respective segments given ageing product portfolio and intensifying competition,” the analysts said in a note on Thursday. “Meanwhile, market expectation remains too optimistic on them.” Geely’s January sales plunged 47.4% from a year earlier. Their problems could mount if the central government announces a relaxation of the rules governing foreign investment in the auto industry, mulled publicly by officials recently. “If China relaxes foreign ownership rules, it would be devastating to China’s indigenous brands,” the China Association of Automobile Manufacturers warned in a statement on Thursday.
Chinese IPOs are heading westward again. In 2014, some 30 Chinese companies could list in New York, according to a report released this week. Mainland companies haven’t flocked in those numbers since 2010, before a slew of fraud cases hit many of those firms the following year. The latest addition to the list of potential IPOs is Jumei, an online jewelry retailer that just hired Credit Suisse (CS.NYSE) and Goldman Sachs (GS.NYSE) to handle its up-to US$600 million IPO. Next week will be quiet in Hong Kong with just one “P chip” (a Chinese firm incorporated in the Cayman Islands or other offshore jurisdiction) set to list, China Metal Resources Holdings.