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KEEPING CHILDREN HEALTHY

Engaging with a leading Chinese dairy producer on better governance and operations, supporting an improvement in its milk quality and ability to capture growth opportunities in new markets.

Following concerns about the quality of milk produced by Chinese domestic dairy companies when several infants died and many thousands fell ill with suspected melamine poisoning in 2008, shares one of China’s major milk producers, more than halved in value and were suspended from trading. Following a change in senior management and the appointment of staff with international experience in dairy production and distribution, we identified improvements in quality control throughout the company’s production process and its supply chain. These changes coincided with improving regulations addressing public concerns about food safety in China and rising milk consumption. In our opinion, it was only a matter of time before this was recognised by the stock market, and we invested in the company in early 2012.

2013

Hermes conducts a site visit to Chinese milk processing plants

45.76%

Chinese milk producer's stock rise from 2012 to 2017

Reputation

Recovery from milk poisoning scandal to world-class consumer good provider

A global dairy giant acquired a 4% stake and the two companies subsequently entered into a joint venture to produce and distribute yoghurt in China, in which the Chinese company gained an 80% stake. Ongoing collaboration with the global company on R&D and improvements to the supply chains of its baby formula and pasteurised milk business, additional partnership with a Danish dairy company, plus its entry into the baby food market, has helped its stock price rise 45.76% from early 2012 to August 2017. This typifies the disciplined, efficient, growing and sustainable companies that we seek in Emerging Markets. The stock appeared expensive at first, because the company was investing for future growth rather than focusing on short-term gains.

These case studies are examples of companies we have either held or engaged with. 
Source: Hermes Investment Management