Ke Li says Synlait Milk was the "perfect match" when Bright Dairy went hunting for an offshore target to expand its international ambitions.
Ke, Bright Dairy's vice-president and head of marketing, says Bright chose Synlait as its final target out of candidates from North America and elsewhere in Oceania after it considered both the national relationship and the entity qualifications.
"New Zealand and China have built a very good relationship between each other and Synlait milk matched all of our business criteria at the time. Our first condition is that their core business matches our core business and the second, that their future development will bring more synergy to communicate and co-operate well in the future."
Ke says that initial investment three years ago is just the beginning. "We have put a lot of resources into Synlait Milk; we expanded our plant one year ago and the coming IPO this month will be another milestone for future development. Our consideration is to gradually explore the international market and make it a special expert with a focus on the Chinese market."
From the time of acquisition in November 2010, Bright made it clear it had no intention of dominating the organisation and influencing the operating activities of Synlait.
Establishing a structure completely independent from Bright, Chinese influence on the business was limited to seats at the board table.
"When we made the investment, we retained all of the staff from the CEO through to middle management. We want to keep them as our key assets in the company," says Ke.
Synlait was the first overseas acquisition Bright Dairy made as part of a considered effort to expand internationally. Bright has since gone on to acquire Australian food producer Manassen Foods for A$530 million in 2011 and British cereal maker Weetabix in a deal valuing the company at £1.2 billion. The decision to expand Bright's international portfolio was no doubt helped by the success of its Synlait investment. On acquisition, Bright set goals for the development of Synlait, incentivised by an agreement to go public should they succeed. "Generally speaking Synlait has met most of our targets and that's why we can launch the IPO project," says Ke.
Although the IPO is expected to dilute Bright's holdings down to 37-41 per cent, Synlait remains the focus of its New Zealand operations. "We want to build Synlait bigger and stronger, and especially get more involved in high value-added products," says Ke.
Synlait has been quickly integrated into Bright's strategy for the Chinese dairy market, with the premium end of the infant milk formula segment well-targeted.
"In China there are 20 million babies born every year. That creates a very big market for each of the infant milk producers," says Ke. "Bright would like to create infant products as the third major pillar of our business, [joining fresh and UHT dairy products]."
Officially launched in the first quarter of 2012, Pure Canterbury is the first product produced by Synlait Milk for Bright Dairy. It is gradually being introduced to the Chinese market, with Shanghai the first destination.
Already Bright has sported sales of RMB50 million from Pure Canterbury, off the back of an extensive publicity campaign which cost RMB20 million. Ke emphasised Bright's long-term vision is to expand the roll-out of Pure Canterbury to cities in the greater Shanghai area, a move she expects to increase sales to RMB200 million this year.
However, RMB200 million of sales still represents a small percentage of the total Chinese infant formula market, which Euromonitor anticipates will be worth US$25 billion by 2017. Competition is fierce however, with many domestic and international players and more than 100 brands from New Zealand.
The problem is that with runaway competition comes quality problems; a situation Chinese authorities have moved to address with a significant tightening of regulations for infant formula production.
On May 31, Premier Li Keqiang announced a host of changes to the industry designed to regain consumer confidence while strengthening the quality and safety of infant formula in China. The measures strictly forbade the common practice of outsourcing the production of baby formula - which was then repackaged and redistributed in China. Foreign producers now need to register with Chinese quality inspectors and substandard producers will be banned from selling on the domestic market. All products must be labelled in Chinese.
A task force dedicated to ensuring infant formula quality throughout the creation process will be established with electronic monitoring used to guarantee the chain of supply.
"In the long run we believe the tightened policy will have a maturing impact on the market. Only qualified producers will be able to survive," says Ke.
The new regulations will require Synlait to register in China as a supplier of infant formula and nutritional products. Certain products will no longer be permitted to be exported to China in the short term while Synlait works to produce alternatives.
"We consider the current change in government regulations as a good opportunity for all high quality products," Ke says. She is confident Bright will have no issue with the strengthened requirements.
"We have already assessed our business, milk and production systems and we think we are already qualified under the new system. It will only bring us new opportunities.
"The Government carried out very strict controls because from every angle they want to make the infant formula market more regulated and more mature."
The regulations have been introduced in the wake of a CCTV expose which uncovered a number of products falsely claiming to be imported from New Zealand. The reports were damaging to the New Zealand image as "not every one of the customers can understand the difference between the exposed products and high-quality products".
Ke hopes however that the content of the reports will resonate with as many consumers as possible, "so only good quality products with genuine resources from New Zealand will be chosen on the market.
"The expose has actually created an opportunity for Bright and Synlait to have a promotion of their branding and reputation. The reporters who came to visit Synlait have seen the up-to-date facilities and controls and they believe this company is qualified for Chinese customers.
"That is why we are very confident that we will make a good opportunity of this and grow stronger."
Seeking to raise $75 million in new capital
IPO will include a secondary sell-own indicatively set at $45m
Indicative price range of $2.05 to $2.65 per share Market capitalisation of $305m to $372m
Proceeds of IPO to be used for financing Synlait Milk's growth initiatives and repay existing debt
Served as a Bright Dairy appointed director of Synlait Milk from acquisition
12-year veteran of Bright Dairy
Currently vice-president of Bright Dairy & Food Co and head of marketing