The founder of Fonterra's Chinese infant formula partner, Beingmate, expects demand for baby milk to stay strong in China despite its economic slowdown, partly thanks to the end of the country's one-child policy.
And Sam Xie, who established the Hangzhou-based company in 1992, says a new wave of baby-milk regulation being introduced by Beijing, including a proposed three-brand limit for manufacturers, will benefit major producers by eliminating thousands of small-scale brands from the market.
Fonterra paid 3.4 billion yuan (about $754 million at that time) for an 18.8 per cent stake in Beingmate last year.
The investment is part of a tie-up with Beingmate that includes a Chinese distribution deal for Fonterra's Anmum infant formula brand, which began sales in China in 2013.
The two companies have also set up a joint venture operating a plant in Darnum, Australia, which is expected to start making product for Beingmate's Chinese customers during the second half of this year.
Beingmate has the largest share of the Chinese formula trade of any domestic producer - about 10 per cent - and the partnership was expected to provide Anmum with access to about 80,000 retail outlets across China.
Speaking to the Business Herald at Fonterra's Auckland headquarters yesterday, Xie said that even with China's growth slowing, he expected the infant formula market to keep growing at double-digit rates.
The Chinese retail baby-milk market is tipped to grow to US$25 billion ($37.9 billion) by next year.
"The economy is slowing, however the two-child policy [introduced last year] will create an additional three million babies born each year," Xie said. "I'm a strong believer that, going forward, demand will continue to be very strong."
Shenzhen-listed Beingmate faced tough operating conditions last year, in August reporting a half-year net loss of 103 million yuan, down from a 107.8 million yuan profit in the same period a year earlier.
Xie said Beingmate and the wider industry had been grappling with the challenge of thousands of formula brands entering China through e-commerce and other channels.
Further tightening of Chinese regulations would eliminate many smaller brands, which would benefit Fonterra and Beingmate, he said.
Beingmate has given guidance for an improved full-year result, with profit expected to rise 45 to 60 per cent on the 65.7 million yuan profit it reported for its last financial year.
Xie said he was confident that Fonterra's Anmum baby-milk brand, a latecomer to China, could establish a strong presence there.
"Having said that, Fonterra really needs to execute well in China and really understand the Chinese market and sales and marketing practices," he said. "That is the challenge."
Xie said Anmum had seen "huge" sales growth in China, albeit from a low base, since the partnership began.
Beingmate shares, which have been caught up in the recent turmoil that's hit China's equity markets, have fallen 24 per cent this year and were trading at 11.38 yuan late yesterday.
Fonterra purchased its stake in the firm at 18 yuan a share.