Pengxin's outgoing CEO, Gary Romano.
Chinese investors are turning their attention to the New Zealand meat industry with Pengxin -- which has made already made two significant investments in the NZ dairy sector -- confirming it is assessing beef investment opportunities in New Zealand and elsewhere.
Long-time dairy executive Gary Romano -- who took up the chief executive's role at Pengxin International three months ago -- told the Herald the company still believed there was "plenty of mileage to be done in milk" but "when you look at what is happening in China there is a massive demand for meat.
"China is looking for protein in various forms. They definitely want more dairy. We believe there is going to be growth in beef. We are a Chinese company -- we believe we can market to Chinese people."
Pengxin has yet to decide whether farming or processing should be the entry point for its first beef investment. "We're not experts in raising beef. Necessarily we will end up having partners at just about every step, sometimes as a minority sometimes as majority," says Romano.
"We have a natural preference for a majority. In the end it is about control -- making sure we can guarantee a supply chain.
"We just need to put down our first investment and use it as a beachhead to be grown from. If you look forward five years we would like to have control of animals from breeding through to fattening, to slaughtering through to marketing. We're having an internal debate as to which end of the supply chain we might enter first. But we are looking to have a cohesive end-to-end strategy."
Chinese consumers' appreciation of beef is rapidly growing. Though the amount of beef consumed in China is less than one-tenth that of pork the growth trend is compelling. Romano cautions that securing the "right taste" for Chinese consumers is all-important. He believes Chinese -- like Japanese consumers before them -- will favour the style of wagyu beef which is renowned for its nutty-flavoured taste and fat-marbled texture.
"It's the right sort of beef in the right sort of cuts and delivered to them in the right positioning at the right outlets," says Romano. "Then it's a matter of securing that supply to service that market."
Terry Lee -- president of overseas M&A for Pengxin Group -- says the company has looked at a number of opportunities but had held back while discussions took place over an industry-wide restructuring along the Fonterra model. Lee says Pengxin is also looking at beef opportunities in Australia and Latin America. The company felt there were political risk factors associated with Argentina, which has long been renowned for its beef trade, particularly if the Argentinian Government starts putting export taxes on export products.
Romano, who resigned from Fonterra at the height of the false botulism scare, says it is quite different heading up a Chinese international company after serving in a large corporate.
He differentiated his role from Lee's as follows, "Terry acquires the investments and I have accountability for running them."
Pengxin International also has investments in mining. But within New Zealand its predominant focus -- apart from a property investment at Auckland's Gulf Harbour -- is in the agribusiness sector.
Pengxin has now bedded down its investment in the 16 Crafar dairy farms in the central North Island and brought them up to the standard required in its Overseas Investment Office approval documents. It also has a 74 per cent stake in Synlait Farms in the South Island. This will be renamed to get some separation from the listed company Synlait Milk in which Shanghai's Bright Dairy is a major shareholder.
During the Prime Minister's visit to China last year to celebrate 40 years of official relations with New Zealand, Pengxin unveiled an agreement with Miraka to process milk from the Crafar farms into UHT products for export to China.
Lee revealed to the Herald that though the UHT exports are still some time off, they would be marketed under "The Land" brand.
The launch has been delayed while Pengxin assesses whether to go it alone on the distribution front in China or work with in-market customers to make a joint launch.
The UHT products are also being refined for Chinese tastes and products will be expanded to cover adult milk brands as well as others geared at teenagers and the elderly.
The company is also exploring entering the infant formula market. Romano notes that market has gone through a lot of turmoil in China. "They've changed the rules and a lot of products have come off the market. We're wondering if this is the right time to make a major stake and we're actively looking at it."
The third product line Pengxin is considering is drinking yoghurts. But it doesn't have a firm timeline or proposition.
"We do want to put dairy products into retail into China and we do want to secure milk volumes," says Romano. "But we don't need to own it all.
"Our aspiration is to ultimately have a bigger consumer footprint which is going to require more milk and more processing and a couple more products."
Both Lee and Romano stress that Pengxin has built strong relationships within New Zealand with Miraka, Synlait and Landcorp.
In the North Island it is still supplying much of its milk to Fonterra which is not making specific products for Pengxin.
The Overseas Investment Commission had commented favourably on its "one-year report" on the Crafar farms investment. The relationship with Landcorp -- which has responsibility for running the farms -- had also ensured environmental standards had been lifted.
Former Fonterra board member Greg Gent is the independent chairman of the North Island farming joint venture with Landcorp. Lee has stepped down from the board in favour of Romano. Other members include Landcorp CEO Steven Carden, Justine Kidd and Traci Houpapa with Bruce Hunter and Andy McLeod making up the executive members.
Synlait Farms' governance structure has also changed since Pengxin acquired a 74 per cent stake. Juliet Maclean remains as chief executive and retains a 16 per cent holding. John Penno, who is also CEO of the listed Synlait Milk, has 10 per cent.
Says Romano, "John has very little to do with farms because he's got his hands full at Synlait Milk but he's a very good board member."
Gary Guerniera is independent chairman for the farms' operation; Both Lee and Romano are board members. There has been a settling down period with some "robust conversations."
"Juliet and John have built up those farms over a decade and then to sell down and bring a board in place and realise you are a CEO working for a board is different," explains Romano. Under the OIO approvals an innovative long-term incentive scheme is being developed for employees.
Wearing his Synlait Milk hat, Penno has stressed the premium Asia places on environmental performance for farm suppliers and the need to pitch products to "Tiger Mom" tastes. "Juliet is quite focused," says Romano. "She gets signals from Synlait Milk and reacts to that."
On the broader question of Chinese players investing in the New Zealand dairy sector, Lee acknowledges Pengxin's path-breaking role.
"Chinese dairy players can learn from New Zealand in terms of the quality control and animal welfare," says Lee.
"But I often think they can bring to New Zealand some skills in marketing to Chinese customers about how they use milk."
Both Pengxin executives say they are wondering about other parts of the world to source dairy from. "But it is quite embryonic at this stage," says Romano.
"We have enough in dairy in New Zealand to occupy us for the short term."
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