Fonterra reassures shareholders after Beingmate slashes guidance

Fonterra Cooperative Group has sought to reassure shareholders after its Chinese partner Beingmate Baby and Child Food Co slashed its full-year guidance.

Shenzen-listed Beingmate now expects to report a full-year net loss of 750-800 million yuan, double its prior forecast loss, according to Reuters. In the previous year, the company reported a net profit of 103.6 million yuan. 

"We are confident in our overall China strategy, of which our Beingmate partnership continues to be an important part," said Fonterra's chief financial officer Lukas Paravicini in an emailed statement after Beingmate's announcement. Fonterra bought an 18.8 percent stake in Beingmate in 2015 as it sought to ensure greater access to the Chinese market. 

"Beingmate’s recent performance reflects China’s market conditions, which remain challenging for all dairy players. The long-term outlook remains strong," Mr Paravicini said. He said distribution of Fonterra's Anmum infant formula brand in China grew from 60 cities in 2015 to more than 170 cities and total sales are ahead of projection. 

UBS analyst Marcus Curley said the small size of Beingmate's contribution to Fonterra's overall earnings before interest and tax means the news of the wider loss is "irrelevant from an earnings perspective" for the New Zealand cooperative and the long term picture is solid. He noted that since Fonterra took the stake, the company has gone through some tough times which "is broadly reflective of what is a very tough market for everybody." 

In December, Fonterra chairman John Wilson said it will probably take another one to two years before there is clarity on how its Chinese partner Beingmate will fare under new regulations governing infant formula in China. The so-called Article 81 regulatory change means each legal entity will only be allowed to have three brands with three recipes for infant formula and that's expected to reduce the number of brands and labels on supermarket shelves in China. Mr Curley said they are expected to go from 2000 to about 500.  

He expects the tough times to continue for the rest of this year and into next. However, "we still believe the business is well positioned in a consolidated market. It will be one of the survivors and hence maybe one of the winners but clearly there is some pain before any gain," he said. 

Mr Paravicini said there were two main reasons for Beingmate's profit warning. First, it described how it has reversed deferred tax assets, amounting to 300 million yuan. Second, it has also made a provision for the bad debt of subsidiaries that have suffered losses, he said. 

Beingmate shares are trading at 12.56 yuan, well down on the 18 yuan per share Fonterra paid for its 18.8 per cent stake.

Units in the Fonterra Shareholders' Fund increased 0.2% to $6.27.