On October 27, Ausnutria Dairy Corporation Ltd (1717.HK, hereinafter "Ausnutria", "the Company", or "the listed company") announced that its shareholders and the company signed a transfer and issuance agreement with Hong Kong Jinshang Trading Holdings Limited (hereinafter "Jinshang"), a wholly-owned subsidiary of Inner Mongolia Yili Industrial Group Co., Ltd. (hereinafter "Yili").

According to the agreement:

1. Jinshang will acquire a total of 530,824,763 shares of Ausnutria at HK$10.06 per share from Citagri Easter Ltd., a wholly-owned subsidiary of CITIC Agricultural Industry Fund, Shengde Pharmaceutical Co., Ltd. and its affiliate BioEngine Capital Inc., and Dutch Dairy Investments HK Limited, a wholly-owned subsidiary of Mr. Bartle van der Meer (collectively, the "Sellers"), representing approximately 30.89% of Ausnutria's issued shares, with a total consideration of HK$5,340,097,116.

2. Ausnutria will issue 90 million new shares to Jinshang at HK$10.06 per share, raising HK$905,400,000. The proceeds will be used to further enhance Ausnutria's R&D, production, sales, and distribution capabilities and optimize its financial structure.

3. According to the transaction agreement, after Jinshang acquires the shares from the Sellers and subscribes for the new shares, it will hold a total of 620,824,763 shares of Ausnutria, representing 34.33% of the enlarged share capital, with a total amount of HK$6,245,497,116. Under the Hong Kong Securities and Futures Commission's Code on Takeovers and Mergers and Share Buy-backs, this transaction will trigger a mandatory general offer, requiring Jinshang to make a mandatory general offer for all issued shares of the listed company and initiate the transaction in accordance with relevant regulations.

Through this acquisition, Yili will further open up the nutrition product track

After successfully entering the "Global Dairy Top Five" in 2020, Yili proposed the medium- and long-term strategic goals of "Global Dairy Top Three by 2025" and "Global Dairy No. 1 by 2030", and accelerated the improvement of its industrial layout and optimization of product structure around these goals.

Among these, the infant formula segment presents huge opportunities due to its high growth and high value, and this will be a key track for Yili's future focus.

Data shows that in the first half of 2021, Yili's infant formula business achieved a year-on-year growth of over 20%.

Among them, Jilinguan Zhenhu grew 37% in the first half of the year, making it the fastest-growing brand in this segment; according to the latest data from Nielsen, in August 2021, Jilinguan led all same-category brands in all-channel growth, becoming the fastest-growing infant formula brand in the Chinese market.

As one of the leading companies in the infant formula market, Ausnutria seized the development opportunity in the goat milk powder market, using differentiated goat milk powder as a breakthrough, and rapidly grew into an international dairy company with a product portfolio covering infant formula, nutrition products, and more. Ausnutria's goat milk powder brand, Kabrita, has also become a benchmark product in China's infant formula sector.

After the completion of this transaction, for Ausnutria, Yili's whole industry chain competitive advantages and rich management experience will become important support for its long-term healthy development. Ausnutria's steady growth will help Yili quickly complete its strategic layout in the milk powder industry.

Starting with infant formula, especially goat milk powder, the two parties will achieve complementary advantages in raw material procurement, marketing models, location, and R&D, thereby strengthening their competitive advantages in their respective market areas. As strategic cooperation deepens, the two parties are also expected to continue deepening cooperation in multiple fields, further expanding synergy and complementary advantages.

In fact, Ausnutria is not only competitive in infant formula but has also made a comprehensive layout in the nutrition product field.

Data shows that over the years, Ausnutria has deeply cultivated health products, probiotics, and foods for special medical purposes, gradually becoming a high-end nutrition and nutrition health service company covering all ages and life stages.

Yili is moving towards becoming a health food group, and the two parties have huge potential for complementary advantages and synergy in the new blue ocean of big health. After integrating their advantageous resources, Yili will further open up the nutrition product track.

2021 is the first year of Yili's medium- and long-term strategic goals, and also a year when China's dairy industry accelerates towards the "post-100-billion era". China's dairy industry, shouldering the mission of "dairy industry revitalization", needs competition and even more cooperation.

Strong alliance to make up for Yili's high-end shortcomings

Yili and Ausnutria are actually complementary brands. From Yili's perspective, acquiring Ausnutria enriches its product line and aims to achieve a 1+1>2 effect. From Ausnutria's perspective, it now has the backing of China's dairy leader, giving it more confidence.

In recent years, high-endization has become the only way for companies in the industry to increase profits, with organic milk powder and goat milk powder being the main characteristics of high-endization in the infant formula industry.

Compared with peers, Yili entered this field relatively late. In July 2019, Yili launched its first organic infant formula, Jilinguan "Senamu"; at the end of that year, Yili launched its first goat milk powder, "Youzhi Xiaoyang".

However, this still cannot support Yili's milk powder profitability. Data shows that in 2020, Yili's gross margin for milk powder and dairy products was 42.90%, a year-on-year decrease of 5.22 percentage points, while Feihe and Ausnutria's gross margins were 72.50% and 49.86% respectively, both higher than Yili's.

Yili's urgent pursuit of the high-end market may be related to its own performance pressure. Data shows that in 2014, Yili proposed the goal of "Top Five and 100 Billion", i.e., entering the global dairy top five by 2020 and exceeding 100 billion yuan in revenue.

However, last year Yili's revenue was 96.523 billion yuan, still a gap of more than 3 billion yuan from the target, and revenue growth has declined for three consecutive years.

Yili has always had the desire to support growth through mergers and acquisitions, so it needs to continuously expand upstream and downstream resources to support long-term stable performance growth.

On the other hand, due to the continuous decline in the number of newborns, the infant formula market has entered a stage of stock competition. High-end products with good profits and market development prospects have become the key for dairy companies to break through.

According to data from the National Bureau of Statistics, in 2020, there were 12 million newborns in China, a decrease of 2.65 million from 2019, marking the fourth consecutive year of decline in new births.

According to a Frost & Sullivan report, the retail volume of China's infant formula market began to decline in 2019, and is expected to drop to 764,900 tons by 2025, with a compound annual growth rate of -4.1% from 2020 to 2025.

Affected by this, the growth rate of China's milk powder market continues to decline. According to Euromonitor data, from 2018 to 2020, the growth rates of the milk powder market were 8.88%, 4.39%, and 4.38%, respectively.

China's infant formula market is transitioning from channel-driven to channel-brand dual-driven, and the power of brands is growing. Such merger and acquisition news is also part of brand building. It's not that this acquisition will necessarily achieve something, but with more such mergers and acquisitions, the success rate will increase, and the heavy concentration of the infant formula market is bound to come.

In fact, mergers and acquisitions among milk powder giants are not limited to Yili and Ausnutria; there were earlier reports that Nestle intended to acquire a2 Milk.

Industry insiders point out that the 2016 milk powder new policy eliminated a large number of small and medium-sized brands, making competition in the milk powder market gradually shift from competition between large and small enterprises to "hand-to-hand combat" among enterprises with a certain scale and brand power.

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