Xu Jiayin of Evergrande led a delegation to visit Heilongjiang, intending to enter the dairy industry

Recently, news about Evergrande travels: "Boss Xu is about to move into dairy" spreads like wildfire. Even though the official story is vague, it is confirmed that Xu Jiayin, chairman of the board of Evergrand Group, has visited Inner Mongolia by private jet, and after that he led his top managers went almost non-stop to Heilongjiang for another investigation, accompanied by vice-governor of Heilongjiang Sun Yao, secretary of municipal party committee of Qiqihar Han Dongyan, mayor Sun Zhe and other heads of government.


"Xu Jiayin led a group of executives to investigate modem agriculture and animal husbandry in Inner Mongolia,Inner Mongoliaautonomous region party committee secretary Wang Jun interviewed Mr Xu yesterday, the two sides exchanged opinions on further cooperation to achieve win-win."


Although Evergrande has not confirmed that Mr Xu will enter the dairy industry, but a lot of insiders believe that it is just a matter of time, and in the long run, the dairy industry investment is worthy. According to the department of agriculture, by 2030,Chinawill be the largest milk market all over the world, predicting that every Chinese drinks25 kgmilk per year, making a demand of 42.5 million tons milk production.
 
A bill for the ranch of Ten thousand cows
 

In addition, reliable sources show that Evergrand is trying to enter the infant formula industry. Evergrand is now transferring a skeleton crew from internal sectors such as hotel, real estate, and fast moving consumer goods (FMCG) to push forward the plan of a milk powder project. The team contains about 20 people who report directly to Mr. Xu. It is also predicted that recruitment from milk powder industry will take place in the soon future.


More surprisingly, it is revealed that the strategy of Evergrande milk powder is a whole industry chain, in other words, Evergrand will go single-handedly from cows farming to seeding in the pasture, from milking to milk powder producing. No matter the news is true or not, we can boldly calculate how much Mr. Xu should invest in the whole industry chain production of infant formula milk powder.


Considering the generous style that Evergrande consistents always, we forecast the goal to invest is at least a pasture of over 10 thousand cows. Because for now in China most rangelands under 1000 cows stay deficit, from 1000 to 3000 cows the profit is sometimes good sometimes bad, while over 3000 cows most pastures can be profitable.


According to the insiders’ estimation, the construction of a ten thousand cows ranch costs about 300 million yuan, among which the price of a cow is about 5000 yuan. In milk source support and the construction of infrastructure requires a lump-sum investment about 700 million to 900 million yuan, including entrusted loans, prepared expenses for milk, participation of large pastures and investment in modern farming equipment, etc. A plant with annual milk powder production of 50 thousand tons needs 1.5 billion yuan of investment. And that does not include personnel, management costs and rising operating costs, making the total number at least 2.5 billion yuan.


The examples of Huishan Dairy may be used as reference. According to previous reports, the investment of the construction of the whole industry chain dairy product industry cluster comprehensive program in Kangping county will be 8.8 billion yuan. Details include 40 modern standard dairy farms, 1 infant formula milk factory with 60000 tons annual output, 1 feed processing plant with annual output of 200000 tons, 10 methane enrichment plant, 240 thousand mu (=0.0667 hectares) of efficient agricultural farming and so on. At the same time, the project inLiaoningprovince costs even 10 billion yuan.


In fact, to do the whole industry chain model in the dairy industry is not optimistic. Construction of milk source is often viewed as "Big investment turns to small profit". Industry analysis shows that the percentages of cost for cow raising, product processing and circulating are respectively accounted for 75%, 15%, and 10%, but profit distribution 10%, 35%, and 55%. It is obvious that the profits of these three links in this chain are inversely proportional to their costs, especially for cow raising. Moreover, there doesn’t exist any domestic ready-made success of dairy farm management to be replicated: land, capital, technology, management and personnel are all at an exploratory stage. Therefore, the risk of self-built ranch for Evergrande is self-evident, especially for giant ranch.


However,China's regulators have been encouraging milk powder companies to build and control their milk source by their own. According to newly issued provisions of the Ministry of Industry and Information Technology (MIIT), to merge and reorganizing a milk powder company, the first premise is "using fresh raw milk as main material to produce infant formula powder, and all the milk has to be from the self-built self-control milk source base of this company".


Having a ranch of cows, a milk powder production line is needed next. And a complete infant formula milk powder production chain needs to build main production workshops, finished product warehouse and related ancillary facilities, and to purchase equipments such as drying tower, evaporator. Take an example of a plant with an annual output of 10000 tons of infant formula milk powder, it needs at least 2 formula milk powder production lines, with daily processing milk capacity of 200 tons, the one-off investment will be at least 100 million .


 However, only the production equipment is not enough, there should be also testing equipment. What's more, due to the highlight of the government for infant formula, the investment of testing equipment maybe is not less than the production one. According to the data revealed by domestic milk powder companies such as Yashili, Mingyi and Chenguan, the initial investment on testing center was above 30 million yuan, and for every ton of produced milk powder, testing would cost at least 5000 to 6000 yuan. In other words, for every ten thousand tons of milk powder, annual operating cost for the testing center reaches at least 500 to 600 million yuan.


"The project of milk powder under the whole industry chain operation, even if the project fails, the land will always be there which still makes a fortune, so we cannot say it will essentially fail." chairman of Putian Shengdao, LeiYongJun told our reporter.
 
Performance of Evergrande real estate on red
By the end of 2013, Evergrande has realiazed 100.4 billion yuan for contract sales, with year-on-year growth of 8.8%, reaching a gross profit of 27.65 billion yuan, rising 51.8%, and gross margin was 29.5%; the net profit margin rate of the group's core business has reached 11%,  with 1.5% growth comparing to 2012.
 

Output value for the entire dairy industry is only a little more than annual sales of Evergrande


    From soccer to mineral water, Mr Xu succeeds in every industry he has entered. After his great success in real estate, he took advantage of these experiences onto the industry of soccer and made it, then he entered the mineral water industry, although it is not yet as successful as football, but Mr. Xu at least led the industry. However, compared to football and mineral water, dairy may be more complicated, while the output value of the entire dairy industry per year is just a little more than annual sales of Evergrand. The complexity of the dairy industry is not inferior to the real estate industry.


    Over the past 15 years, the nature of real estate is the victory of resources, in other words, who has occupied the land resources, who will be able to succeed. And the depth of marketing for real estate is not as good as FMCG.. Milk powder is not the same, however, from brand, channel, price, to the quality and the public's trust, every link will decide whether the milk powder can sell or not. What's more critical, one drop of poison infects the whole tun of wine, Dumex and Abbott after the "Clostridium botulinum affair" will be a good example.


    Chinese milk powder industry needs capital, but capital is not everything. Considering the low-trust of Chinese consumers on the current domestic milk powder, this industry contains a huge risk, and the rate of return may not match the high risk. It is what capital predators need to carefully consider before entering the industry.