Although many Chinese dairy producers had shown a keen interest in acquiring the assets of the now-defunct Sanlu Dairy, the Beijing-based Sanyuan looks certain to claim it all.

Sanyuan shares, which had been suspended from trading since Sept 26 following reports that it planned to buy Sanlu, resumed its trek on the bourses from Feb 16. Its share price soared to the 10-percent daily limit on two consecutive days, and closed at 7.45 yuan on Monday.

"At a time when numerous domestic producers, especially brands such as Mengniu and Yili, are struggling to regain consumer confidence, investors are pinning their hopes on Sanyuan to reinvigorate the Chinese dairy industry and prevent it from being taken over by the international players," said Huang Wei, a food and beverage analyst at China Jianyin Investment Securities.

Many dairy companies were forced to suspend production during the time government inspectors were trying to identify the root of the poison milk problem.

From September to November 2008, output of liquid milk fell 20 percent and dairy products, by 22.3 percent.

Sanyuan has been well known only in Beijing and its neighboring Hebei province. Its business is mainly liquid milk and yoghurt. During the past three years, Beijing contributed to around 50 to 60 percent of its sales revenue.

But the Sanlu buy is not without risks. "The biggest problem is how Sanyuan can manage a company that is much larger than itself," said Huang.

In 2007, Sanyuan posted sales of over 1.1 billion yuan while Sanlu had sales of around 10.3 billion yuan.

"Potential challenges are how the company can merge its sales network with Sanlu's, and how it can amalgamate the two different teams and minimize the negative impact on business operations," Sanyuan said.

The company, one of the few producers left untainted by the scandal, made no bones about its intention to buy Sanlu. It said the acquisition of Sanlu's production facilities, and, more important, its well-established distribution network would help diversify its product mix and market beyond Beijing.

Sanyuan has said it would raise funds ranging from 800 million yuan to 1 billion yuan by selling shares to its parent company, Sanyuan Group and its affiliate Hebei Sanyuan, at 4 yuan each. The company said the proceeds of the share sale would be used to finance the acquisition of

(China Daily February 24, 2009)