Beijing Sanyuan Foods, the only listed dairy producer that avoided being associated with China's milk contamination scandal, is to expand its national network and develop high-end products, the company's executive said.

The company wants a speedy increase in profitability and to shorten the gap with its larger counterparts, including Mengniu and Yili.

The melamine contamination scandal still casts a shadow over the top two dairy players, hitting their sales. In contrast, Sanyuan Foods registered an increase of 138 percent in profits during the first half of this year.

"This should be attributed to our timely shift towards improving our sales network especially beyond Beijing and injecting more into developing more profitable high-end products," Niu Liping, general manager of Beijing Sanyuan Foods Co Ltd, told China Daily.

Sanyuan posted an increase of 138 percent in profits during the first half of the year. [CFP]

The products in question include top quality yoghurts, liquid milk, milk powder and cheeses.

Niu said he was upbeat about the performance of the business over the rest of the year. "We showed we took the right direction so we shall continue as we were. The growth rate for the second half will be sustained or probably higher," he predicted.

The Shanghai-listed dairy firm released its interim financial report on Tuesday. This showed its profit grew to 36.73 million yuan on sales of 1.13 billion yuan, up by 73 percent. This is the first interim report released by the dairy industry. It will be followed by Bright Dairy and Yili Industrial Group later this week and Mengniu Dairy Group in September.

Despite increasing advertising and improving brand image, analysts are not pinning high hopes on profits at Mengniu and Yili, believing Chinese consumers' confidence has not recovered in the companies.

In 2008, Yili and Mengniu incurred a loss of 1.68 billion yuan and 950 million yuan respectively.

Sanyuan is the only one among them that enjoyed profits last year. "The melamine scandal gave our business a boost, and we took advantage of the opportunity to grow stronger," said Niu.

During the first half, Sanyuan expanded its sales network by 20 percent in Beijing, where it is based, and also extended reach into second-tier cities, especially in central and eastern regions in the provinces of Shandong, Shanxi, Hebei, Henan and Fujian.

"We are avoiding stiff competition with our competitors. Also, costs in first-tier cities are much higher," Niu explained.

The company also doubled distributors outside Beijing to more than 1,500, which helped to drive up profits in markets beyond the capital by 107 percent, the first time that regions outside Beijing outperformed what was the best performing market, Niu said.

"We will keep employing more quality distributors and set up more sales destinations."

While the major competitors are still seeking to recover lost ground, Sanyuan developed and launched a series of high-end sector products, which it had previously ignored, to gain more brand awareness. Although still small in scale, "the sector contributed 20 percent of profits", said Niu.

The company acquired Shijiazhuang-based Sanlu Group, which was at the center of the melamine crisis and went bankrupt afterward. Sanyuan expanded its capacity and became a national brand overnight through the deal, because Sanlu had been China's largest milk powder maker for years.

About 30 percent of Sanlu's former factories are redundant and expenditure is needed to standardize the two operations, factors which will cut into Sanyuan's profits over the next two to three years, said Huang Mao, a beverage analyst at Guosen Securities.

"Expanding capacity is a very urgent job for us now," said Niu.

In June, Sanyuan said it would set up an industrial park handling 1,200 tons of fresh milk on the outskirts of Beijing in an investment costing 680 million yuan. The first phase will come into operation in 2011.

Shares of Sanyuan dropped by 0.14 percent on Tuesday but bounced back yesterday and rose by 1.83 percent to 7.24 yuan at the close.

(China Daily August 27, 2009)