Meiji reduces its dairy business in China, AustAsia to acquire for up to 350 million yuan

AustAsia Group plans to take over Meiji's dairy production and sales business in China.

On July 21, AustAsia Group announced that its wholly-owned subsidiary, Shanghai AustAsia Foods Co., Ltd., intends to acquire all shares of the newly established subsidiary of Meiji China, with a base purchase price of 320 million yuan, and an adjusted cap of 350 million yuan.

Prior to the transaction, Meiji China will undergo a restructuring, transferring Meiji Dairy's Suzhou and Tianjin companies, along with related assets, personnel, and contracts, into the target company. Upon completion of the acquisition, the target company will be consolidated into AustAsia Group's financial statements.

The two companies mainly produce milk, yogurt, and cream in China. AustAsia also plans to sign a trademark licensing agreement with Meiji Japan, continuing to use certain Meiji trademarks.

AustAsia Group's core business is dairy farming and raw milk production, but it also engages in dairy product sales and distribution. This acquisition means the group will further supplement its downstream manufacturing capacity and extend into dairy processing.

Since Meiji China holds about 15.85% of AustAsia Group’s shares and is one of its major shareholders, this acquisition constitutes a connected transaction and still requires approval from independent shareholders.

Based on the maximum purchase price of 350 million yuan, the target group will have an unaudited pro forma net asset value of about 548 million yuan by year-end 2025, indicating an implied price-to-book ratio of about 0.64x, which is about 51.1% lower than the median price-to-book ratio of 1.31x for five comparable A-share dairy companies.

The discounted price reflects the target business’s continued losses.

In 2024 and 2025, the target group is expected to have post-tax losses of approximately 149 million yuan and 156 million yuan, respectively. Therefore, AustAsia has chosen price-to-book ratio as the main valuation metric, believing that price-to-earnings ratio and EV/EBITDA could not accurately reflect the value of its manufacturing assets.

This transaction should be understood in the context of changing upstream and downstream relationships in China’s dairy industry and the ongoing recovery of the sector cycle.

Six years ago, the direction of cooperation between the two parties was exactly the opposite.

In 2020, Meiji acquired a 25% stake in AustAsia Group’s pre-IPO entity AustAsia Investment Holdings for USD 254.4 million.

At that time, Meiji stated that its China business was experiencing steady sales growth, with chilled milk growing significantly in the East China market. The company was expanding its Suzhou plant, constructing a Tianjin plant, and investing upstream in ranches to ensure high-quality raw milk supply.

The logic back then was for downstream dairy firms to extend upstream to support their market expansion in China.

Six years later, the roles in the transaction have reversed. Meiji plans to sell its loss-making, underutilized dairy business to AustAsia; AustAsia hopes to take over two factories and the existing sales network to create an internal channel for its self-produced raw milk.

This change is underpinned by shifts in China's dairy supply and demand. In the past four years, growing raw milk supply and sluggish end demand have combined to drive the industry into a lengthy downcycle.

In 2025, national milk production will still rise 0.3% year-on-year to 40.91 million tons, but dairy product output will drop 1.1%, and raw fresh milk prices in major producing provinces will fall 7.8% year-on-year.

As the national dairy herd continues to be reduced, the excess raw milk powder production will decrease slightly in 2026, and milk prices have started to show signs of stabilization, but the supply-demand pressure is not yet fully digested.

For AustAsia, extending downstream is an active form of hedging.

In 2025, AustAsia’s revenue is expected to be 3.468 billion yuan, down 5.9% year-on-year; a decline in milk prices will cause its raw milk business revenue—which accounts for more than three-quarters of its total—to fall by 7.3%.

During the same period, AustAsia’s dairy cattle inventory will decrease by 8.2% to 112,200 head, but the number of mature cows will decrease by only 1.6%, and annual milk yield per cow will actually rise by 0.7% to 14.1 tons.

Upon completion of the acquisition, AustAsia can direct more self-produced raw milk into downstream plants, improve capacity utilization, dilute fixed costs, and reduce dependence on third-party customers.

However, the group will also see its operational risks extend further into product, channel, and brand management.

The target business has been loss-making for two consecutive years, so AustAsia will have to increase factory utilization while also addressing issues such as terminal demand, product mix, and channel efficiency.

For a company that has long focused on upstream ranching, this acquisition is only the beginning of vertical integration.