By Ben Otto

 

Yashili International Holdings Ltd. shares are sharply higher on news that controlling shareholder China Mengniu Dairy Co. intends to raise its stake by acquiring shares held by Danone S.A.

Shares of Yashili, a maker of dairy and nourishment products based in Guangzhou, rose as much as 22% in early trading on Tuesday before paring their gains to 15%, at 1.06 Hong Kong dollars (13 U.S. cents), by mid-morning. Shares have now more than doubled this year.

China Mengniu shares are 0.1% higher at HK$38.65, having recovered from a 7.6% drop at the market's open. The Hang Seng Index is 2.5% lower in mid-morning trade.

Tuesday is the first day the stock is trading in Hong Kong since China Mengniu said it would raise its stake in Yashili to 76% from 51% by buying Danone's interest in the company. It said it would also make an offer to buy remaining Yashili shares for HK$1.20 each.

As part of an ongoing unwinding of its relationship with Danone, China Mengniu also plans to sell Yashili's Dumex brand to Danone and buy the French company out of a separate loss-making joint venture.

Citi maintained a buy rating on Mengniu's shares with a HK$57.30 price target, saying in a research note that the unwinding of deals with Danone "do not surprise" given the Paris-listed company's exit of its Mengniu investment last year. Citi added that Mengniu remains its top pick in the China staples space and said it doesn't expect the end of the relationship with Danone to significantly impact Mengniu's fundamentals.

"In our view, Mengniu's sustainably strong top-line growth (at low-teens rates) and better margin visibility in 2022-24 offer investors unique access to high-quality China consumption growth without regulatory concerns," Citi said.

Jefferies said in a note that it expects the unwinding to have limited impact on Mengniu's business operations given that "after years of cooperation, we believe Mengniu has acquired know-how from Danone, and leads the co-operated business."

Jefferies added that it expects all of the transactions together, including interest expense, to drag down Mengniu's net profit this year by 1.8%. But over the mid-long-term, it expects Mengniu to improve its operating efficiency, leading to a better profit margins. The bank has a buy rating on Mengniu with a HK$54.00 target price.

Daiwa Capital Markets keeps a buy rating and a HK$60 target price on Mengniu, saying that taking full control of the units in the deals will "help it develop a business strategy and products that are more suitable for the local market."

 

Write to Ben Otto at ben.otto@wsj.com

 

(END) Dow Jones Newswires

May 09, 2022 23:32 ET (03:32 GMT)

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