Concerns expressed over investor’s move
Sunshine Insurance increases holding in Yili, leading to hostile takeover speculation
Dairy industry association authorities said on Thursday that they are not willing to see the interference of “unfavorable factors” in the development of the dairy industry, or investors using dairy enterprises as vehicles for capital operation.
They expressed their concern after Inner Mongolia Yili Industry Group Co, China’s largest dairy products supplier, announced that Sunshine Property Insurance Co and Sunshine Life Insurance Co (both arms of Sunshine Insurance Group), had increased their combined equity interest in Yili from 4.9 percent to 5 percent this month, a level that triggers debate over whether the move is just an investment or signals a potential hostile takeover bid.
On Monday, Yili suspended its shares from trading at the Shanghai Stock Exchange to avoid heavy fluctuations and protect shareholders interests. By Thursday, the firm’s stocks had yet to resume trading.
“The dairy sector has been experiencing drastic reform and is fragile to risks, so if a key player in the sector is affected, the entire supply chain of the dairy sector will be affected,” said Liu Meiju, secretary-general of the China Dairy Industry Association.
Gu Jicheng, secretary-general of the Dairy Association of China, said the association is reluctant to see a situation in which leading dairy companies are used as a tool for capital operation, which harms dairy farmers, processors and the healthy development of the entire sector.
SIG indicated in a filing to the stock exchange that it currently has no plan to increase its equity interest in Yili in the next 12 months. In two separate announcements, SIG said it would not seek to become Yili’s largest shareholder, and this position will not change.
Yili declined to comment on SIG’s move.
Analysts said that it is not a rare move for insurers to increase stakes in companies with a good performance, because insurers are under great pressure when interest rates are low, and in dire need of seeking good assets to grow the value of their capital.
In recent months, insurers including Fore sea Life Insurance Co,Guohua Life InsuranceCo and An bang Insurance Group have increased holdings of consumption-related businesses, such as traditional Chinese medicine materials, logistics properties and departments stores.
“Insurers increasing stakes in leading companies in sectors of consumption-driven business actually reflect the scarcity of high-growth stocks and industries,” said Qin Peijing, an analyst at CITIC Securities Co.
Due to a lack of good-quality assets, long-term funds tend to favor leading companies with solid fundamentals and good cash flow, said a research note from UBS AG.