Huishan Dairy

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	27367
Company name	Shenyang Dairy Co., Ltd.
Country	China
Sector	Food & Beverages
Environmental category	B
Department	Agribusiness
Status	Hold

Date SPI disclosed	May 20, 2009
Projected board date	June 22, 2009
Date revised SPI disclosed	May 22, 2009

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Shenyang Dairy Company Limited, (“Shenyang Dairy” or the “Company”) was originally founded in 1951 as a state owned company that ran into financial distress towards the end of the 1990s due to management problems. Shenyang Dairy was partially privatized in 2002 when 52% was sold to the current sponsors and completely privatized in 2004 when it was transformed into a Wholly Foreign Owned Enterprise. Shenyang Dairy now has 11 self run cattle farms in Liaoning Provinces, a frontier region in northeast China with over 22,000 cows. The downstream dairy processing facilities capacity is 620 tons per day (tpd). The company supplies 67 different products comprising various grades of milk, flavored milk, yoghurt and other milk-based drinks. The company has a unique business model that sources a majority of its milk from its own cattle farms and a smaller portion from nearby big farms under its close supervision.

The project to be implemented by Shenyang Dairy (“the Project”), one of the biggest dairy producers in North Eastern China consists of:

- Installation of canning and packaging machines with a capacity of 50 tons per day to meet the growing demand for its products.
- Build three new cattle farms of 2,500 cows within two years to accommodate natural growth of existing herd and imported cows. This will bring the company’s total herd size up to 31,000 cows.
- Incremental working capital.
- Reduce short term debt to improve liquidity.

Anticipated development impact of the project

The project will support the continued expansion of a successful private dairy company in the Liaoning Province. The majority of the investment program is for the development of integrated dairy farms that will provide the company with a reliable source of high quality milk. The company creates significant benefits to the communities where it operates in terms of employment, marketing outlet for local farmers and business opportunities for SMEs.

1) Employment. The company’s operations are located in Liaoning Province. It provides stable employment opportunities for around 2,800 staff, including more than 1,000 female employees.

2) Farmers reached. Shenyang Dairy relies on a large network of farmers to supply its farms with raw materials such as corn, hay and silage. Huishan forward contracts with local farmers to supply the company with feed materials, particularly corn silage. Currently, about 10,000 household farms supply silage to the company. Contracts are used by farmers to obtain financing for the crop cycle from local credit unions. It also purchases part of its milk requirements from around 30 integrated and independent farms. Huishan services these suppliers with field support including nutrition and hygiene advice.

3) SMEs reached. Shenyang Dairy services a network of 259 small sales outlets that only carry its milk products under a franchise agreement. In addition, those 259 independent distributors also service an estimated 50,000 small retailers. The company also has about 600 SME raw material or services providers.

IFC's expected development contribution

cLong term financing and advice: the company welcomes equity and long term debt investments from credible partners like IFC and other long-term foreign investors introduced by IFC.

Stamp of approval: The company expects IFC’s presence as a knowledgeable partner to induce public confidence when the Company lists on the international markets in the next 3-5 years.

Quality standards: With the help of IFC, the company will try to create an example in China for setting standards for food safety and high quality milk production, thus improving consumer confidence in the domestic dairy supply chain.

Countercyclical role: By providing long term financing for a fundamentally sound company during a global financial crisis.

Environmental and social issues - Category B

This is a category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result that can be avoided or mitigated by adhering to generally recognized performance standards and guidelines.

The company has various elements of an Environmental & Social Management System (ESMS) in place, and is committed to consolidating these into a single ESMS – including a comprehensive monitoring mechanism – to govern all aspects of its operations. Its operations are ISO9001 and HACCP compliant. Implementation of an integrated management system will allow Shenyang Dairy to ensure adherence to environmental, health and safety, food safety, and social performance requirements, including World Bank/IFC policies and guidelines. The company has provided technical assistance to cooperative dairy farms and smallholder farmers in Liaoning Province to improve their productive capabilities, and will build on this work to help third-party dairy suppliers strengthen their environmental, social and safety performance.

The company has a workforce of 2,400 persons at its processing plant and farms in Liaoning. The company’s human resource policy and practice in aspects such as minimum wage, minimum worker age, and overtime payment conform to Chinese labor laws and regulations. The company has a strong track record in occupational health and safety and is committed to maintaining a high level of performance in this area. It will take steps to strengthen its employee grievance mechanisms.

Shenyang Dairy produces significant quantities of animal wastes and waste water at its farms and processing plant, and about 140,000 tons of CO2 emissions from its operations. The company has committed to establishing a comprehensive waste management and monitoring system to ensure compliance with WBG/IFC EHS guideline requirements. It has undertaken a number of energy and water efficiency initiatives in the past, and is committed to energy and water audits to identify further efficiency opportunities. It is committed to annual tracking and reporting of CO2 emissions to IFC.

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