(Yicai Global) Dec. 14 -- Shares in Shanghai Milkground Food Technology shot up by the exchange-imposed daily limit today, on the news that Inner Mongolia Mengniu Dairy will invest CNY3 billion (USD459 million) to become the cheese maker’s biggest shareholder as cheese becomes the Chinese dairy giant’s focus for growth.

Milkground’s stock [SHA:600882] soared 10 percent to CNY43.09 (USD6.56). Mengniu [HKG:2319] closed up 2.4 percent at HKD42.60 (USD5.48).

Mengniu will buy 101 million new shares at a price of CNY29.70 (USD4.50) apiece for an additional 18.8 percent stake, the Shanghai-based cheese maker said yesterday.

After the deal, chairwomen Chai Xiu’s holdings will be reduced to 16 percent from 19.9 percent. Chai will gradually give up her stake and voting rights in the firm over the next 12 months, it added.

Hohhot-based Mengniu will be allowed to appoint a financial director to Milkground, according to the agreement. No other significant changes will be made to Milkground’s senior management for three years after the deal is completed, Milkground said.

The funds will be used in the firm’s three cheese and special dairy production bases in Shanghai and the country’s northeastern regions, and to supplement working capital, it added.

Mengniu has been eyeing Milkground’s positioning and growth potential in the cheese market for quite some time. In January it bought a 5 percent stake for CNY287 million (USD43.9 million) and injected CNY458 million into Milkground’s cheese-making unit Jilin Guangze Dairy Technology for 42.88 percent equity.

Fast Growing

China’s cheese market was worth CNY6.6 billion (USD1 billion) last year, according to data from industry analyst Euromonitor. It has been growing at an annual compound rate of 16 percent and is expected to keep expanding at a rate of 12 percent a year until 2024.

Cheese is the fastest growing segment of China’s dairy industry. Milkground’s cheese sales last year surged 71.4 percent from the year before to 18,069 tons. Milkground makes processed cheese with a Chinese twist. It has developed original snacks such as stringy cheese, cheese sticks and cod-flavored cheese which are particular popular among children.

It is China’s most popular home-grown brand, but ranks fifth overall with 4.8 percent market share, behind Germany’s Milkana which has 22.7 percent market share, France’s La Vache Qui Rit with 7.7 percent, New Zealand’s Anchor at 6.4 percent and the US’ Kraft at 5.5 percent.

Mengniu languishes in eighth place with 2.8 percent market share, but by partnering with Milkground, they can jump to third place with 7.6 percent.

The company’s executives and shareholders, though, have been warned multiple times by regulators since the start of the year for reducing their shareholdings against regulations and lending idle funds.

Hopefully, the issues with internal management can be rectified once Mengniu becomes controlling shareholder, said Song Liang, a dairy product analyst.

Editors: Tang Shihua, Kim Taylor