ESG case study Hermes Emerging Markets China Mengniu Dairy: Crisis and recovery Gary Greenberg, CFA Head of Hermes Emerging Markets and Lead Portfolio Manager With new management and a Results government focus on improving food The company was making all the right moves: it was only a matter of time before this was recognised by the stock market. Dairy giant safety, the company has recovered from Danone later acquired a 4% stake in China Mengniu Dairy and the two companies subsequently entered into a joint venture, in which the a milk poisoning scandal to fast become local company gained an 80% stake, to produce and distribute yoghurt a world-class consumer goods provider. in China. Since then, the companies have collaborated in R&D and on measures to improve the supply chains of China Mengniu Dairy’s baby formula and pasteurised milk businesses. Concern In 2008, several Chinese infants died and 296,000 children fell ill after drinking melamine-poisoned milk produced by domestic dairy companies. Shares in China Mengniu Dairy, one of China’s major milk producers, more than halved in value and were suspended from trading amid the crisis. The company’s management team later exited and a former Coca Cola CEO took charge, appointing staff with international experience in dairy production and distribution. So began the company’s recovery. Action Identifying this change and other positive stock fundamentals, we Driven by a better supply chain, a stringent focus on food safety and invested in the company in early 2012. Hermes EOS, our stewardship quality control, the promotion of its key brands, partnerships with team, subsequently engaged the dairy producer and confirmed that Danone and Danish dairy company Arla, plus its entry into the baby- it was improving its practices: a new quality-control division reported food market, the company typifies the disciplined, efficient, growing directly to the CEO, detailed guidance was provided to suppliers, the and sustainable companies that we seek in emerging markets. The sourcing of produce was being streamlined in order to reduce the stock appeared expensive at first, because China Mengniu Dairy was number of intermediaries in a market with an extremely fragmented investing for future growth rather than focusing on short-term gains, supply chain, and more third-party checks on product quality were being but has risen 45.76% from early 2012 to August 2017. made. These internal improvements occurred amid supportive external factors: improving regulations to address the public’s concerns about food safety in China, and rising milk consumption from a low base. Stock performance of China Mengniu Dairy 25 In 2013, I visited one of China Mengniu Dairy’s milk-processing plants. I saw spotless new German and Swedish equipment automatically 20 producing dairy goods that were tested twice for 100% purity before Initial purchase being packaged in containers that were digitally tagged. The machinery, 15 sealed off from walkways by glass enclosures, was flushed clean every 24 hours. Employees’ mood, gauged through a translator, seemed to 10 be very good. Share price (HKD) 5 Jan 11 Jan 17 Jan 12 Jan 15 Jan 13 Jan 16 Jan 14 Source: Bloomberg as of 18 August 2017. This stock was bought in March 2012 and is still held within the portfolio. For professional investors only www.hermes-investment.com HERMES EMERGING MARKETS This document is for Professional Investors only. In Australia this document is directed at ‘Wholesale Clients’ only. Any investment products referred to in this document are only available to such clients. Investing with Hermes may be restricted in other countries and as such, any person who receives this document is required to make themselves aware of their respective jurisdictions and observe any restrictions. This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. It pays no regard to the investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. Any opinions expressed may change. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed. Subscription and redemption fees are not included in the performance figures. All figures, unless otherwise indicated, are sourced from Hermes. Further information on investment products and any associated risks can be found in the Fund’s Key Investor Information Document (“KIID”), the Prospectus, the articles of association and the annual and semi-annual reports. These documents are available free of charge at Hermes Investment Funds plc, Georges Court, 54-62 Townsend Street, Dublin 2, Ireland, www.hermes-investment.com; and at its representative in Switzerland (ACOLIN Fund Services AG, Affolternstrasse 56, CH-8050 Zurich, www.acolin.ch). The Paying agent in Switzerland is NPB Neue Privat Bank AG., Limmatquai 1/am Bellevue, P.O. Box, CH-8022 Zürich. Issued and approved by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Lloyds Chambers, 1 Portsoken Street, London E1 8HZ. HIML is a registered investment adviser with the United States Securities and Exchange Commission (“SEC”). HIML is the investment manager and promoter of Hermes Investment Funds plc (“HIF”) – an open-ended investment company with variable capital and with segregated liability between its sub-funds – incorporated in Ireland. Authorised by the Central Bank of Ireland and recognised by the Financial Conduct Authority. Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation will not be available under the United Kingdom Financial Services Compensation Scheme. BD00664 0001531 08/17 2 HERMES INVESTMENT MANAGEMENT We are an asset manager with a difference. We believe that, while our primary purpose is to help savers and beneficiaries by providing world class active investment management and stewardship services, our role goes further. We believe we have a duty to deliver holistic returns – outcomes for our clients that go far beyond the financial – and consider the impact our decisions have on society, the environment and the wider world. Our goal is to help people invest better, retire better and create a better society for all. Our investment solutions include: Why Hermes Credit? Private markets Edge Infrastructure, Private Debt, Private Equity, Commercial and A focus on security selection through the capital structures, and across residential real estate debt instruments, of issuers worldwide. We believe that capturing superior relative value depends as much on finding attractive securities High active share equities as identifying creditworthy companies. This approach helps to deliver Asia, global emerging markets, Europe, US, global, and small strong returns through the cycle. and mid cap Rigorous, repeatable process Credit Intensive relative-value investing in bonds, loans and derivatives. Absolute return, global high yield, multi strategy, This bottom-up credit selection is guided by top-down analysis. Risk global investment grade, real estate debt and direct lending management is a core function at all stages of our investment process. Multi asset Experienced team Multi asset inflation Skilled, integrated team whose principal members have worked together since 2004. We are expert managers of global multi-strategy, Stewardship high-yield and investment-grade credit strategies. Active engagement, advocacy, intelligent voting and sustainable development Aligned interests The autonomy of a boutique with the operational strength of an Offices institutional fund manager. To ensure our interests are aligned with our London | New York | Singapore clients’, long-term outperformance is a condition of incentive pay. The Hermes Investment Office performs independent risk management. Contact information Business Development United Kingdom +44 (0)20 7680 2121 Africa +44 (0)20 7680 2205 Asia Pacific +65 6850 0670 Australia +44 (0)20 7680 2121 Canada +44 (0)20 7680 2205 Europe +44 (0)20 7680 2121 Middle East +44 (0)20 7680 2205 United States +44 (0)20 7680 2205 Enquiries [email protected] Certified ISO 14001 www.hermes-investment.com Environmental Management.