Strong Food spent 315 million yuan to become the tenth largest shareholder of the Shenhua Group (601088.SH), taking about 0.09% shareholdings, the third quarter financial report of Shenhua shows.

Strong Food is the world’s largest jelly producer and seller, while Shenhua Group is the largest coal company in China.

As Strong Food didn’t show this in its semi-annual financial report, it is reasonable to say that Strong Food purchased the stocks of Shenhua in the third quarter.

However, the general situation of the coal industry is not optimistic and coal prices are on the decline since last November. Insiders generally hold the viewpoint that Strong Food is betting on the improvement of the coal industry in the long term.

According to the third quarter financial report of Shenhua Group, though its net profit decreased 8% year-on-year; it still realized a net profit of 11.37 billion yuan.

“Many coal companies suffered negative profits in the third quarter. By comparison, the performance of Shenhua Group is relatively stable,” said Yu Hong, analyst from Datong Securities.

Guangdong Strong Food Group, founded in 1993, is headquartered on Shenzhen, Guangzhou with fixed assets of 7 billion yuan.

Net profit in the food and drink industry is on the decline as well. “As for FMCG (fast moving consumer goods), companies cannot earn profit if they cannot obtain a profit margin higher than 30%,” said Zhang Zhonghua, marketing manager of one famous food and drink company.

As the leader in the jelly industry, the profit margin of Strong Food is about 20%; while the company’s other products such as milk tea brands YouLeMei cannot exceed the 30% profit margin.

While competition in the food and drink industry is fierce due to the low industry threshold, foreign industry giants such as Coca-Cola and DANONE are expanding capacity in China as well. Strong Food is expected to suffer from the ceiling effect soon.

“This investment in the coal industry will help Strong Food to keep stable development in long term,” said Liang Mingxuan, food industry analyst at China Venture.

Source: Morning Whistle Nov 2012

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