Shiyao Investment Ltd Corporate

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Shiyao Investment LtdCorporate Financial
Advisory for the Food Food Retail sector

• The Functional Food industry in China
• HK Polytechnic University
• 1 21 2005

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Shiyao Investment Ltd

• Shiyao Investment Ltd is a niche investment bank
  strictly focused on the food retail sector in
  PRC Japan and headquartered is Shanghai.
• Our team members, most of them from PRC, have
  been active in PRC Japan for the last twenty
  years in the Food Food Retail sector.

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The Functional Food Industry in China

• Definition
• Production
• Consumption
• Key players
• Opportunities Challenges

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1. Definition

• There is no universally accepted definition for
  functional foods, and few countries, such as
  Japan have established a legally defined and
  recognized functional foods category.
• In China, the Ministry of Health defines the
  category of Functional Food as a category of food
  able to regulate functions of the human body and
  suitable for specific consumer groups, but
  without being assimilated as a medicine
  prescribed for therapeutic purpose. Often,
  Functional Foods are assimilated to the broader
  category of Health Food.

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1. Definition

• Main categories of Functional Foods in PRC
• Food which naturally contains compounds
  recognized as bringing health benefits to the
  human body
• tea which contains catechins recognized as a
  protective agent against cancer development
• bean which contains isoflavones recognized as
  decreasing LDL cholesterol in the blood.
• Food to which has been added nutrients recognized
  as bringing health benefits
• Milk enriched with vitamin D and calcium,
• Juice enriched with ß carotene
• Food, beverage in particular to which has been
  added natural herbs recognized as bringing health
  benefits to its consumers

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2. Production

• There are few reliable statistics concerning the
  size and scale of the functional food market in
  China.
• Recent research reported that the total sales of
  Chinese health-related food was RMB 3 billion
  (0.36 billion) in 1997, RMB 4.5 billion (0.54
  billion) in 2000.
• Forecast give a figure of RMB 13 billion (1.58
  billion) by 2005.
• Accordingly, it is clear that this a high growth
  category which increasingly domestic PRC and
  foreign players will intend to further develop.
  This is clearly demonstrated by the following
  chart which shows the still large market size gap
  with other countries such as the USA where the
  size of this market was estimated at USD 18.25
  billion in 2001.

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2. Production

• Total sales of functional foods in selected
  countries (2001)

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3. Consumption

• Functional food is a category which has and is
  still experiencing a great deal of development in
  the world.
• Functional food have been developed for an
  increasing number of categories of food such as
  baby food, bakery, candy, beverage, pet food,
  leisure food, etc.
• In China, the categories of functional food found
  on the market are still limited in variety, and
  most of them can be classified as follow

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3. Consumption

• Functional beverage
• with three sub-categories found in the Chinese
  market sports drinks for physical performance
  enhancement, energy drinks for mind and body
  stimulation, enriched drinks for specific health
  benefits.
• Compared with the world average consumption
  level of such products (7kg per capita per year),
  China, with an average consumption amount of 0.5
  kg per capita, is still having a large potential
  for further development.
• Functional dairy products
• - In the dairy market, functional dairy products
  would be for instance milk (liquid or in powder)
  enriched in calcium or iron, thus carrying a
  premium price over normal milk..

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3. Consumption

• Functional biscuits
• In order to differentiate themselves within this
  highly competitive sector in PRC, some
  manufacturers have developed functional
  biscuits. The most popular functional biscuit on
  the Chinese market currently are biscuits
  supplemented in calcium, biscuits with high
  protein content or biscuits with amino acid
  supplement.
• Oats
• Wheat, rice, corn and sorghum are the most
  popular grain consumed in PRC, but for breakfast,
  oats are widely consumed, especially by older
  people, children. Recognized as bringing good
  quality fiber to its consumer, some oats products
  on the Chinese market have been supplemented in
  Vitamins and marketed as carrying additional
  health benefits to its consumers, especially
  children and older people.

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4. Key players

• Brief introduction
• Two types of enterprises are involved in the
  health food industry in PRC
• large multinational food or nutrients companies
  such as Nestlé, Danone, Novartis. Other more
  traditional food global players have also started
  to market food with additional health
  functionalities such as Quaker Oats.
• Domestic company such as Jianlibao, RT Ego have
  also , developed functional food products. But
  the market is still very young and very
  fragmented between a few large global and
  domestic players, and many small, regional
  players emerging in this food category.

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4. Key players

• Major players in the health food industry of
  China
• Special functional/energy drink manufacturers
  Redbull, Quaker, Jianlibao, RT Ego, etc.
• Large beverage manufacturers such as Wahaha,
  Suntory, Kirin, which all have functional drink
  in their product portfolio.
• Large dairy enterprises such as Bright and Yili
  which have developed different type of enriched
  dairy products.
• Multinational food enterprise such as Nestlé and
  Danone which launched nutritious cereal
  breakfast or nutritious biscuit for breakfast.
• Pharmaceutical company such as Novartis which has
  developed health food product (energy bar) in its
  portfolio of products.

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5. Market review

• Government Support
• -- The Chinese government is attaching great
  importance to the development of the functional
  food industry in PRC.
• -- It has targeted certain cities as TCM
  (Traditional Chinese Medicine) and health food
  "centres of excellence." For example, in 2001,
  the Shanghai government decided to contribute
  US14.5 million over a two years for TCM and
  functional foods related research and the
  construction of a research centre.
• The Chinese central government is also
  encouraging Chinese companies to develop
  functional food products and contribute more RD
  investment for the development of functional
  foods in PRC.

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5. Market review

• Forecast Challenges ahead
• -- Experts estimate that the Chinese market for
  quality functional foods will continue to grow at
  an exponential rate over the next five years, as
  rising incomes in China's urban areas and
  increased health concerns are developing among
  Chinese consumers.
• -- This development will be challenged by a
  lack of detailed quality controls in China's
  emerging domestic functional foods market as well
  the rise of food products falsely claiming
  functional effects.
• -- With the recent food scandal in PRC, we
  believe that in a market with increasingly aware
  consumers, companies which intends to develop
  functional food products will have to increase
  considerably their RD expenses to develop
  quality products recognized as truly being
  functional food

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5. Market review

• Challenge and Opportunities
• -- Foreign manufacturers face a range of other
  difficulties besides regulatory issues. These
  include import licensing requirements, labeling
  requirements as discussed above, tariffs, customs
  duties and Value-Added Tax (VAT). Establishing an
  appropriate Chinese-language brand strategy and
  securing intellectual-property protection are
  important considerations for many companies,
  particularly those that are entering the Chinese
  market with a long-term strategy.

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6. Thank you For further contact

• Dr Benoit Rossignol
• Managing Director
• Shiyao Investment Ltd
• Shanghai Office
• Tel [phone]
• E-mail contact_at_shiyaoinvestment.com
• www.shiyaoinvestment.com