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Fonterra's troubled Chinese partner Beingmate Baby & Child is in talks with state-owned firms about introducing capital as part of a strategic review.
This is leading to speculation Fonterra could look to sell its 18.8% stake to Chinese Government interests even as tensions build between the two countries over New Zealand's pushback against telco Huawei.
Beingmate announced on Tuesday it is negotiating "strategic co-operation and investor issues" involving the introduction of state-owned assets.
The company said it was working with controlling shareholder Beingmate Group, which is owned by its chairman Sam Xie, but has not signed any legally binding agreements.
State-owned investment and co-operation would "protect the company's long-term strategic development and value realisation, help improve corporate governance and achieve transformation," Beingmate said in its statement.
The announcement saw Beingmate shares listed on the Shenzhen Stock Exchange climb 3% to 5.44 ($NZ1.14) before pulling back to 5.38 yesterday.
The news came as Fonterra reviewed its poorly performing investment in the Chinese infant formula manufacturer along with other assets. Chairman John Monaghan has said the company was doing a "full stocktake and portfolio review" looking at all major investments, assets and joint ventures."
Fonterra paid 18 per share for a total outlay of $755million as part of a joint venture partnership. It has since written down the carrying value to $204million after a string of heavy losses decimated Beingmate's market value.
Guangzhou's Yangcheng Evening News quoted dairy analyst Song Liang saying Beingmate courting Chinese Government-backed investment opportunities could offer a solution to both partners.
"Do not rule out that Fonterra really wants to withdraw, and then the shares are transferred to the state-owned background investors."
Fonterra declined to comment.
Beingmate has shown improved financials after posting successive losses of $780million ($164million) in 2016 and 1.06billion ($223million) in 2017.
The company turned in a profit of 19.43million in the third quarter of 2018, and a nine-month profit of 27.96million, an increase of 107.3%.
Since April, Beingmate shares have been market ST (Special Treatment) which carries a delisting warning, and the company has been repeatedly warned for violations of information disclosure.
China is one of Fonterra's largest global markets, accounting for $3.4billion of sales revenue and a normalised earnings contribution of more than $200million.
In 2015 when Fonterra announced the joint venture, former chief executive Theo Spierings said the deal was a game changer for the co-operative in China. However, it has been a financial disaster that many shareholders want to see the back of.
- Duncan Bridgeman