Mengniu milk products at a supermarket in Beijing. Company sales fell 20 percent during the first five months of this year. [CFP]

China Mengniu Dairy said yesterday that it would raise HK$3.058 billion ($394.56 million) from a share sale to China National Oils, Foodstuffs and Cereals Corp (COFCO) and Hopu Investment Management.

Hopu, a private equity fund, and COFCO, China's largest food importer and exporter, will own about 10.01 percent of China Mengniu's enlarged issued share capital upon completion of the share subscription, the company said.

"It is the company's intention to use the proceeds from the share subscription to expand its existing operation, or to invest in opportunities which may arise as a result of the upstream milk source consolidation and development in (the) dairy product industry," China Mengniu said in a statement to the Hong Kong stock exchange.

Through a special purpose vehicle, both COFCO and Hopu would subscribe for the shares at HK$17.60 a piece, which would be a 7.85 percent discount to China Mengniu's Friday closing price of HK$19.10 per share before the announcement.

COFCO will own a 70 percent stake in the special purpose vehicle, and Hopu will own the remaining 30 percent, while the pair will buy a further 10 percent in the dairy from existing shareholders at the same price to raise their overall stake to marginally above 20 percent.

Mengniu was one of the Chinese dairies found to have sold milk containing melamine during last year's tainted milk scandal. It and other major dairies like Yili and Bright Dairy all saw major sales declines in the scandal's wake, leaving them needing cash to fund their sprawling operations.

Mengniu shares plunged 67 percent in September last year after the scandal broke. They have come back since then, up about 89 percent this year, but are still 20 percent below their pre-scandal levels.

Fund managers said the outside investment might be less designed to seize on low valuations, and is more of a bet on Mengniu's long-term prospects.

Mengniu said in June its sales were 20 percent lower than normal for the first five months of 2009, but that the negative impact of the scandal was basically over and its products were 100 percent safe to consume.

The cash infusion for Mengniu would mark the second major investment in a Chinese dairy company by a private equity firm within the last month.

Last month, Kohlberg Kravis Roberts & Co said it had completed a series of investments in Ma'anshan Modern Farming Co Ltd, a leading dairy farm company headquartered in Anhui province.