Wednesday, 28 December 2011

Mengniu shares sink after new scandal

China Mengniu Dairy lost one-fifth of its value on Wednesday after its shares plunged 26 per cent to their lowest level in more than two years after the nation’s biggest dairy company was hit by a tainted milk scandal over the Christmas holiday.

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Guanyu 道 said...

Mengniu shares sink after new scandal

Reuters in Hong Kong
28 December 2011

China Mengniu Dairy lost one-fifth of its value on Wednesday after its shares plunged 26 per cent to their lowest level in more than two years after the nation’s biggest dairy company was hit by a tainted milk scandal over the Christmas holiday.

Mengniu said in a statement on its website over the weekend that it had destroyed products at a plant in Sichuan found by the government quality watchdog to contain aflatoxin, a substance that can cause severe liver damage, including liver cancer.

The discovery of the toxins is the latest of several safety scandals to hit China’s dairy industry in recent years.

“Panic selling has dragged the stock down as the scandal hit in a quiet and nervous market,” said Alfred Chan, chief dealer at Cheer Pearl Investment. “But the impact is expected to be temporary.”

China Mengniu said none of the tainted milk had entered the market and it would work harder to meet all national and corporate quality standards in the future.

“At present, all products available in the market within and outside China, including Hong Kong, have passed relevant standards,” Mengniu said in a separate statement on Wednesday.

Shares of Mengniu fell as much as 26 per cent in early trading to HK$19.46, the lowest since September 2009. At 11.02am, the stock was at HK$20.50, down 22.05 per cent. The Hang Seng Index was down 0.62 per cent.

“We believe this may be a short-term problem for Mengniu, given the weak market sentiment and negative media reports,” Royal Bank of Scotland said in a research note.

“Consumers may have doubts about Mengniu’s product quality and may avoid purchasing its products in the short term. However, we do not think the impact will be as serious as the melamine scandal, since there have not been any reports of directly related health cases.”

In 2008, at least six children died and nearly 300,000 became ill from powdered milk laced with melamine, an industrial chemical added to low quality or diluted milk to give misleadingly high protein level readings.

Deutsche Bank downgraded Mengniu Dairy to hold from buy. It cut Mengniu’s next year-13 net profit forecasts by 6-7 per cent and lowered its target price to HK$22.60 from HK$31.50.

“We believe near-term earnings growth momentum will likely be affected by the new carcinogen-tainted pure milk in its Meishan factory,” Deutsche Bank said in a research note.

“We believe this incident is not as serious as the melamine crisis in 2008,” it said. “However, dwindling consumer confidence in Mengniu’s products is likely to have an impact on near-term sales.”

Bank of America Merrill Lynch also said Mengniu’s near-term re-rating potential is capped by the incident and the bank cut its earnings estimates by 3 per cent for next year-13 to factor in expenses related to upstream investments. It also downgraded its rating to neutral.

“Given no consumers would be affected and it is only one out of 25 sample batches that was detected with issues, we do not expect any meaningful impact on sales, as was the case with the past three incidents since 2009, and so maintain our revenue forecasts,” Bank of America Merrill Lynch said in a note.

Analysts said the incident had again shaken consumer confidence in the country’s dairy industry, putting pressure on other mainland dairy producers.

“This incident may raise concerns over the overall quality of dairy products in China,” Royal Bank of Scotland said.

Shares of China Modern Dairy Holdings, one of Mengniu’s suppliers of raw milk and in which KKR & Company holds about a 24 per cent stake, fell 15.6 per cent to HK$1.51, the lowest in nearly three months. The stock was at HK$1.55 as of 11.32am, still down 13.4 per cent.

Guanyu 道 said...

“We believe that the fragmented raw milk supply, under-developed dairy sector supply chain and the structural shortage of raw milk supply in China, have all made it almost impossible for major dairy companies like Mengniu to fully guarantee end-product quality,” Mirae Asset said in a research note.

“The structural raw milk supply shortage in China should support further raw milk price increase in the long run in our view,” Mirae Asset added.

Shares of Chinese dairy company Inner Mongolia Yili Industrial Group, another Mengniu rival on the mainland, have fallen 7.8 per cent so far this week. The stock gained 0.52 per cent on Wednesday following recent weakness.

Beijing Sanyuan Foods was down 3.06 per cent on Wednesday morning.

Mengniu is about 28 per cent held by units of state giant China National Cereals, Oils and Foodstuffs Corporation, which invested in the company after Mengniu was hit by the 2008 scandal that involved the discovery that its milk products contained toxic chemicals.