Saturday, 13 July 2013

Formula makers facing an end to plump profits

Chinese mothers’ fears of contaminated milk powder may no longer benefit foreign producers

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Guanyu 道 said...

Formula makers facing an end to plump profits

Chinese mothers’ fears of contaminated milk powder may no longer benefit foreign producers

Bloomberg in Shanghai
13 July 2013

Mainland parents’ distrust of local milk has elevated foreign baby-food brands into luxury goods and allowed firms from Danone to Mead Johnson Nutrition to fatten margins. But those plump profits are now at risk.

The troubles started this month, when state media reported the central government was investigating them and other overseas competitors for possible price-fixing. Within days, Danone and Nestle cut some prices by as much as 20 per cent. Mead Johnson, the country’s largest infant formula seller, announced its own cuts on Wednesday.

The central government is looking to improve the mainland industry, Wells Fargo analysts wrote this month. The government has said it will strengthen entry requirements and provide financial incentives for producers to own their raw material supply chain. It is also encouraging mergers between local producers to make them more competitive.

Morgan Stanley downgraded US-based Mead Johnson’s stock to an equal-weight rating this month, similar to a hold, partly because of Beijing’s push to support domestic manufacturers. The analysts reduced their 2013 earnings estimate on Mead by five US cents a share to US$3.22.

Mead Johnson, which saw its operating profit on the mainland rise 12 per cent to US$870 million last year, is cutting prices on its main products in China by up to 15 per cent. The company was looking for “potential offsets” globally and co-operating with the National Development and Reform Commission’s antitrust review, it said on Wednesday.

Paris-based Danone reported first-quarter sales growth that beat estimates as Chinese food-safety worries helped drive a 17 per cent jump in baby-nutrition revenue. Switzerland’s Nestle reported first-quarter infant-nutrition sales increased at least 10 per cent, faster than the company’s overall growth.

The probe could also create some problems for the domestic industry. Foreign companies may introduce more inexpensive products, putting pressure on cheaper local brands, said Hong Kong-based Standard Chartered analyst Charles Yan.

“If foreign producers lower the price, Chinese will be happy to buy more of imported brands,” Yan said.

The domestic companies with the most to lose may be Inner Mongolia Yili Industrial, Yashili International and Zhejiang Beingmate Technology Industry & Trade because they have the highest market share among the local brands, said Matthew Crabbe, Asia-Pacific director of research at Mintel Group.

Zhejiang Beingmate, the Hong Kong-listed arm of China’s second-largest baby formula company by market share, has said it will cut product prices by up to 20 per cent to be more competitive.

Shares of Guangzhou-based Biostime International Holdings, the only local producer named in the probe so far, have lost about 26 per cent since June 27 when it announced it was being investigated. In a statement the firm said it had not raised prices since 2008 and declined to comment on the probe’s impact on profitability. The company has said it was offering a discount of about 11 per cent on infant formula products through reward points.

With several companies operating in the industry, it may be hard to prove that they are monopolies, said Kent Kedl, managing director for Greater China and North Asia at global risk consultancy Control Risks. That may still not satisfy the regulators.

“We have seen in the past that when the regulators start looking at something under one motivation, it sometimes changes in the middle,” he said.