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Dairy firms start to gain market favor

By Lillian Liu (China Daily)
Updated: 2009-02-19 07:53

Mengniu's premium product - Dluxe Milk - displayed at a food exhibition in Shanghai. [China Daily]

Chinese dairy producers seem to be catching the fancy of the markets going by the recent favorable ratings of stock market analysts.

The ratings indicate that the industry has recovered from last year's poison milk scandal that had severely dented the fortunes of many companies in the sector. It still would take a long time for these companies to regain investor and consumer confidence, said analysts.

Related readings:  MOH: Mengniu milk additive not harmful to health  Mengniu stepping up the ante Mengniu, Yili pledge stringent milk tests

Mengniu Dairy, a key industry player, said its January sales have recovered 80 percent of its pre-crisis level. Sales of the other two key players, Yili and Bright Dairy, have also bounced back to about 70 percent of their previous levels.

Goldman Sachs has upgraded Mengniu Dairy to "buy" from "neutral", citing a recovery in milk demand and consumers shifting to premium products.

"We expect a better product mix and softening raw milk price to increase visibility on 2009 earnings, which may help rebuild investors' confidence and drive a re-rating (of) Mengniu," the firm said.

The US investment bank has also raised its target price on Mengniu shares to HK$11.7 from HK$8.3 and increased the 2010 earnings per share forecast to 0.52 yuan from 0.49 yuan.

"The pace of recovery is faster than expected and we are confident that sales revenue this year will return to 2007 levels," said Jiang Zhihui, analyst, Guoco Capital Ltd.

Guotai Junan Securities expects Yili sales to bounce back later this year. "Yili's profit warning meets our expectations. The results for 2009-10 fiscal would be better than our expectations," the firm said.

It has been just over four months since products from 22 dairy firms including Mengniu were found to contain melamine, an industrial chemical that can cause kidney stones if taken in large doses.

Banks and brokerages have now upgraded their ratings on Mengniu and its peers to "buy" from "sell".

Some analysts felt that the upgrades have ignored some negative factors and said the tainted-milk crisis is far from over.

Though Mengniu sales have recovered it is not yet reflected in its profit margins. The company has and would continue to invest heavily on image rebuilding and product promotion, said Lawrence Chor, beverage analyst, Taifook Securities.

"The expenditure in marketing is going to be huge," he said. "The company might have to lower its product prices to lure customers, which doesn't help its earnings."

Worse still, the compensation plan hasn't been confirmed and many parents are still not reconciled, Chor said.

Taifook Securities has set a target price of HK$8 for the Inner Mongolia-based Mengniu.

"Mengniu is over-optimistic in saying that it would achieve an earnings result similar to the pre-melamine crisis level by the fourth quarter of this year," said Jiang.

When the milk scandal surfaced, "our customers hastily dumped their holdings in Mengniu indicating a loss in investor confidence," said Andrew To, sales director, Taifook Securities in Hong Kong.

As many as six babies died and more than 290,000 infants nationwide developed symptoms of urinary disorders after consuming products tainted with melamine, according to statistics from the Ministry of Health.

To remedy the "biggest crisis since the establishment of Mengniu", as described by its deputy president Yao Haitao, the company sought to calm public anxiety by organizing media and customer visits to its dairy farm and reassure the public on product safety. Its rival Yili followed suit with a series of damage-control exercises.

Mixed response

Online forums on the mainland reveal the public has mixed feelings towards the two giant dairies.

Supporters called on customers to forgive the companies because no further toxic products were discovered by authorities and cited the companies' ongoing attempts to restore reputation.

"I take Mengniu with comfort now, because the government has stepped in and the crisis is over, and I believe many consumers have done the same," wrote a netizen.

Media published anecdotes of Mengniu's founder Niu Gensheng bursting into tears and sending letters to fellow entrepreneurs soliciting help. Some people expressed sympathy, "Mengniu made a mistake, but why not give it a second chance?"

But others question Niu on whether his tears were shed for the affected babies or his own loss.

Hohhot-based executives of Mengniu declined to comment when contacted by China Daily. The Yili management also chose not to respond.

Mengniu said in a statement to the Hong Kong stock exchange that it expects to post a loss of about 900 million yuan.