Meat products produced by Yurun Food on sale at a market in Beijing. The company expects its third quarter profit to fall on unfavorable media reports, rising pork prices and difficulties in passing on increasing costs to consumers. Keith Bedford / Bloomberg

Investors scramble for the exits after meat processor predicts Q3 income drop

China Yurun Food Group Ltd, the nation's second-largest meat processor, saw its share price plunge the most in nearly six years after the company issued a quarterly profit warning.

Shares of the Nanjing-based meat producer plummeted 30.97 percent, the largest slide since the company began trading in Hong Kong in October 2005, to HK$7.51 ($0.96) on Monday.

Investor confidence, which had already been shaky after the recent spate of negative news on the company, took another blow on Monday when the company said that it expects its third-quarter profit to drop.

The "continual publication of negative media reports in the past few months", "the substantial increase in raw material costs" and the growing difficulty in passing on the higher costs to consumers were cited by the company as major factors that will drive down Yurun's earnings.

"The board expects that these unfavorable factors may continue to have an impact on the business of the group in the fourth quarter this year," the company said in a statement to the Hong Kong Stock Exchange on Monday.

Margins of meat processors are thinning as hog prices continue to rise. Prices of pork, the most-consumed meat in China, soared 46 percent in August, data from the National Bureau of Statistics show.

But for Yurun, higher costs for raw materials is not the only factor. The company has also been bombarded by news reports questioning its corporate governance and the safety of its meat products, which have led to a collapse in its share price.

The company has lost nearly half of its market value since September 8, when the Shanghai-based National Business Daily reported that meat sold by one of Yurun's subsidiaries contained clenbuterol, an illegal additive fed to animals to keep their meat lean. Yurun, which sells chilled and frozen meat from its slaughtering business, and processed meat products with brands such as Sunshine sausage and bacon, has seen its shares dip from a 2011 high of HK$29.25 on April 27.

"The company's shares will remain under pressure in the medium and longer term," said Linus Yip, a strategist with First Shanghai Securities. Yip said he wouldn't be surprised if the current sharp fall was followed by a slight rebound. But more likely, the slide will continue with so many factors working against the company, he added.

In a research note released on September 9, SinoPac securities said it expects the Clenbuterol incident will have "a significant adverse impact" on Yurun's sales going forward, believing the management's clarification to be "insufficient to remove the concerns about the company".

"It takes time for investors to regain confidence in a company", said Yip.

Yurun shares have been under selling pressure since the rumours spread in June that it may be a target of short seller Muddy Waters, whose negative reports have caused companies' shares to tumble.

The short seller didn't issue a report on Yurun.

emmaan@chinadailyhk.com

China Daily

(HK Edition 09/27/2011 page2)