• Sun
  • Dec 21, 2014
  • Updated: 1:09am

Market calls

PUBLISHED : Monday, 02 January, 2012, 12:00am
UPDATED : Monday, 02 January, 2012, 12:00am

China Mengniu Dairy (2319), China's biggest milk seller, dropped 24 per cent on Wednesday after the company revealed that its milk contained flavacin M1, a toxin known to cause severe liver damage, even cancer. The news pressed the hot-button issue of food safety on the mainland for a sensitive consumable: milk.

In 2008, Mengniu was among the major dairies found to be distributing melamine-tainted milk.

The company said the contamination was caused by cows eating mouldy feed at a farm run by one of its suppliers.

Analysts took the news in their stride. The event triggered only two downgrades (by Deutsche Bank and Bank of America) with the rest tending toward the view that the problem was a one-off for Mengniu.

Yixin Luo (Jefferies) says the declines were overdone. A Jefferies report on Wednesday reiterated a buy rating on Mengniu and described the price drop as a buying opportunity.

Luo was encouraged by a speedy company response to the crisis, which compared favourably with its slow, defensive handling of the melamine poisoning in 2008.

Mainland authorities on December 24 said that Mengniu milk made in a Sichuan factory was tainted by flavacin M1. The firm posted an apology on its website on December 25. On Wednesday morning before the start of trading, it posted a statement on the Hong Kong stock exchange website confirming the test result.

'Mengniu's reaction after the accident shows they were timely to react,' says Luo. He adds that no tainted milk is known to have been released to the public.

Jacqueline Ko (Kim Eng) agrees that Mengniu's response was much improved over its 2008 handling of the melamine scandal.

However, she notes that as of late last week, the firm did not return any calls from analysts. Mengniu also did not name the farm that produced the tainted milk, and she also wonders why the government delayed releasing news of its toxic-milk finding.

'The testing was done in October, but the government only issued the results in December. It's strange. That may hurt consumer confidence,' says Ko.

Olive Xia (Core Pacific-Yamaichi) says she is positive on the firm owing to its track record of continuous market-share expansion. She expects it will be under selling pressure for the near term due to heightened sensitivity about food safety on the mainland. But she expects the crisis will soon pass.

'The news was delivered faster this time so the crisis should dissipate more quickly,' says Xia.

The views stated here are those of analysts and are not stock calls by the South China Morning Post


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