China Mengniu Dairy

China Mengniu Dairy's earnings go sour

Mainland firm vows to improve controls after profit falls 18pc amid food-safety scandals

PUBLISHED : Wednesday, 29 August, 2012, 12:00am
UPDATED : Wednesday, 29 August, 2012, 4:11am

China Mengniu Dairy plans to undertake more quality-control measures, after sales were severely hit by quality-related scandals in the first half of the year.

The largest dairy producer on the mainland saw its net profit plunge 18 per cent to 645 million yuan (HK$789.16 million) in the first six months while revenue fell 1.2 per cent to 18.4 billion yuan.

The company, based in Inner Mongolia, said sales volume plunged nearly 30 per cent after a government check in December found its milk products contained unsafe levels of flavacin M1, a cancer-causing substance.

Chief financial officer Wu Jingshui blamed the drop in net profit on aggressive spending on marketing to regain consumer confidence, and extra costs for product inspection.

"The incident has taken a bigger toll on Mengniu than expected," said Sunny Kwok, an analyst at Guotai Junan Hong Kong.

"It will affect sales expectations for the rest of the year as well."

The dairy producer, plagued by a series of quality scandals in recent years, was in the media spotlight again this month. A Mengniu sales manager in Yiwu city, Zhejiang, reportedly falsified the production date on 3,000 boxes of milk products that were about to expire.

Chief executive Sun Yiping, who is a former senior executive of Cofco, the largest stakeholder in Mengniu, said the company had compensated affected consumers and was working to ensure that such incidents did not recur.

She said the incident did not have any significant impact on the company. Mengniu said it was establishing upstream milk sources and improving its internal control system.

In the first half, revenue generated from liquid milk products amounted to 15.9 billion yuan, about 86 per cent of the total revenue. Ice cream and other dairy products accounted for 11.7 and 1.4 per cent respectively.

The overall gross profit margin stood at 25.7 per cent, down 0.3 percentage points from a year earlier. Mengniu did not propose an interim dividend for the reporting period.

Its shares closed at HK$23.10 yesterday, up 0.4 per cent.