Shares of local dairy-makers may win as rules force consumers to shop at home | South China Morning Post
  • Thu
  • Apr 2, 2015
  • Updated: 5:04am
Mr. Shangkong
PUBLISHED : Thursday, 14 March, 2013, 2:15pm
UPDATED : Thursday, 14 March, 2013, 3:43pm

Shares of local dairy-makers may win as rules force consumers to shop at home

BIO

George Chen is Managing Editor for SCMP.com International Edition and Mr. Shangkong Columnist. George has covered China's political and economic changes since 2002. George is the author of two books: This is Hong Kong I Know (2014) and Foreign Banks in China (2011). George has been named a 2014 Yale World Fellow. Follow George on Twitter: @george_chen.
 

The Netherlands is the latest country to limit infant formula purchases after some Dutch supermarkets found Chinese customers buying suspiciously large quantities of formula.

The Netherlands joins Hong Kong, Australia and Germany in seeking to curb what’s turning into a small industry – buying huge amounts of formula to export to China, where many people are justifiably suspicious about the integrity of the home-grown product.

But while attention has focused on the Chinese speculators buying the stuff and re-selling it at a profit, analysts say it might be time to think about investing in some Chinese dairy groups that are already listed in Shanghai and Shenzhen.

It’s no secret that many years Chinese parents prefer to buy baby formula abroad, particularly from Hong Kong, the favourite shopping destination for mainland Chinese travellers. Mainland Chinese are justifiably still wary about China’s dairy products after a series of food safety scandals, not least of which involved baby formula.

In 2008, milk powder produced by China's Sanlu Group was found to have been adulterated with the industrial chemical melamine, causing the deaths of at least six children and making more than 300,000 others ill.

But let’s face it – your baby still needs to be fed and if you have no choice but to buy the local product, you probably want to go for the best of the domestic brands.

“Imported milk formula is now out of stock (in mainland China). As a result, mainland consumers have fewer choices,” said Dong Guangyang and Long Jun, two industry analysts at China Merchants Securities (CMS) in a research note for clients.

Mainland Chinese milk powder manufacturers stood to benefit from Hong Kong’s decision to limit will benefit from this new regulation, they said, referring to the new Hong Kong rule.

From March 1, the Hong Kong government began to limit travellers to no more than two cans of baby formula when they crossed the border, usually heading up to the southern mainland city of Shenzhen by train or by bus.

“The new regulation has blocked the express delivery channel via Hong Kong. It is hard to find a substitute for Hong Kong due to high costs,” said the two analysts. In this case, many Chinese parents may have to face the reality at least for the short term – go for local brands.

Among domestic dairy product makers, CMS recommended Shanghai-listed Inner Mongolia Yili, and Shenzhen-listed Zhejiang Beingmate. Both firms have already gained bigger domestic market shares, the analysts said.

Yili may still be tarnished in some investors’ eyes by the 2008 melamine scandal, when melamine was also found in Yili’s product.

The scandal broke at the worst possible time for China, which was trying to portray itself in the best possible light as it prepared to host the 2008 Beijing Olympics. And, yes, Yili Group was official dairy products provider for the Beijing Olympic Games and the 2010 Expo in Shanghai.

Ouch!

 

George Chen is the Post's financial services editor. Like the column? Visit facebook.com/mrshangkong

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