State-owned food conglomerate Cofco is playing a more active role in China Mengniu Dairy, and has raised its stake after an excessive amount of a carcinogenic substance was found in its dairy products last month.
The mainland's largest grain trader has reportedly been participating in Mengniu's daily operations, including quality control, despite having said it would not do so when it became a shareholder four years ago.
In addition, Cofco increased its equity to 28.09 per cent from 27.96 per cent after buying 220 million shares for HK$41.12 million last Friday, according to its filing with the Hong Kong stock exchange.
The move is seen as a vote of confidence in Inner Mongolia-based Mengniu, which was among the dairy firms involved in the melamine milk contamination scandal in 2008.
'It's good timing for Cofco to enhance its role in Mengniu,' said Titus Wu, food and beverage analyst at DBS Vickers Securities.
Wu said Cofco, a leader in the mainland's food processing industry, would help Mengniu by sharing its food safety know-how.
However, it would take time for new quality-control measures to take effect because of the dairy producer's expanded production facilities and the fact that its suppliers were spread across the mainland, said Sunny Kwok Yap-sing, an analyst at Guotai Junan Hong Kong.
Mengniu shares have slumped 25 per cent in the past two weeks after a government inspection found excessive levels of carcinogenic aflatoxin in milk made in Sichuan province.
The firm's sales in first-tier cities nosedived as much as 50 per cent to 60 per cent following the incident, the Hong Kong Economic Times yesterday quoted Mengniu's management as saying.
But sales in those cities have been improving, and Mengniu expects sales to recover fully in two to three months.
At a Wal-Mart supermarket in Beijing yesterday, a Mengniu saleswoman said sales had plummeted about 30 per cent after the latest incident, with sales of milk and children's milk products hit hardest.
'But it's getting better now,' she said. 'We still have a lot of loyal customers.'
The impact of the latest incident would not be as protracted as that of the melamine scandal in 2008, Citigroup said in a research note.
Sales would accelerate ahead of the Lunar New Year celebrations, according to the American bank, which has a 'buy' rating on Mengniu.
Deutsche Bank, which has a 'hold' rating, said the incident would hurt profit growth this year.
Mengniu shares edged up 0.2 per cent to HK$19.74 yesterday.