Baby formula maker Yashili International's shares bounce back after profit warning

Shares in baby milk powder manufacturer Yashili International dipped 6.1 per cent in early trading on Wednesday but bounced back by the close after the firm said it expected 2014 year end profits to fall about 40 per cent.

The Guangdong based firm blamed a slowdown in the growth of the paediatric milk powder industry and said it was reforming its marketing and distribution models, according to a recent stock market filing.

“Due to the weak performance of 2014, the Board believes that there are still challenges for the overall operation and financial position of the Group,” company chairman Sun Yiping wrote in the filing.

Yashili’s shares closed up .88 per cent at HK$2.30 in Hong Kong.

Its rationale for the profit drop surprised analysts who follow the fast growing market.

“The sector is booming so it is ridiculous to say the sector is not doing well,” said Shaun Rein, managing director of China Markets Research Group.

Rein’s firm predicts 12 per cent annualised growth for the milk powder industry over the next three years driven by rising household incomes and a relaxation of the draconian one child policy in 2013 for parents who are themselves an only child.

Yashili’s problems stem from “terrible sales promotions and terrible brand positioning” and the firm, “was viewed as the lowest end and lowest quality of the domestic brands,” said Rein, who recently completed a research report on the firm.

The company posted a 437.6 million yuan (HK$ 547m) profit for 2013, down 6.6 percent from the previous year.

Last October, Danone Asia Baby Nutrition, the wholly owned Singapore unit of Danone, bought a 25 per cent stake in Yashili for HK$ 4.39 billion as part of the French group’s China expansion