Mengniu Dairy’s interim profit hit hard by bruising price war

China Mengniu Dairy, the country’s second largest milk and dairy producer, delivered a worse-than-expected double digit drop in interim net profit on Thursday, as its stellar premium milk and yoghurt sales were offset by the cost of a bitter marketing battle with its rivals.

Net profit tumbled 19.5 per cent to 1.077 billion yuan from 1.338 billion yuan in 2015, falling short of analysts consensus estimates of 1.366 billion yuan in a Reuters poll, with its total revenue climbing 6.6 per cent to 27.26 billion yuan from a year earlier.

While scrambling to expand its product lineup to lure increasingly health-conscious Chinese consumers, the Hohhot-based milk, yoghurt and infant formula producer saw its growth stalled in an industry already over-crowded with domestic and foreign players.

“With the macro economy still sluggish, raw milk in surplus supply, pressure from online

competition and the government pushing ahead restricter food safety regulations, the

dairy industry is facing severe challenges,” said Mengniu chief executive officer Sun Yiping, at the results announcement in Hong Kong,

Bai Ying, its chief operating officer, added that he expected the company to fare better in the months ahead, however, as the slide in milk prices stabilises.

“There used to be a milk glut earlier in the year, but I’ve seen the oversupply issue lessen since June, which spells a more favourable business environment for us.”

Sales of liquid milk, including its high-end Milk Deluxe offerings, jumped 8.30 per cent to 23.76 billion yuan, and yoghurt sales surged 31.57 per cent to 7.33 billion yuan, which now accounts for 30.9 per cent of the total, up from 25.4 per cent a year earlier.

Mengniu shares traded at HK$14.06 nearing the lunchtime break, 7.98 per cent ahead. The price has climbed 17.08 per cent over the last six months.

No interim dividend was declared, for the second year running.

Ahead of the earnings announcement, Song Liang, an independent dairy analyst, told the Post: “While competition still remains intense among the biggest players, there is a chance for Mengniu’s earnings to improve in the second half after pulling the plug on its aggressive sales promotions.

“Long term, Mengniu really has to cement its status as the number one player in China’s yoghurt and low-temperature milk markets, as its peers are also eyeing these two lucrative businesses,” he added.

China’s dairy industry is dominated by Mengniu, Inner Mongolia Yili and Shanghai-based Bright Dairy, all of which have gone head to head against each other, as well as against their foreign rivals, for larger market share.

The company, backed by China’s food conglomerate Cofco and the Commonwealth Bank of Australia, bought Danone’s Dumex infant formula brand last July through its unit Yashili International, in an effort to win back consumers who shied away from domestic brands amid baby milk scandals.

A price war broke out among China’s consumer dairy producers in the first half as smaller firms rushed to offer discounts in response to plunging global raw milk prices, forcing industry majors Mengniu and Yili to take part later.

Robin Yuen, an analyst with RHB Securities, said huge price cuts are now becoming less likely, given China’s raw milk prices may pick up along with a recovery in global milk powder prices.

But Daiwa Securities analysts Anson Chan, who downgraded the stock to underperform in June, argued that the entry of new players such as Huishan Dairy and Modern Dairy in the premium market segment would continue to squeeze Mengniu’s gross margin.

“We don’t see the competition abating,” he wrote in a note.