Milk Scandal Memories Drag Global Dairy Shares Lower on Debut in Hong Kong

Global Dairy Holdings Ltd. fell for a second day in Hong Kong after yesterday enduring the city’s fifth-worst trading debut of 2010 as skepticism about China’s dairy industry lingers two years after about 300,000 children were sickened by tainted milk.

Global Dairy dropped 3.3 percent to HK$3.81 at the 12:30 p.m. lunch break in Hong Kong. Its shares fell 10 percent yesterday. The 59 stocks started trading in Hong Kong in 2010 through yesterday rose an average 12.5 percent from their initial prices, according to data compiled by Bloomberg.

Three Chinese dairy companies, including Global Dairy, are collectively seeking about $850 million in their Hong Kong IPOs this quarter, betting that enough trust in the industry has been restored after milk tainted with melamine, a toxic chemical, killed at least six infants in China in 2008. The country’s government has since implemented new food-safety standards and is reviewing local authorities’ efforts regarding milk powder and other products.

“Dairy farms in China are not modernized yet and there’s still skepticism,” said Nicholas Yeo, who helps oversee China equities fund at Aberdeen Asset which manages $261 billion globally, “I suspect investors will have short-term memory, but we tend to be more conservative.”

Yeo said he doesn’t plan to buy shares in the dairy initial public offerings because of concerns about the quality of milk products made in China.

Yashili, Modern Farming

Global Dairy Chief Executive Officer Zhao Yu said his company wasn’t implicated in the tainted milk scandal. The company plans to develop farms to have more control of the quality of its products, Zhao said at a listing ceremony in Hong Kong yesterday. The company’s IPO, which was priced in the middle of a range indicated by term sheets sent to investors, raised $204 million.

Yashili International Holdings Ltd., the Chinese milk- product maker backed by Carlyle Group, will start trading on Nov. 1, while Modern Farming (Group) Co., based in the eastern province of Anhui, aims to list next month. Yashili, based in Chaozhou, southern China, sold 644 million shares at HK$4.20 apiece, near the midpoint of the offer range.

Consumers and investors remain cautious about the quality of milk powder produced in mainland China, with parents buying foreign brands of infant formula from Hong Kong or elsewhere.

“I’ve completely lost confidence in milk powder made in China,” said Emily Tang, 31, a civil servant from the southern city of Shenzhen, who has a three-year-old daughter. “My child has always had a U.S. formula bought from Hong Kong.”

Among people she knows, only those who can’t afford to buy foreign brands will resort to milk powder made in China, Tang said.

‘Scars Run Deep’

China last month announced a range of measures aimed at improving confidence in the industry, including factory inspections, increased testing and a crackdown on illegal dairy production. Three people were sentenced to death in the wake of the scandal.

“Throughout 2010, the domestic industry has progressively recovered,” said Matthew Marsden, a Hong Kong-based analyst at Samsung Securities Co. “However, the scars of melamine incidents will run deep in the minds of Chinese consumers. Foreign dairy products and pediatric milk formulas will continue to command a premium in the Chinese market.”

Recovering sales of Chinese dairy companies is an indicator that confidence is returning to domestic brands, according to Marsden and Alice Hui, an analyst at DBS Vickers Hong Kong Ltd.

Sanlu Collapse

First-half sales at China Mengniu Dairy Co., the country’s biggest dairy company by market capitalization, rose to 14.4 billion yuan ($2.15 billion) from 12.1 billion yuan a year earlier, according to data compiled by Bloomberg. Before the milk scandal, Mengniu reported sales of 13.7 billion yuan in the first half of 2008, the data show.

Fu Chong, chief operations officer at Global Dairy, said on Oct. 14 that the collapse of Sanlu Group Co., which was at the center of the 2008 scandal, created an opportunity for companies making quality products to grow quickly.

“The collapse of Sanlu created room of about 4 billion yuan in the dairy market,” Fu told reporters in Hong Kong. Global Dairy’s revenue began to grow rapidly in 2008 as rival products disappeared from shelves because of the scandal, the company’s CEO Zhao said at the same briefing.

“China’s dairy industry has been consolidating as regulation, especially in the area of safety, is becoming more onerous, putting pressure on smaller dairies,” Samsung Securities’ Marsden said.

To contact the reporter on this story: Fox Hu in Hong Kong at fhu7@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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