Mengniu Falls on Margin Concerns Amid Tougher Competition

China Mengniu Dairy Co. (2319) plunged the most in more than two years in Hong Kong trading on concern that an increase in marketing expenses and intensifying competition will put pressure on profit margins.

Mengniu fell 6.7 percent, the biggest loss since December 2011, to close at HK$35.45. It was the worst performer on the benchmark Hang Seng Index, which dropped 0.7 percent.

“Investors are concerned about the margin contraction,” Charlie Chen, a Hong Kong-based analyst at BNP Paribas, said by phone today. “The company indicated advertising and promotion costs will continue to increase amid tougher competition.”

Mengniu, the nation’s second-largest dairy firm, faces increasing competition from imported products and foreign companies. Sun Yiping, the company’s chief executive officer, is introducing new varieties of liquid milk and cheese this year and is investing in food safety technology to boost sales.

Mengniu more than doubled advertising and promotional expenses in the first six months ended June to 2.86 billion yuan ($466 million). The company is betting more on marketing, including social media and mobile networks, to lure customers, the Inner Mongolia-based company said in a Hong Kong stock exchange filing yesterday.

“The marketing expenses are likely to rise as we need to keep investing for our growth,” Liu Shengli, vice president of sales, said at the press conference in Hong Kong today.

Profit Increase

The company reported first-half net income gained 40 percent to 1.05 billion yuan, meeting the average of seven analysts’ estimates compiled by Bloomberg. Sales rose 25 percent to 25.8 billion yuan.

Mengniu has been seeking to win back customers over the past year with new products, collaboration with companies based outside China and supply-chain improvements. Scandals including one involving melamine-tainted milk sold by the company in 2008 led buyers to shun Chinese dairy products. Also, foreign infant formula makers have gained market share in China after incidence involving contaminated products killed six children in the country.

Foreign Partners

The dairy producer has formed ventures with foreign companies, including France’s Danone and Denver-based WhiteWave Foods Co., amid a government push to raise food-industry standards. It last year agreed to buy about 27 percent of China Modern Dairy Holdings Ltd., giving it preferential purchase rights to Modern Dairy’s milk supply, and purchased 75 percent of baby formula maker Yashili. (1230)

A Mengniu unit will also take a 4.25 percent stake in organic milk producer China Shengmu Organic Milk Ltd., Shengmu said in June.

Rising demand for Mengniu products such as milk and yogurt boosted sales. Purchases of stakes in raw-milk producer China Modern Dairy Holdings Ltd. (1117) and baby-milk maker Yashili International Holdings Ltd. last year also helped earnings.

Mengniu had about a 27 percent share of China’s 90-billion yuan milk market in 2013, trailing behind Inner Mongolia Yili Industrial Group Co. (600887), according to Euromonitor International.

To contact Bloomberg News staff for this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net; Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Stephanie Wong at swong139@bloomberg.net Stephanie Wong, Dave McCombs

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