Mengniu Plunges Most Since September 2008 on Tainted Milk

Mengniu Falls Most in More Than Three Years on Tainted Milk
Shoppers walk down an aisle with cartons of China Mengniu Dairy Co. milk for sale in Beijing. Photographer: Nelson Ching/Bloomberg

China Mengniu Dairy Co., the nation’s largest milk producer, fell the most in more than three years in Hong Kong trading after saying moldy feed given to cows led to excessive levels of a toxin in its milk.

Mengniu declined 24 percent to HK$20 at the close in Hong Kong, the most since September 2008. China Modern Dairy Holdings Ltd., a Mengniu supplier, fell 13.4 percent.

The stock plunge wiped out HK$11 billion ($1.4 billion) from Mengniu’s market value, reflecting investor concern over food scandals in China that include melamine-tainted formula milk that killed at least six babies in 2008 and an illegal additive to pork this year. Mengniu will strengthen quality-control measures and the contaminated milk products have been destroyed, the company said today.

“Consumers are more and more concerned about food safety in China, making the market more sensitive to this kind of news,” Olive Xia, a Shanghai-based analyst at Core Pacific-Yamaichi International Ltd., said by telephone.

Xia, who is maintaining a “buy” rating on the Hohhot, Inner Mongolia-based company, said she will revise down her 12-month stock-price estimate of HK$32 to reflect the latest news.

A random inspection by Chinese regulators found one out of 25 batches of Mengniu’s milk tested positive for the toxin, the company said. The samples were taken from a warehouse and none had been released for sale, it said.

Moldy, Deteriorated Fodder

“The Group believes that the incident was caused by moldy and deteriorated fodder taken by milk cows,” Mengniu said in a statement. At present, all products in markets within and outside China, including Hong Kong, “have passed relevant standards,” it said.

The General Administration of Quality Supervision, Inspection and Quarantine, citing the results of tests carried out on milk products, first reported the excessive toxin levels found in products from Mengniu and closely held Fujian Changfu Dairy Industry Group Co. on Dec. 24.

The amount of toxin in one batch of Mengniu milk was more than double the nation’s permitted level, an unidentified official at the regulator said in an interview with the official Xinhua News Agency on Dec. 26. The amount in Changfu’s milk products was almost twice the standard, the official said.

China has ordered local regulators to toughen inspections of milk products for the toxin and to recall them if it is found to be present, according to the interview.

Food-Safety Crackdown

This year, the government has shut more than 5,000 companies that violated rules, arrested more than 2,000 people, and handed down at least one death sentence in a crackdown on food safety.

Pork products containing an illegal additive used to produce lean meat were found earlier this year. In 2008, formula milk containing melamine, used to make plastics, sickened about 300,000 babies, including six who died and more than 54,000 who were hospitalized. Sanlu Group Co., one of 22 companies that sold the tainted formula, went bankrupt in December 2008.

“The under-developed dairy sector supply chain in China makes it almost impossible for major dairy companies like Mengniu to fully guarantee end-product quality,” Selina Sia, an analyst at Mirae Asset Securities Co. in Hong Kong, said by telephone. “Fundamentally, Mengniu is worth HK$19.60 until we find out how badly the business is being affected by the latest quality issue,” said Sia, who rates the stock “reduce.”

China Modern Dairy and its subsidiaries generated 97 percent of revenue from Mengniu in the year ended June 30, according to the Anhui, China-based company’s annual report. Deng Jiuqiang, China Modern Dairy’s chairman, was a co-founder and former vice chairman of a Mengniu subsidiary, the report showed.

Cofco Dairy Investment Ltd., a company affiliated to Cofco Corp., China’s largest food maker, is Mengniu’s biggest shareholder with a 19.7 percent stake, according to data compiled by Bloomberg.

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