Mengniu 2013 Profit Beats Estimates on Milk Beverages

China Mengniu Dairy Co., the country’s largest dairy producer, posted profit that beat analyst estimates last year as Chinese demand rose for liquid milk and milk beverages. The stock surged the most in 10 months.

Net income climbed 25 percent to 1.63 billion yuan ($263 million) in 2013 and sales increased 20 percent to 43.4 billion yuan, the Hohhot, Inner Mongolia-based company said in a filing today. Analysts projected profit of 1.5 billion yuan, according to the average of 13 estimates compiled by Bloomberg.

Mengniu is winning back customers through increased foreign partnerships such as with France’s Danone, after scandals including melamine-tainted milk from the company led buyers to shun Chinese food products. The company moved to strengthen its supply chain and products through stake purchases in raw-milk producer China Modern Dairy Holdings Ltd. and baby-milk maker Yashili International Holdings Ltd. last year amid a government push to raise food-industry standards.

“We will be focusing this year on developing new products that provide higher margins,” Chief Executive Officer Sun Yiping said at a press conference in Hong Kong today. The company will expand its offering of ice creams, cheese and butter, she said.

Mengniu gained 8.6 percent, the most since May 20, to close at HK$38.60 in Hong Kong trading.

Flavored Milk

The company, which sells dairy products including yogurt and flavored milk under its namesake brand in China, said sales of milk beverages jumped 30 percent to 10.4 billion yuan, and rose 18 percent for yogurt. Mengniu will focus on developing those two markets while the market matures for liquid milk, sales of which rose 17 percent to 38 billion yuan, it said.

Mengniu has the second-biggest share in China’s 90-billion yuan milk market, with about 27 percent in 2013, according to Euromonitor International. It lags behind Inner Mongolia Yili Industrial Group Co. in market share, the industry analyst said.

In a separate statement, the company said four directors have resigned to cut the size of the board, allowing more efficiency in decision making.

Food and drug safety was voted the third-biggest concern for ordinary Chinese this year, up from seventh place last year, according to an annual online poll of 3.26 million people by the state-run People’s Daily in February.

Food Safety

In 2011, Mengniu said moldy cattle feed led to excessive toxin levels in its milk. Mengniu also was among 22 dairy companies found in 2008 to have sold milk products containing melamine, a chemical used to make plastics and dishware. At least six infants died from drinking formula tainted with melamine, the government had said in 2008.

Since then, Mengniu has entered into pacts to strengthen control of its supply chain and expand its infant formula business amid a government consolidation of the industry.

Mengniu agreed to buy about 27 percent of Modern Dairy in May for HK$3.18 billion ($410 million), giving it preferential purchase rights to Modern Dairy’s milk supply. A month later, Mengniu offered to purchase 75 percent of baby formula maker Yashili International Holdings Ltd. in a deal valued at about HK$12.5 billion.

“Earnings growth at the company this year was boosted by their acquisitions of Yashili and Modern Dairy,” Charles Yan, the Greater China consumer analyst at Standard Chartered Bank (H.K.) Ltd., said before the earnings. “These helped consumer confidence in Mengniu.”

Yan is one of 11 analysts tracked by Bloomberg who recommend holding the stock, while 17 analysts suggest buying and two suggest selling.

Organic Milk

The company also expanded its product lineup to tap consumer demand for safer food, starting sales of organic infant formula and organic milk with Danish partner Arla Foods amba in the second half of 2013. In January, Mengniu formed a joint venture with WhiteWave Foods Co., the maker of Silk plant-based beverages and Horizon organic milk, to produce and sell nutritious products in China.

Last month, Danone, the world’s biggest yogurt maker, agreed to pay 486 million euros ($671 million) to more than double its stake in Mengniu, raising its holding to 9.9 percent. Danone will help Mengniu expand in chilled products such as as yogurt and will improve the Chinese company’s quality control and production efficiency, Bessie Wu, Mengniu’s chief financial officer, said Feb. 12.

China’s relaxation of its one-child policy will help boost demand in the infant formula segment and the government is working to improve consumer confidence in domestic dairy products, the company said in the statement. Mengniu is also seeking to build an online business platform to sell its products this year, Yiping said today.

The world’s most populous nation is seeking to create as many as five large domestic infant-formula companies under a government plan to raise food product standards by 2018, according to the China Securities Journal in August.

— With assistance by Liza Lin, and Vinicy Chan

Before it's here, it's on the Bloomberg Terminal.