Mengniu Dairy Co., China'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% to 1.63 billion yuan ($263 million) and sales increased 20% 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.
“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.Mengniu gained as much as 8.4%, headed for the largest advance since May 20. The stock rose 6.3 percent to HK$37.80 as of 9:43 a.m. 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% for yogurt. Mengniu will focus on developing those two markets while the market matures for liquid milk, sales of which rose 17% to 38 billion yuan, it said.
Mengniu has the biggest share in China’s drinking-milk market, with about 34 percent in 2012, according to industry analyst Euromonitor International.
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 in 2013, 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, that killed at least six infants in China.
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% 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% of Yashili International Holdings Ltd. in a deal valued at about HK$12.5 billion.
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 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.
Danone Shareholding
Last month, Danone, the world’s biggest yogurt maker, agreed to pay 486 million euros ($672 million) to more than double its stake in Mengniu, raising its holding to 9.9%. 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 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.
Bloomberg
