Investors sour on Mengniu after H1 report

Mengniu Dairy saw the biggest fall in its share price for more than two years on Thursday, in Hong Kong trading, over concerns about soaring marketing costs and leaner profits due to fierce competition.

Stock in China Mengniu Dairy Co Ltd, the second-largest dairy producer in the country, at one point fell by 8.16 percent before closing at HK$35.45 ($4.57), down 6.71 percent, the biggest single-day loss since December 2011.

It was the worst performer in the benchmark Hang Seng Index, which dropped 0.7 percent.

The dairy producer's interim results posted on Thursday showed 25 percent year-on-year revenue growth to 25.84 billion yuan ($4.2 billion) in the six months ending June 30. In the same period, net profit soared 39.9 percent to 1.05 billion yuan.

No interim dividend was proposed.

The company's marketing expense more than doubled in the first half. Selling and distribution cost rocketed 54.91 percent to 5.9 billion yuan from 3.81 billion yuan in the same period last year, highlighting the intensifying competition in the sector.

"Chinese dairy companies are largely uniform and that leads to fierce competition. New product promotion, in particular, consumes huge amounts of marketing funds. Mengniu is not the only listed company reporting enormous marketing expense in the first half. Bright Dairy also reported an increase in sales costs," said Jian Aihua, food industry analyst of CIConsulting.

Song Liang, an industrial analyst, said: "The fact that Mengniu's shares slid despite the improving financial results reflects investors' doubts over China's dairy industry. Lack of confidence in the dairy product concept, relatively high prices for raw milk and the potential threat from imported milk and dairy products have been holding investors up."

However, the company said marketing expense was mainly boosted by an abundant supply of raw milk.

"In the first half, the industry faced an oversupply of raw milk. To maintain the loyalty of dairy farmers, we had to purchase more than usual. As a result, marketing expenditure also increased as we tried to sell more end products," said Bai Ying, executive director and chief operation officer of Mengniu, adding the company has already consumed the inventory in the first half.

Sun Yiping, executive director and chief executive officer, said: "The sales team is the lifeline of our company. We will continue to concentrate all the resources to boost sales."

She admitted that competition is becoming fierce in light of more imported dairy goods and increased local competition.

"We will continue to focus on high-margin products to lift profitability. Meanwhile, we will diversify our product structure, reducing our reliance on liquid milk products," Sun said.

Mengniu is working with Danone to boost the revenue share of its yogurt business.

"With a prudent capital expenditure approach, we don't have any plans for new plants in the next five years. Instead, we will focus on key brands and startup products," she said.