CHINA Mengniu Dairy Co, the country's largest milk producer by market value, plunged by a record in Hong Kong trading because some of its products were found to contain an industrial chemical.
Mengniu fell 60 percent, the most since its debut in 2004, to HK$7.95 (US$1.02) at the close. Trading resumed yesterday after the stock was suspended on September 17.
Tainted milk has sickened almost 53,000 children in China, triggering the resignation of the chief quality inspector and causing Malaysia, Singapore and the Philippines to pull Chinese dairy products off shelves. Premier Wen Jiabao last week ordered the US$20 billion dairy industry to be overhauled after products of 22 companies were found to contain melamine, Bloomberg News said.
"Investors should avoid Mengniu as there're so many uncertainties," said JPMorgan Chase & Co's analyst Selina Sia, who cut her target price of the stock to its HK$3.80 book value. "Mengniu may incur a loss in the second half as the recalls are expected to have a meaningful financial impact. Compensation and more tests on products may also lift costs."
Mengniu, based in Hohhot, Inner Mongolia, on Monday said it is now carrying out tests on "each and every lot" of raw milk sourced and on final products to check for melamine. It has recalled all products that were found to contain the chemical.
Inner Mongolia Yili Industrial Group Co and Bright Dairy & Food Co both fell by the daily 10 percent limit in Shanghai trading. Mengniu, Yili and Bright Dairy make up 70 percent of China's market for liquid milk, according to Goldman Sachs Group Inc.
Dairy companies hadn't checked for the chemical before the scandal broke, Mengniu said.
Beijing Sanyuan Foods Co, whose products have been cleared in the nationwide probe into tainted milk, surged 10 percent to close at 4.62 yuan (68 US cents) in Shanghai, jumping 52 percent in five days.
Goldman Sachs, Deutsche Bank AG and ABN Amro Bank NV cut their ratings on Mengniu from "buy" to "sell." Goldman yesterday cut Yili's rating from "neutral" to "sell."
"The board wishes to sincerely apologize for the incident and any inconvenience caused to the public," Mengniu said in an exchange filing late Monday. "The board and the management believe that this is a critical moment for both industry."
Mengniu last Friday posted a first-half profit of 583 million yuan. China's dairy product market is set to grow 12 percent to US$20.1 billion this year from 2007, Euromonitor said before the melamine scandal.
Melamine, used to make plastics and tan leather, can disguise diluted milk by raising the protein content.