China’s 1.3bn people eat a lot of food. That should be a platform on which to build a thriving food and beverage industry. The sector, however, is often undermined by scandal and vicious rumours that quickly go viral thanks to China’s hyperactive netizens, sending share prices tanking. China’s dairy sector is particularly volatile for investors.
Chinese people consume six litres of dairy milk annually – a quarter of the level in Japan, reckons Euromonitor. Since the melamine milk scandal of 2008 shares in Mengniu, the nation’s biggest dairy group, have returned investors 150 per cent against the one-fifth gain for the Hang Seng. The company has a lot of fans: nearly all Hong Kong analysts hold a buy rating on the stock and its shares trade at 17 times forward earnings, almost twice as much as the broader index. Perhaps there is confidence that Mengniu’s efforts to address safety concerns will finally work out. This week it said that it would spend Rmb3.5bn over the next three years investing in large-scale dairies to gain better control over milk supplies and adopt more modern milking methods.
The risk for investors is guarding against the next scandal. Shares in Mengniu were merely dented in May when rumours, which the company denied, circulated that its milk supplies had been diluted with cow urine. Yet a random inspection by safety regulators in December, which found a carcinogenic toxin in Mengniu’s milk, wiped a third off its share price within days. Other food groups have suffered similar setbacks. The restaurant chain Ajisenhas lost investors 62 per cent over the past year over continued reports of health quality incidents.