Milk slump sends warning on China consumer froth

Yashili International Holdings

14/01/2015 05:24

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are his own.) (Refiles to add context news.) 
    By John Foley 
    BEIJING, Jan 14 (Reuters Breakingviews) - A year ago, 
China's thirst for milk was the great white hope for dairy 
companies. Now the froth has started to subside. A profit 
warning from Hong Kong-listed infant formula maker Yashili 
 1230.HK  shows the dangers of investing based on broad consumer 
trends. 
    At first glance, the halving of Yashili's shares in just 
over a year doesn't square with the consumer reality. Food 
scares and an expanding middle class have driven China's 
consumers to prefer foreign powdered milk. The overall market is 
set to double in the four years to 2017, according to 
Euromonitor. Yashili's appeal, and one reason French dairy group 
Danone  DANO.PA  has bought a 25 percent stake in the company, 
was that it sources its raw material overseas, so can charge a 
premium. State pledges to consolidate the milk market should if 
anything help support Yashili's value. 
    The trouble is that markets and suppliers got ahead of 
themselves. Imports of whole powdered milk in China are likely 
to fall 12 percent in 2015, according to the U.S. Department of 
Agriculture. The price of the stuff has sunk by over 50 percent 
over the past year. Customers are as thirsty as ever, but 
suppliers now need to work through their inventories, and worry 
about increasing domestic production. Yashili's profits are set 
to fall 40 percent this year. Babies still need milk, but 
producers forgot that what's rational for one company is the 
opposite when all join in. 
    Too-great expectations have set in elsewhere too. Li Ning 
 2331.HK , a sportswear brand, is still reeling from stuffing 
retailers with stock they now can't sell. It also warned on 
profits last week. Auto manufacturers are having to compensate 
car dealers who filled showrooms in the expectation that auto 
sales would keep climbing rapidly. For them, estimated 7 percent 
demand growth in 2015 is a disappointment, and a financial 
headache. 
    The Chinese consumer is still rising. Retail sales grew 11.7 
percent year on year in November, while average wages are likely 
to have increased by 10 percent in 2014. But investment based on 
demographics and broad economic trends is a poor way to generate 
sustainable returns. What looks irresistibly fresh today can 
curdle by tomorrow. 
     
    https://twitter.com/johnsfoley 
 
     
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    CONTEXT NEWS 
    - Yashili, a Chinese maker of baby milk formula, warned that 
its profit for 2014 was likely to be 40 percent lower than the 
previous year, because of an industry slowdown. The company's 
statement did not specify whether it was referring to earnings 
or pre-tax profit. 
    - Analysts had expected Yashili's earnings to decline 23 
percent, according to estimates gathered by Eikon, on a 14 
percent decline in revenue.  
    - The price of milk powder halved in 2014 according to the 
U.S. Department of Agriculture, driven partly by a slump in 
Chinese imports. The country is forecast by the agency to import 
12 percent less whole milk powder in 2015 than it did the 
previous year. 
    - Yashili is 51 percent owned by Chinese milk producer 
Mengniu Dairy, and 25 percent owned by French dairy company 
Danone, according to a filing on Nov. 13. Danone replaced the 
chief executive, one of Yashili's founding family, with one of 
its own executives on Jan. 7. 
    - Yashili's shares were up by 0.44 percent to HK$2.3 at 
midday in Hong Kong. 
    - Reuters: China's Yashili shares fall 5.7 pct after profit 
warning  ID:nH9N0U100A  
    - Yashili profit warning: http://bit.ly/1swqg6k 
    
    - For previous columns by the author, Reuters customers can 
click on  FOLEY/  
 
    
 
 (Editing by Peter Thal Larsen and Katrina Hamlin) 
 ((john.foley@thomsonreuters.com)(Reuters messaging: 
john.foley.thomsonreuters.com@reuters.net)) 
 
Keywords: YASHILI STOCKS/BREAKINGVIEWS