China Mengniu Dairy - Quality of products in question

The Chinese authorities are yet to verify the questioned substances found in Mengniu‘s products and this delay could be detrimental to consumers‘ confidence in Mengniu‘s products in the near term. Subjected to the new developments that may arise, one of the key differences of this second quality —scandal“ with the melamine scandal, which occurred less than six months ago, is that Mengniu is the only named dairy player to date, which could bring new uncertainty to its market positioning ahead.

While the premium milk product series account for less than 10% of Mengniu's overall sales, the impact on the overall consumer confidence towards the brand could be affected and consumers may be induced to switch to other brands. Sales aside, the premium milk product series command one of the highest margins for Mengniu and this incident could bring further uncertainty to the maintenance of historical margins. Overall, the event adds to the uncertainty risks of the post-melamine recovery period of Mengniu. We maintain our UNDERPERFORM rating.

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