China Milk - Tainted Milk Despite Heightened Checks

The China Daily reported that the Ningxia provincial government has ordered 2 dairy companies (Ningxia Tiantian Dairy and Ningxia Panda Dairy Co) to close last Saturday for selling tainted milk powder and candies made with melamine-tainted raw materials. And it will recall 170 tons of milk powder.

The above comes 1 year after China’s largest dairy company Sanlu was declared bankrupt and 2 top officials in the company were sentenced to death as a result of the melamine-tainted milk products scandal.

China Milk, which sells bull semen, cow embryos as well as raw milk, was negatively impacted by the scandal as consumers in China switched to overseas milk products from locally produced products as a result of the scandal. This resulted in the latest quarter to Sept ’09 top and bottom-lines plunging 73-75% yoy.

The latest milk scandal despite the execution of 2 top officials in Sanlu a year ago and heightened checks of milk products in China will likely cause China consumers to continue to stay away from locally produced milk which will continue to negatively impact China Milk.

It has been slightly more than a month now after China Milk requested for money to be transferred out of China to meet the redemption requests of their bond-holders and there is no news yet. And its CFO Choi Ho Yan’s abrupt resignation last week to pursue other career interests is bad news as he is the main point of contact for investors and has been the only representative in Singapore for results briefings as well as investor conferences.

Technically, the stock remains well-entrenched in its downtrend channel established since hitting its peak of S$1.60 in mid-2007 and having just broken below its 29 cents level hit in Oct ’08 (which is right after the revelation of the Sanlu milk scandal and collapse of Lehman Brothers) it looks likely to re-test its all time low of 20 cents (hit in March ’09).