HONG KONG - China Mengniu Dairy Co Ltd lost almost one-fourth of its value on Wednesday after its shares plunged 26 percent to their lowest level in more than two years. The retreat came after the nation's biggest dairy company was hit by a tainted milk scare over the Christmas holiday.

In a statement on its website over the weekend, Mengniu said that it had destroyed products at a plant in Sichuan province that were found by the government quality watchdog to contain aflatoxin, a substance that can cause severe liver damage, including liver cancer.

The discovery of the toxins is the latest of several safety scares to hit China's dairy industry in recent years.

"Panic selling has dragged the stock down as the scandal hit in a quiet and nervous market," said Alfred Chan, chief dealer at Cheer Pearl Investment Ltd. "But the impact is expected to be temporary."

China Mengniu said none of the tainted milk had entered the market and it would work harder to meet all national and corporate quality standards in the future.

"At present, all products available in the market within and outside China, including Hong Kong, have passed relevant standards," Mengniu said in a separate statement on Wednesday.

Shares of Mengniu fell as much as 26 percent in early trading to HK$19.46 ($2.50), the lowest since September 2009. It closed at HK$19.96, down 24.1 percent.

"We believe this may be a short-term problem for Mengniu, given the weak market sentiment and negative media reports," said Royal Bank of Scotland PLC in a research note.

"Consumers may have doubts about Mengniu's product quality and may avoid purchasing its products in the short term. However, we do not think the impact will be as serious as the melamine scandal, since there have not been any reports of directly related health cases."

In 2008, at least six children died and nearly 300,000 became ill from powdered milk laced with melamine, an industrial chemical added to low-quality or diluted milk to give misleadingly high readings of protein levels.

"We believe this incident is not as serious as the melamine crisis in 2008," Deutsche Bank AG said in a research note. "However, dwindling consumer confidence in Mengniu's products is likely to have an impact on near-term sales."

Bank of America Merrill Lynch also said Mengniu's near-term re-rating potential is capped by the incident and the bank cut its earnings estimates by 3 percent for 2012 to 2013 to factor in expenses related to upstream investments.

"Given no consumers would be affected and it is only one out of 25 sample batches that was detected with issues, we do not expect any meaningful impact on sales, as was the case with the past three incidents since 2009, and so maintain our revenue forecasts," said Bank of America Merrill Lynch in a note.

Reuters

(China Daily 12/29/2011 page16)