Posted by: Bruce Einhorn on August 9, 2010
Following the well-publicized scandals surrounding Made-in-China products, how nervous are Chinese consumers and investors about food safety? Look at what happened Monday to the stock price of Synutra International, a mid-tier manufacturer of infant formula that has offices in Qingdao, China and Rockville, Maryland. The company’s Nasdaq-listed shares plunged 27 percent on Monday following reports in the Chinese media linking Synutra’s formula to premature breast development in three baby girls in the central Chinese city of Wuhan. According to the media, the girls all drank the same formula produced by Synutra. Of course that doesn’t mean Synutra’s to blame. The company issued a statement yesterday decrying claims that are “highly irresponsible and based on speculation instead of scientific evidence.” Liang Zhang, Synutra’s chairman and CEO, said in the statement that China’s Center for Disease Control and several leading scientists had said there was no evidence tying Synutra’s formula to the girls’ problems. “We are completely confident that our products are safe and our quality levels are industry-leading,” Liang Zhang said.
Still, it’s easy to see why people would jump to conclusions, given the 2008 safety scare surrounding Chinese infant formula tainted with the industrial chemical melamine. At least six babies died and 300,000 others were sickened by poisoned formula. Synutra was one of the companies tainted by the scandal: Its sales dropped 14 percent last year after the government in September 2008 found melamine in some of its products.
The one-day plunge in the stock price could make Synutra an easier takeover for Western companies looking to expand in China. For instance, Nestle needs to grow in emerging markets - and has a huge cash pile thanks to $28.1 billion from Novartis for Nestle’s majority stake in contact-lens cleaner Alcon. Bloomberg News reported last month that one possible target is Synutra. Back in April, Bloomberg reported that analyst Alexia Howard of Sanford C. Bernstein wrote in a report that Synutra might be attractive to H.J. Heinz. The ketchup giant also makes baby formula and CFO Art Winkleblack told Bloomberg in February there’s potential in China. “The infant-formula market is still highly fragmented outside the U.S. In China, there are eight or ten players who have a piece of the pie, and not all of them are folks you would recognize.”