Dairy company will invest up to 3.5b yuan to set up its own farms

China Mengniu Dairy Co Ltd, China's largest dairy producer by sales, aims to expand its product portfolio and improve cost controls this year to keep expanding its business, which was harmed by a safety scandal late last year, said a company official.

The company's sales were affected "to some extent" after a government quality regulator found aflatoxin, a substance that can cause cancer, in a batch of its milk in December, said Wu Jingshui, executive director and chief financial officer of the company, during an earnings conference on Tuesday.

He didn't reveal how much the company had lost because of the scandal, but said he is "confident" of maintaining a stable gross profit margin this year.

Chris Kwok, financial controller and company secretary, said first-quarter sales this year were higher than the same period in 2011 despite the scandal.

Analysts believe the incident will continue to cast a shadow on Mengniu, which sustained another blow to its reputation following an industry-wide scandal in 2008.

At least six children died and nearly 300,000 became ill in China in 2008 after drinking powdered milk that contained the industrial chemical melamine, which is used to give misleadingly high protein readings.

Products from industry leaders, including Mengniu and Inner Mongolia Yili Industrial Group Co Ltd, were found to contain the substance.

Mengniu's sales have recovered to 80 to 90 percent of the levels before the December scandal, but growth will remain difficult in the first half of this year because of a high sales base in 2011 and the negative influence of the scandal, Deutsche Bank AG said in a research note this month.

Sunny Kwok, a Hong Kong-based analyst with Guotai Junan International, said the company's recovery has been better than expected, judging by its increasing sales in the first quarter.

To build up consumer confidence and ensure quality, Wu said Mengniu will spend 3 billion ($476 million) to 3.5 billion yuan in the next five years to establish its own farms.

Mengniu reported a net profit of 1.59 billion yuan last year, with a year-on-year increase of 28.4 percent. Its gross profit margin remained the same as in 2010, at 25.7 percent, the company said on Tuesday.

Mengniu said it will also continue its efforts to go abroad.

It has established a marketing center targeting overseas markets, and will look to possible merger and acquisition opportunities outside China, Wu said.

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