Poisonous rumours put dairy firm at risk

Meng Niu Dairy was sitting pretty. Founded in 1999 by former cow herder Niu Gensheng, in four short years the company had become the country's fourth-ranked dairy business. 2003 was a particularly good year for the firm, after it secured a plum role as official sponsor for the milk on China's historic Shenzhou V rocket launch. It followed this up by landing CCTV's highly-coveted first advertising slot after the evening news, paying Rmb 310 million (US$37.5 million) for the privilege. A growth rate of 1,000 per cent over the past two years is impressive business, and Meng Niu took advantage of this success, planning a dual listing on the Hong Kong and New York Stock Exchanges for later this year. Then the rumours started. In March, the Hubei health authority issued a notice that it had received news of Meng Niu's milk being 'poisoned'. This was, clearly, not the kind of publicity that Meng Niu was after. However, it soon transpired that only a few bottles of milk were tainted, and the health authority retracted its notice. Most remarkably, the authority instead said that the company had been the victim of sabotage. While it is still unclear as to which of its rivals is to blame, Meng Niu finds itself in a difficult predicament. The police continue their search for the perpetrator of the crime, and the company is faced with the tricky task of rebuilding trust, which has already been weakened in China by a succession of unrelated food poisoning incidents. The prize at stake is huge. The milk market in China has been growing strongly since the '80s, and there is still room for expansion. According to the China Consumer Association, annual per capita milk consumption currently stands at 6.5kg, well below the 105kg world average. On the domestic front, Meng Niu remains well-placed to ride out the storm. It counts Morgan Stanley, CDH Investment and CGU-CDC China Capital Partners as major investors, and has cultivated an image which blends cheerful Mongolian cows with a space-age appeal. The real question is whether the bad publicity will jeopardise its proposed listings.