Milk lift 'limited' from China child policy change

The relaxation of China's one-baby policy, which has spurred expectations of rising demand for food, and in particular dairy, may not prove as supportive as many believe, Credit Suisse said, trimming its hopes for Danone shares.

Many commentators have said that Chinese birth rates will rise significantly thanks to the relaxation of rules limiting families to one child, with the University of California foreseeing a rise of up to 2m birth a year.

Indeed, the immediate market impact of the announcement was to send shares soaring in Chinese dairy groups such as milk powder maker Yashili International and China Mengniu Dairy.

However, Credit Suisse said that the rise in births may actually come in below 1.2m a year, a factor curtailing the boost to dairy demand.

Reasons for doubt

In fact, nearly two-thirds of Chinese families are already exempt from strict one-baby polices, given exceptions already applied in rural areas for those whose first child is a girl, for some ethnic minorities, and for couples where both parents are only children.

Indeed, the Chinese fertility rate, which the World Bank sees as 1.7 children per couple, is already relatively high, and well above rates of 1.1 in Hong Kong and Taiwan.

Economic factors "will also play a role" in limiting the birth rate, with 68% of women working, while the potential for huge bureaucracy in gaining permission for a second child may also act as a deterrent, Credit Suisse said.

The prospect of a limited impact was also supported by survey evidence that few couples desire an extra child, and with precedents in Ghangzhou and Nanjing, where rules were relaxed in 2000, showing only a small increase in birth rates by 2009, o f1.4% and 0.7% respectively.

'Fragile confidence'

The comments came as the bank lowered by E3 to E46 its target price for shares in France-based Danone, a major supplier to the Chinese baby nutrition market, while keeping an "underperform" rating on the stock.

Dairy group shares of Chinese infant formula market

Mead Johnson: 16%

Nestle: 16%

Danone: 15%

Beingmate: 9%

Other: 44%

Source: Credit Suisse. Mead Johnson

The group, which operates in China through the Dumex brand, has also suffered from the fallout of the Fonterra milk powder contamination furore in August which, while ultimately proving unfounded, raised food safety concerns over product from companies such as Danone which use it.

"The experience of the local brands which have struggled to recover from 2008's melamine contamination scandal shows how fragile that confidence is and how hard it is to win in back," the bank said.

Furthermore, foreign milk powder suppliers face pressure from authorities to limit prices - which cost twice as much in China as in markets such as France, Russia and the UK, according to Credit Suisse and from efforts to step up competition by creating a domestic dairy champion.

'Favoured play'

Indeed, the bank highlighted a preference for China Mengniu, in which Danish-based Arla took a 5% stake last year, as its "favoured play" on China's dairy market.

"By leveraging Arla's product knowhow and Yashili's extensive distribution network, we believe Mengniu is well positioned to capitalize on China's fast growing demand for infant milk and one-child policy change," the bank said.

China Mengniu shares closed down1.1% at HK$25.30 in Hong Kong on Thursday.

Danone shares were 0.3% lower at E51.32 in lunchtime deals in Paris.

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