China Mengniu Dairy, a leading Chinese dairy company, saw its stock price plummet after it was implicated in a major melamine milk scandal in 2008 that sickened thousands of children. While Mengniu's operations and products were not directly involved, the scandal severely damaged consumer confidence in the company. However, major investors like KKR and Goldman Sachs began acquiring stakes in Mengniu in 2009, signaling their belief that the company's brand and operations could recover over time. The Chinese government also took steps to reform the dairy industry and improve food safety standards following the scandal.

1. SGA1
Tony Lew’s Top Pick:
“What Does the Mengniu Melamine Milk Scandal
Have To Do With American Express & Tylenol?”
BACKGROUND
§ China Mengniu Dairy founded by Chairman/CEO Mr. Niu Gen Sheng in 1999
§ Mengniu ranked # 1 in liquid milk, yogurt and ice-cream in 2008
§ Private Ownership – only one among major Chinese state-owned dairies
• Management Team & employees own 72% of Mengniu
§ International Quality Control Certifications:
• GMP, HACCP, ISO9001, ISO14001, OHS, 18001
MS & BNP - IPO June 2004 - HK$3.92 - 20x 2004E earnings, in-line with HK F&B sector
PROBLEM: Kidney damage in children linked to melamine doping of powdered milk
§ Increasing competition esp in powdered milk - WTO cut tariffs on imports 2005
§ Collection Stations: 74% of dairy cows are owned by families who own 4 cows or less

2. SGA2
Tony Lew – Mengniu 01/02/07 – 11/2/11
Trading halted 9/17/08 at HK$20
Resumed trading 9/23/08 closed at HK$7.95

3. SGA3
Tony Lew - Mengniu Financials
JPM report – Sept. 25, 2008 in black
JPM report – Dec. 8, 2009 in blue
FY07
FY08E
FY08
FY09E
FY09E
FY10E
FY10E
FY11E
Sales
(HK$
MM)
21,318
18,176
23,865
16,471
25,568
16,025
28,561
31,870
Net
Profit
(HK$
MM)
936
122
-­‐952
-­‐267
1,339
-­‐223
1,600
2,098
EPS
(HK$)
0.66
0.08
-­‐0.61
-­‐0.17
0.77
-­‐0.14
0.92
1.21
DPS
(HK$)
0.24
0.00
0.15
0.00
0.15
0.00
0.18
0.24
Sales
growth
(%)
31.2%
-­‐14.7%
11.9%
-­‐9.4%
7.1%
-­‐2.7%
11.7%
11.6%
Net
profit
growth
(%)
28.7%
-­‐87.0%
NA
-­‐319.5%
NA
-­‐16.6%
19.5%
31.1%
EPS
growth
(%)
24.9%
-­‐88.3%
-­‐319.5%
-­‐16.6%
19.5%
31.1%
ROE
(%)
18.3%
2.3%
-­‐21.3
-­‐5.4%
15.6
-­‐4.7%
16.2
18.2
P/E
(x)
11.3
95.9
-­‐39.6
-­‐43.7
31.3
-­‐52.4
26.2
20.0
P/BV
(x)
2.1
2.2
8.4
2.4
4.9
2.5
4.2
3.6
EV/EBITDA
(x)
5.4
14.1
-­‐72.5
35.9
14.6
30.3
11.9
0.0
Divdend
Yield
(%)
3.3%
0.0%
0.6%
0.0%
0.6%
0.0%
0.8%
1.0%
Mkt
cap
(US$)
$1.64
Bil.
$6.16
Bil.

4. SGA
4
Tony Lew – Mengniu - I told clients ‘Buy it’ on Oct. 22, 2008
n WHO TAKES THE FALL?
Ÿ 1920 – FDR picks Joseph P Kennedy to clean up Wall St
» Mengniu Chairman Niu – also chairs Inner Mongolian Dairy Assn.
» Honorable man, makes the rounds in gov’t, tells his story
» Problem with milk powder, not liquid milk
» Problem with collection & Sanlu, not Mengniu
n ONE TIME EVENT?
Ÿ 1962 – American Express soybean oil fraud
» Warren Buffet puts on 40% position, largest ever before or since
n IS THE BRAND IRREPARABLY TAINTED?
Ÿ Fall 1982 - Tylenol Cyanide poisonings. 7 deaths. Unsolved
» Nov’08 – CLSA reports Mengniu volume back to ~60% pre-scandal
levels

5. SGA5
n 10/15/08: Gov’t checked 18,800 milk collection stations, found 151 in violation
n Oct – Jan: 6 kids died, 300,000 sickened – Ministry of Health – Mengniu one of 22
n 12/1/08: KKR expects to invest US$100 mil. in Mengnui Modern Dairy [farm, land,
cows]
n 1/16/09: 213 families filed lawsuits
n 1/22/09: 2 men sentenced to death; Sanlu Chairwoman to life
n 2/1/09: Goldman ups from Neutral to Buy
n 2/11/09: Milk stocks fall on reports of Osteoblast Milk Protein Additive [OMP]
n 2/15/09: Ministry of Health clears OMP
n 2/26/09: JPM ups stake to 7% at HK$9.80
n 6/15/09: KKR [ex-MS banker] completes buy US$150 mil in Mengniu Modern Dairy
n 7/6/09: Gov’t announces encouraging mergers to improve quality
n 7/9/09: China Nat’l Cereal, Oils, and Foodstuff Corp [COFCO – state-owned] and
HOPU [ex-Goldman] invest US$790 mil for a 20% at HK$17.60 a share.
Trading halted HK$19.10