Yashili warns of profit dip on slowing market demand

Chinese milk powder maker Yashili International Holdings Ltd said on Wednesday it expects its 2014 net profit to fall about 40 percent, hit by slowing demand for baby formula and higher marketing and compliance costs.

The profit warning by Yashili, owned by China Mengniu Dairy Co and French dairy Danone SA, highlights the challenges local and foreign firms face as intense competition makes growth more elusive in the world's largest infant formula market.

Yashili is one of China's leading infant formula makers by sales. Chairman Sun Yiping said there were still challenges ahead for the "overall operation and financial position" of the company, which also blamed its poor performance on a lack of new product launches.

"The decrease in profit of the group is primarily due to a slowdown in the growth of the paediatric milk powder industry," Sun said in a filing to the Hong Kong exchange.

Yashili, due to announce its annual 2014 results in March, saw its net profit slide 28.7 percent in the first half of 2014 compared to a year earlier. Euromonitor said its 2014 market share also fell to 4.6 percent from 5.1 percent a year earlier.

The firm's shares plunged 6 percent on Wednesday before reversing to be up 0.9 percent.

"Consumption was still increasing in 2014, just not quite at the pace that everyone was anticipating," said Con Williams, Wellington-based agricultural economist with ANZ, adding that high product prices had dampened some consumer demand.

"What it [the profit warning] highlights is that the dairy story, or any demand story, doesn't occur at any price point, it still has to be affordable."

China's infant formula market is set to grow from $17.8 billion in 2014 to $43.3 billion in 2019, according to Euromonitor.

Analysts said competition between foreign and local brands for market share was hitting profits as companies spend more on marketing. Tougher manufacturing regulations for the sector that took effect in 2013 and 2014 also raised costs.

Yashili's rivals have felt the pinch too. Beingmate Baby & Child Food Co said in its half-year report that adapting to sector reform had slowed sales and it was spending more to stave off rivals. The firm saw profit in the first half of 2014 drop 72.1 percent.