Chinese Dairies Still Suffering From 2008's Milk Scandal

Includes: EMDY, RDBO
by: China OTC Player

I'm in Asia for the next four weeks and I'll write whenever I can. But here is an interesting story that has direct relevance to Chinese small caps.

I was having a multi-hour layover in Shanghai's Pudong Airport this past weekend and had enough time to have dinner and do a little shopping in the terminal. There was little to buy, apart from the soon-to-be ubiquitous souvenirs for the upcoming World Expo. As beautiful as the pavilions are going to be, these tacky t-shirts and key-chains clearly don't measure up.

After inhaling a bowl of noodles, I was craving for some dessert. Looking around, I spotted a freezer full of ice cream bars. On closer inspection, they turned out to be Haagen-Dazs products. Then it hit me, the price for each bar was ¥68, in other words, ten (yes, TEN) dollars each!!

This wasn't a case of price gouging aimed at clueless tourists, for in the next freezer were locally-made ice cream bars and cones for no more than ¥12 (~$1.50) each. So what was so special about these Haagen-Dazs ones? Well, for one, they were "imported from France". And second...

Actually there's no second. The fact that the ice cream was imported is the key factor here. This is a legacy of the Chinese tainted milk scandal of 2008, of which effects are still very much present. Judging from recent news, the Chinese continue to distrust their milk producers and still prefer the imported variety. It is no wonder then that someone has taken the trouble to ship ice cream bars all the way from Europe.

This, interestingly, has everything to do with the reason why the two food-related stocks on the Rising China Stock Index are both Chinese dairies - Emerald Dairy (OTC:EMDY) and Rodobo International (OTC:RDBO). Months ago, we saw the value of these companies and decided to monitor them closely. The contrarian in me told me that they were potential good buys.

Sad to say, things are (still) not looking too good for either of these companies. Rodobo is actually the better of the two, moving up from $3.10 at the beginning of this year to its last close price of $3.35. Still, this underperforms our RCS Index significantly. EMDY fared much worse, dropping from $1.80 to its current $1.20, a loss of exactly one-third. I don't see the light at the end of the tunnel for these two companies. Or at least, not yet.

So, the ten-dollar ice cream, in the grand scheme of things, makes sense. Is there a market for this? Well, I saw someone eating one. More importantly, did I buy one? The answer is no. If you know me, you will know that I take risks -- why else would I invest in Chinese small caps in the first place? So I forked over my ¥10 and had a locally-made Wall's Magnum bar instead. And no, I didn't die.

Disclosure: None.