Synear’s unpalatable rude shocks
Shareholders of Synear Food got their first rude shock last Thursday when media reports surfaced in China that a batch of savoury dumpling products were found to contain staph bacteria.
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By LYNETTE KHOO
24 October 2011
Shareholders of Synear Food got their first rude shock last Thursday when media reports surfaced in China that a batch of savoury dumpling products were found to contain staph bacteria.
Their next rude shock came from realising that Synear had recalled that batch of products earlier in July - but it took the group three months to issue an announcement on this.
This raises the question why the group did not choose to disclose its product recall in July and waited till now to inform its shareholders.
During a random food inspection in China in July, a batch of savoury dumplings produced by Synear in June were found to contain minute traces of staphylococcus aureus - a pathogen that can cause serious infections such as pneumonia. The Zhengzhou-based company immediately recalled all 350 cartons of the infected products.
But news of this incident broke only last week after China’s list of 18 food products that failed safety inspections was made public - which included that batch of savoury dumplings under the ‘Synear’ brand.
Prompted by a slew of media reports on this recall incident in China, Synear issued a clarification note on Friday confirming the recall. But by then, its share price had already plunged some 7.9 per cent the day before as investors who got wind of the incident dumped the stock. Other shareholders, however, were arguably compromised as a result of a lack of clarity from the group.
It appears that Synear did not deem the incident important enough to be disclosed when the recall took place in July given the lack of materiality - for now. According to the group, the total retail value of the recalled products was 40,000 yuan (S$7,950) and will not have a material impact on its financial performance for this fiscal year ending Dec 31.
But this should not serve as a convenient excuse for the group to not disclose the incident.
While the short-term impact on the group’s financials may be immaterial, the longer-term impact on Synear’s branding and consumer perception of its products remains unknown.
In fact, the group conceded that the actual impact remains unclear. In its clarification note, Synear said it was monitoring market conditions and feedback closely, and was unable to assess the potential impact of the incident on its fiscal 2011 financial performance. Its savoury dumpling products have historically accounted for about 40 per cent of group revenue.
And the fact that Synear shares reacted sharply to the news of the product recall suggests that this piece of information was potentially material information that required prompt disclosure under SGX listing rules. In any case, a lack of disclosure simply runs counter to corporate governance best practices that call for timely disclosure.
One could draw a comparison between this incident and the one that took place in 2008 involving Taiwanese candy maker Hsu Fu Chi. The latter publicly announced its recall of two puffed rice roll products one day after the products were tested positive in Singapore for the industrial chemical melamine in September 2008.
Hsu Fu Chi made the disclosure in good faith even though the loss incurred from the recall was insignificant to its total earnings and no material impact on the group financials was expected.
Such accountability probably put Hsu Fu Chi in good stead with investors and its branding withstood the test. This second largest confectioner in China is now the subject of a US$1.7 billion takeover offer from Swiss-based Nestle.
As one of the largest quick-freeze food producers in China, Synear has painstakingly built up its branding and visibility in China over the years. But all it takes is a mismanagement of a critical situation to dilute its brand equity.
Also, in fairness to investors, the potentially price-sensitive information warranted prompt disclosure.
however, synear should still be a good buy and in moderate portion.
JOSEPH J
http://sharing-investing.blogspot.com/