Vitasoy International Holdings Limited (“Vitasoy”) (HKG:0345)’s stock has taken a beating this year. Its shares have plunged more than 35% year-to-date, as the company is under threat in its most important market, Mainland China, where it derives two-thirds of its revenue.
Here are 3 reasons why Vitasoy’ share price is falling.
1. Consumer boycotts
Vitasoy triggered a strong boycott against its liquid beverages in early July after an internal memo expressing condolences to the family of an employee who stabbed a police officer and then killed himself got circulated online. The memo angered netizens who criticised the company for indirectly condoning violence and terrorist acts.
Hong Kong authorities classified the episode as a “lone-wolf” attack, saying a computer they seized from his home showed that he had been “radicalised”. Police did not however provide further details about his alleged radicalisation.
Nevertheless, the incident occurred on a tense day for the city, as it marked the first anniversary of Hong Kong’s new National Security Law, which Beijing imposed on the city to quash dissent following the 2019 protests. That day, Hong Kong police deployed thousands of officers across the city to enforce the government’s ban of a planned pro-democracy march.
2. Public relations fiasco
Local Hong Kong media reported that the assailant used to work as a purchasing agent for Vitasoy and that the company had expressed condolences to the man’s family in an internal memo to company employees. Vitasoy has confirmed the existence of the email but denied responsibility for sending it.
In a statement on the Chinese social media platform Weibo, Vitasoy said a staff member had circulated a memo that it described as “extremely inappropriate” without authorisation, and the company reserved the right to take legal action against the employee for writing the email.
Vitasoy’s explanation however did not quell outrage among some Chinese consumers who accuse the company of “protecting a terrorist”. The boycotters view anything less than unequivocal support for Hong Kong’s police force as an affront to the city’s government and Beijing and see Vitasoy’s supposed support for the attackers’ family as tantamount to endorsing the assailant’s actions.
Following the incident, two Chinese actors, Gong Jun and Ren Jialun have cut ties with Vitasoy.
3. Profit warning
Vitasoy issued a profit warning in early August warning that its operating profit in the six months ending on 30 September 2021 is expected to see between a loss of HK$50 million and a profit of HK$60 million, down 91% to 107% from the same period last year. The company attributes the drop mainly due to the sharp fall in market demand in the second quarter of the 2021/22 fiscal year.
The company explained that the internal memo containing inappropriate content had resulted in “repercussions” from customers in Mainland China. Therefore, during July, Vitasoy’s drink products were removed from shelves by many retailers and merchants in the Chinese mainland.
While the company shared that its products are gradually returning to shelves in selected outlets, it said that the loss of sales during the summer peak season is expected to have a material impact on its revenue and profitability for the six months ending 30 September 2021.
What can investors learn
After the US-China trade war broke out in late 2018, nationalistic fervour has grown among Chinese consumers against foreign goods. It has become increasingly common for consumer boycotts to take place in China.
Swedish fashion giant H&M saw its sales slump in China months after it became the target of a Chinese boycott. Its sales in China were down 23% in the local currency for the second quarter of 2021, compared to the same time last year.
H&M was among several brands that raised concerns over alleged human rights abuses against Uyghur Muslims in China’s Xinjiang province.
Moreover, since China imposed a national security law on Hong Kong in June 2020, many Hong Kong or foreign companies have also suffered a consumer backlash in Mainland China for anti-government or anti-China undertones.
Therefore, investors should be mindful of this consumption patriotism amongst Chinese consumers. Foreign companies with business operations in China should be careful to steer clear and not be embroiled in political turmoil tied to national security and trade.