How to Invest in China's Food Safety Progress

BEIJING (TheStreet) -- An odd fact of life in modern China is that shopping at a supermarket for a carton of milk is often a stressful experience.

Consumer confidence in dairy products has been extremely shaky ever since toxic plasticizers contaminated baby milk powder in 2008. At least six children died and about 300,000 were sickened.

The dairy sector was quickly overhauled. But today wary shoppers still sweat over whether to buy a Chinese milk brand, or pay twice as much for one of the many imported brands on store shelves shipped from as far as New Zealand and Germany.

Will shoppers in China ever again feel comfortable with domestic dairy? More to the point, will China ever get a handle on its broader and well-known struggles with food-safety issues?

Investors who think the answer to both questions is "yes" see opportunities amid positive changes for the Chinese food industry. Behind these changes are technological developments, entrepreneurship and government initiatives. Competitive pressure from imported food has been an added incentive for progress.

Food suppliers with exceptional track records as well as the makers of special kinds of food-testing and processing equipment are among the companies in China recommended by stock analysts in recent weeks. Another way to bet on the country's food-safety developments is to buy global retailers such as Walmart (WMT) and France's Carrefour (CRRFY) whose Chinese grocery aisles attract shoppers searching for food they can trust.

Carrefour was the standout corporate sponsor at a major food security meeting recently held in Beijing and organized by government agencies from France and China. Topics on the table included a new food safety law drafted by the Chinese cabinet, the State Council, which could be enacted soon.

Last year, France and China agreed to cooperate on a project aimed at improving food safety and ingredient tracing in China, from farm to kitchen. France's successful tracking system will serve as a model. This and related industry oversight projects are expected to put more government inspectors in the field at slaughterhouses, dairies, food processing plants and fish farms.

China's contaminated food problems have long had nationwide as well as global implications. Chicken scares in the past have hit sales at KFC outlets nationwide, which are owned by Yum! Brands (YUM). And pet stores in the United States have been stung by tainted doggie treats imported from China.

On the other hand, food safety problems have created demand in China for testing equipment made by foreign companies such as Agilent Technologies (A) and Thermo Fisher Scientific (TMO). Multinational players in this field have several up-and-coming competitors in China such as Skyray Instruments and Centre Testing International (CTI), which are listed on the Shenzhen exchange.

Skyray and CTI made names for themselves by providing milk-testing equipment and services widely used by dairies in China since the 2008 tragedy. Skyray also helped trace pesticide-laced cowpeas sold in several cities in 2010, and illegally recycled cooking oil, called "gutter oil," found in the Shanghai region last year.

Another recent analyst pick is Sunner Development, a Shenzhen-listed poultry processor that sells chicken to KFC and is considered a national leader in safe meat production. A hog-farming and processing company Truein Group, also listed in Shenzhen, is a favorite for raising chemical-free animals including a special breed called the Tibetan pig.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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