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China authorities fine Nu Skin over sales tactics

By Simon Pitman+

25-Mar-2014

China authorities fine Nu Skin over sales tactics

The China government says it will fine Nu Skin in excess of $500k for ‘illegal sales’ and ‘misleading’ consumers and will also make moves to tighten regulations governing direct sales.

The country’s watchdog said that the fine targets practices that often rooted in how sales staff are trained, causing them to pass on the misleading information to the consumers.

The China State Administration for Industry & Commerce (SAIC) said in an official statement concerning the action against Nu Skin that the decision to fine stemmed from the fact that it had sold products in its portfolio that were outside the permitted range, while some sales staff had engaged in ‘unsanctioned’ sales.

Investigation has been going on since January

The SAIC began a probe into Nu Skin’s practices back in January, after China media had run a number of stories, suggesting that the company’s practices might be illegal and that sales staff had been ‘brainwashed’.

Similar reports by China media on practices carried out to market and sell supplements produced by US-based Herbalife, a direct seller of nutritional supplements, have also led to investigations by the SAIC.

As a result, both Herbalife and Nu Skin have seen their share prices slashed, as the investigation has hung over an area of their businesses that has grown significantly in recent years.

Since the beginning of January, share prices in Nu Skin have fallen from around $135 a share, to a current rate that has remained fairly steady at around $75 a share over the past few weeks.

Decision gives Nu Skin chance to rebuild China business

While the SAIC chose to fine Nu Skin a total of $540k and fine six sales staff a further $240K, Nu Skin can now devote its energies to putting its China business back on the road to recovery.

Last week Nu Skin stated in a Securities and Exchange Commission note that it expected to receive a fine from the China authorities, with the possibility of further restrictions on future licensing.

In 2013 mainland China became the company’s largest market, with a 32% share of its total revenues, which topped $3.1bn last year, a fact that is making investors nervous, given the potential impact this could have on the bottom line.

Industry experts believe Nu Skin will soon be on the mend

However, despite the significant impact the investigation by the China authorities has had on the business, industry experts have also stated their belief that the company would soon be on the road to recovery.

In a note related to the announcement, analyst John Faucher of JPMorgan stated that the company was in a good position to pay any fines or sanctions to the China authorities, and although he expressed concerns over the company’s future stability, ultimately believes the company will be able to pull through.

“We think the stock will continue to be volatile in the near term until a resolution is reached, but we expect NUS to emerge relatively unscathed," the note stated.

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