Chinese Gov. Fines Nu Skin Enterprises, Employees

PROVO, Utah—The Chinese government has fined Nu Skin Enterprises, Inc. USD $524,000 (RMB 3.26 million) for selling products that were not registered for the direct selling channel, the marketer of skin care and nutrition products announced today.

The company (NYSE: NUS) was fined another USD $16,000 (RBM 100,000) for making product claims that lacked adequate documentary support, and six employees were fined USD $241,000 (RMB 1.50 million) for unauthorized promotional activities, Nu Skin said.

Nu Skin announced the fines following an investigation into the company's business practices by China's Administration of Industry and Commerce (AIC).

The fines could provide certainty for Nu Skin, which said it is unaware "of any other material enforcement investigations currently pending in China." People's Daily, the Communist Party's official newspaper in China, first reported on the investigations.

In early afternoon trading, shares of Nu Skin were up 18 percent to $89.

"Investors’ worst fears that included material business model adjustments for NUS and/or a major direct selling industry crackdown were not realized," said Scott Van Winkle, an analyst with Canaccord Genuity, a banking and financial services company, in a research note.

Van Winkle maintained a "hold" on Nu Skin's stock but raised the price target to $93 from $78, questioning when Nu Skin would resume its normal business activities in its largest market, mainland China.

Mainland China comprised 32 percent of Nu Skin's annual revenues, according to its March 18, 2014 filing with the Securities and Exchange Commission. Revenues in mainland China soared to $1 billion in 2013 from $256.8 million in the previous year, straining Nu Skin's supply chain and other resources, the filing said.

"We continue to believe in the potential of China's large and growing market," said Dan Chard, Nu Skin's president of global sales and operations, in a statement. "We remain committed to working cooperatively with the Chinese government to ensure the healthy, long-term growth of our business."

China authorizes direct sales but prohibits multi-level marketing arrangements in which marketers can earn compensation based on product sales to other distributors within their own network.

China banned direct sales for several years beginning in 1998 after consumers reported getting ripped off through pyramid schemes.

AIC conducted investigations in Shanghai, where Nu Skin's China business is based, and Beijing, where the company maintains a branch office.

As Nu Skin previously announced in January, the company voluntarily suspended business promotional meetings and applications for new sales representatives while the regulatory reviews were pending. The company said it is working to improve training and supervision of sales representatives and plans to consult with the Chinese government in an effort to resume normal business activities.

Nu Skin operates in 53 markets around the world, with 92 percent of revenues coming from outside the United States. Last year, revenues rose 49 percent to $3.18 billion from $2.13 billion, thanks in part to 43-percent growth in greater China.