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Nu Skin shares rise on smaller-than-expected China fine

A Chinese regulator fined Nu Skin Enterprises a smaller-than-expected $540,000 for illegal product sales and misleading local consumers, sending its shares soaring as much as 33 percent in U.S. premarket trading.

The company sold items outside the permitted range and overstated the potential results from using some of its products, China's State Administration for Industry & Commerce (SAIC) said in a statement on its website, adding some employees had also engaged in unsanctioned sales and misled consumers.

Nu Skin has been fined $540,000, while six sales staff will also face individual fines totalling $241,000, the U.S. firm said in a statement.

(Read more: Icahn to get three more seats on Herbalife board)

The company has previously said it has taken steps to resolve the matter and said last week it expected to face a fine in China.

Nu Skin's Chinese website
Source: Nu Skin
Nu Skin's Chinese website

"The scope of the penalties is a little narrower than we had expected," J.P. Morgan Securities analyst John Faucher wrote in a note.

Direct sales firms have come under fire in China, with the official People's Daily newspaper saying in January Nu Skin had organized "brainwashing" gatherings, prompting SAIC to launch a probe. This dragged down Nu Skin's shares, as well as rivals Herbalife and Usana Health Science.

"The company is already taking steps to correct the issues raised in the SAIC reviews, and is not aware of any other material enforcement investigations currently pending in China," Nu Skin said.

The company added it would seek direction from the government about restarting normal business activities in China. It previously suspended promotional meetings and accepting applications from prospective new sales representatives.

(Read more: Herbalife says FTC opens inquiry; shares slump)

SAIC said it would also look to increase regulation of the direct sales sector, an area analysts said was a regulatory grey area in China. This could pose a headache for rivals such as Herbalife, currently under investigation in the United States.

"For the next step, SAIC will work with other departments to increase the level of regulation of the direct sales market and sternly investigate and prosecute any illegal behavior in the direct sales sector," the SAIC statement said.

Chinese laws allow direct sales under limited conditions, but there are laws banning so-called pyramid selling, when members make more money recruiting new members than selling the actual product.

The company's shares rose to $99.69 in premarket trading on Monday after closing at $75 on Friday on the New York Stock Exchange. (Click here for the latest quote.) They have lost more than a third of their value since Jan. 16 when China started its probe.

By Reuters

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