China Mengniu


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*At the time of publication

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One of the leading giants. Mengniu is one of the leading dairy giants in China. Mengniu, through its subsidiaries, manufactures and distributes dairy-related products (UHT milk, yogurt, and milk beverages), ice cream, and other dairy products, such as infant formula powder.

Key listed companies. Mengniu has controlling stakes in two listed companies – Yashili (1230.HK) (51% stake) and China Modern Dairy (1117.HK) (c.61% stake) – which secures Mengniu’s upstream supply chain as well as improves on its infant formula capabilities. It also holds minor equity stakes in other upstream players such as Shengmu and YST Dairy.

Partnerships with international players. Mengniu has formed partnerships with its stakeholders such as Danone and Arla; Danone holds a 20% stake in Mengniu’s cold-chain business that includes yogurt offerings. In addition, Mengniu has also formed a 51%/49% JV with US-based Whitewave Foods, which has launched plant-based products.

Previous Close Price

Key Statistics

Dec RMB m20182019f2020f
Revenue68,97779,17583,616
Net Profit3,0436,4754,404
Profit Gth (%)48.6112.8(32.0)
PE (X)33.915.923.3
Div Yield (%)0.71.51.0
P/BV (X)4.13.33.0
Source: DBS Group Research (At the time of publication)

Recent Developments

Our Views

Heightened raw material cost pressure, with topline on track. We expect China Mengniu to sustain a teen’s top-line growth in 2H19, driven by slight acceleration in Milk Deluxe sales (1H19: +22% y-o-y). Organic products now account for 15% of Milk Deluxe sales. Chun Zhen also sustained similar growth momentum as in 1H19’s 25%. Low-temperature yogurt saw mild recovery, after posting weaker growth in 1H19. That said, raw milk prices have risen by 8% YTD, thereby offsetting product mix enhancement and VAT reduction. All in, we forecast core operating margin to contract by 0.5ppt to 5.0% in 2H19, and recover by 0.7ppt in FY20F, lifted by the disposal of Junlebao. We remain positive on the group’s strategy to deliver steady margin enhancement with a collective premium product portfolio. Maintain BUY.

Where we differ: We adjust our earnings by 4%/-4%/-2% for FY19-21F to account for higher raw milk prices, the disposal of Junlebao and the acquisition of Bellamy’s Organic. We forecast a stronger recovery in operating margin of 0.7ppt than consensus’ +0.5ppt in FY20F on softer A&P costs.

Potential catalysts: Firstly, with an adjustment in infant formula portfolio, market share gains in infant formula category driven by Bellamy’s Organic and Yashili would support margin enhancement. Secondly, Mengniu’s investment in fresh, plant-based protein, cheese and butter could cement the group’s positioning in the dairy sector, and lastly, the development of low-temperature products could leverage on Mengniu’s strategic farm locations. Any positive progress in the above areas could prompt further re-rating.

Risks

Food safety issues. Mengniu may be affected by dairy-related industry news concerning food safety issues.

Raw material price volatility. Gross profit margin may be affected by raw material cost changes.

Valuation

Our new TP of HK$33.1 is pegged to 26.3x FY20F PE (Prev. 26.4x), equivalent to +1 SD of average PE to reflect Mengniu‘s steady earnings outlook.

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