EUR 850.00 For Business Accounts Only

Morningstar | Mengniu’s First-Half Results Largely In Line; Cutting FVE to HKD 18.50 Owing to Weaker Chinese Yuan. See Updated Analyst Note from 31 Aug 2018

No-moat China Mengniu Diary, or Mengniu, posted an upbeat interim result largely in line with our expectations, with revenue and EBITDA up 17% and 19% year on year, respectively, to CNY 34.5 billion and CNY 2.7 billion. We attribute the strong performance to promising sales growth in premium liquid milk and infant formula powder products, along with lower losses of CNY 101 million versus a loss of CNY 355 million in the previous year, recognized from its upstream associate, China Modern Dairy.

Remarkably, gross margin advanced 3.6 percentage points from the year-ago period to 39.2%, a record high for the company, driven by significant improving product mix, while the raw milk price remained relatively low. Although the operating expense ratio increased 4.4 percentage points, owing to higher costs for active channel development and brand promotion strategies, EBITDA margin still rose 10 basis points to 7.9%. Profit attributable grew 38.5% year on year to CNY 1.6 billion.

We cut our fair value estimate marginally to HKD 18.50 per share from HKD 18.80, mainly owing to the depreciation of the Chinese yuan against the Hong Kong dollar, while we maintain our no-moat and stable trend ratings. Following the first-half result, we increase our revenue growth and gross margin forecasts, mostly offset by our higher operating expense assumption. We now anticipate the company’s revenue and operating profit to grow at CAGRs of 10% and 19%, respectively. We think the shares are overvalued at current levels, trading at a 22% premium to our fair value estimate.

On the revenue front, while sales from the liquid milk and ice cream segments grew 14% and 12.8% year on year, respectively, the milk powder business saw an impressive 65% top-line growth rate from the prior year. Liquid milk remained the biggest income contributor, accounting for 84% of total sales. Within the business, the ultra-high-temperature milk, milk beverage, and yogurt segments recorded revenue growth of 16.3%, 11.3%, and 12.4%, respectively. Room-temperature yogurt, high-end pure milk, and chilled products have become the main growth drivers. Mengniu continued to launch more high-end products, such as upgraded versions, to better respond to consumers’ appetite for premium products, as their health-consciousness further increases.

Surprisingly, the infant formula powder business performed stunningly well, as a result of upgrading the Yashily brand image and effective business unit restructuring. The subsidiary company has completed the registration of 48 formulas in 16 series of its own brands and Arla. China government has approved 1,177 infant milk product formulas; this figure is significantly fewer than the formulas available in the market before the system took effect, meaning the market is subjected to yet more stringent regulations, which will benefit stronger players such as Mengniu.