Morningstar | Mengniu’s 2018 Results Beat Our Forecasts; Raising FVE to HKD 20.50 On Higher Profit Growth Forecast
Founded in 1999, Mengniu Dairy has evolved to become China’s second-largest dairy product manufacturer, with 2018 sales of CNY 69 billion. This slightly trails industry bellwether Yili’s CNY 79 billion. In 2018, approximately 86% of Mengniu's revenue came from its liquid milk segment, with ultra-high-temperature liquid milk alone contributing 50% of revenue for the segment.Mengniu's success comes against the backdrop of China’s booming dairy demand. China’s per capita consumption is still less than half that of Japan, while it is at about half the average in Asia, and one third the world average. We believe there is still potential for growth in future. We believe this will result in a high-single-digit range in the medium term.Policy tailwinds will bolster Mengniu’s medium-term growth, in our view. In August 2013, China’s Industry and Information Technology Ministry announced a plan to increase the concentration rate of the infant milk powder industry over the next five years. Market leaders like Mengniu will benefit from this policy orientation. The relaxation of the one-child policy will boost demand for infant formula and will be another revenue driver for Mengniu.Despite the favourable market opportunity, we believe Mengniu is exposed to growing competition from other dairy firms. Yili has comparable market share and an overlapping distribution network, capping Mengniu’s bargaining power along the industry chain. In addition, after a series of milk safety issues in 2008, Chinese consumers perceive domestic brands as being inferior to foreign brands, limiting domestic dairy producers’ pricing power.We are favourable about Mengniu's long-term prospects, given the industry growth and robust demand for dairy products in China. In addition, collaboration with large global dairy firms, such as Danone and Arla Food, will strengthen Mengniu's product development capability.China Mengniu Dairy is an investment holding company. Through its subsidiaries, Co. is engaged in the manufacturing and distribution of dairy products including liquid milk products (such as ultra-high temperature (UHT) milk, milk beverages and yogurt), ice cream, milk formula and other products (such as cheese) in China. Co.'s core brand is MENGNIU. Co.'s segments include liquid milk products, which manufactures and distributes UHT milk, milk beverages and yogurt; ice cream products, which manufactures and distributes ice cream; milk powder, which manufactures and distributes milk powder; and other products, which includes Co.'s cheese, plant-based nutrition product and trading business.
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