Net Margin Improvement on Low Raw Milk Price

Transcription

1 : Mengniu Dairy (02319 HK) Sunny Kwok 郭日升 公司报告 : 蒙牛乳业 (02319 HK) sunny.kwok@gtjas.com.hk Margin Improvement on Low Raw Milk Price 原奶价格走低, 净利率有提升空间 GTJA Research 国泰君安研究 Mengniu held a reverse roadshow in Chengdu last Friday introducing its new slogan Start-off from the Better One. Mengniu is conducting distribution channel restructuring in order to gather more information from consumers. Just Yoghurt and Milk Deluxe are Mengniu s star products in 2015 and the Company will increase A&P on milk beverages, following a disappointing year of such products. The management expects raw milk procurement price to decrease YoY in 2015 but the fall could be lower-than-expected as Mengniu does not hope to see many dairy farmers leaving the industry. Mengniu does not expect any milk powder impairment loss to be made in 2H14 but the Company is not going to procure milk powder in 2015 in order to lower its milk powder inventories level. We still expect sales volume growth to stay weak in Despite intensifying competition of UHT market, cost savings from lower raw milk price helps operating margin to further improve in We revise up our EPS forecast in 2014 by 0.7% but revise down EPS forecasts by 3.2% and 3.7%, respectively. We expect Mengniu s EPS to grow by 33.7%, 16.9% and 11.4%, to RMB1.208, RMB1.412 and RMB1.573 in , respectively. Rating: 评级 : Accumulate Upgraded 收集 ( 上调 ) 6-18m TP 目标价 : HK$33.00 Revised from 原目标价 : HK$37.30 Share price 股价 : Stock performance 股价表现 % of return HK$ Following the sharp decrease of the share price in the past 3 months, current valuation appears to be attractive. Therefore, we upgrade Mengniu s investment rating to Accumulate but cut its TP to HK$33.00 on weak investor sentiment towards dairy industry. The new TP represents 21.6x 2014 PER, 18.5x 2015 PER and 16.6x 2016 PER. 蒙牛于上星期五于成都举行了反向路演, 其最新的口号为 从更好的自己出发 蒙牛正 在重组销售渠道, 目的为直接掌控终端销售网点以获得更多销售数据 纯甄及特仑苏为蒙 牛于 2015 年的主打产品, 而因为 2014 年销售不佳, 公司将于明年加大乳饮料的推广力度 管理层预期 2015 年原奶采购价将下降, 但下跌幅度或低于市场预期, 主要原因是因为蒙 牛不想奶农大规模退出市场 蒙牛并不预期于 2014 年下半年录得大包粉存货计提, 但公 司同时表示不会于 2015 年采购大包粉以降低大包粉库存水平 我们预期蒙牛 2015 年销量增速仍然疲弱 虽然常温奶市场竞争激烈, 原奶价格走低令公 司 2015 年的经营溢利率有上升空间 我们我们上调蒙牛 2014 年每股净利 0.7%, 但分别下调 年每股净利 3.2% 及 3.7% 我们预期蒙牛 年每股净利分别为人民币 元 人民币 元及人民币 元, 同比分别增长 33.7% 16.9% 及 11.4% (10.0) (20.0) (30.0) Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Change in Share Price 股价变动 HSI 1 M 1 个月 MENGNIU DAIRY 3 M 3 个月 1 Y 1 年 Abs. % 绝对变动 % (5.6) (17.7) (18.6) Rel. % to HS index 相对恒指变动 % (4.5) (12.8) (19.6) Avg. share price(hk$) 平均股价 ( 港元 ) Source: Bloomberg, Guotai Junan International. 蒙牛股价于过去 3 个月大幅下跌, 现估值吸引 因此, 我们上调蒙牛评级至 收集, 但由于投资者对乳业公司热情转淡, 目标价下调至 港元, 相当于 21.6 倍 2014 年市盈率 18.5 倍 2015 年市盈率及 16.6 倍 2016 年市盈率 Year End 年结 Turnover 收入 Profit 股东净利 EPS 每股净利 EPS 每股净利变动 PER 市盈率 BPS 每股净资产 PBR 市净率 DPS 每股股息 Yield 股息率 ROE 净资产收益率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) FY12A 36,000 1, (18.8) FY13A 43,357 1, FY14F 49,839 2, FY15F 53,349 2, FY16F 57,933 3, Shares in issue (m) 总股数 (m) 1,958.4 Major shareholder 大股东 COFCO 16.3% Market cap. (HK$ m) 市值 (HK$ m) 56,598.7 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( 000) 5,570.7 FY15 gearing (%) 15 年净负债 / 股东资金 (%) Cash 52 Weeks high/low (HK$) 52 周高 / 低 / FY13-16 PEG (x) 市盈率 / 增长率 ( 倍 ) 1.2 Source: the Company, Guotai Junan International. See the last page for disclaimer Page 1 of 7

2 Key Takeaways from Reverse Roadshow: Distribution Channel Restructuring. Mengniu hopes to gather more information of its consumers and thus, the Company engages in direct selling of its products to points-of-sale (POS) instead of through its distributors. Direct selling accounts for roughly 13% of Mengniu s sales. The original distributors are removed or act as logistic operators for the Company only. Such model had been initiated and will continue to be initiated in 1st-tier cities and major 2nd-tier cities. However, there is no plan for Mengniu to engage in direct-selling business model in other lower tier cities currently. The management admits that some distributors left due to lower profitability under the new system but Mengniu believes that the Company is able to analyse the data gathered from the consumers to launch products that fit the customers needs and to launch promotion campaigns more efficiently. On the other hand, Mengniu targets to expand its current existing distribution channel to potential new clients such as restaurants, schools and companies and canteens located in office buildings. The negative impact from distribution channel restructuring was reflected from weak sales volume growth but we believe cost-savings and better control over POS will pay off in the long run. New Products Focus but Weak Volume Growth Expectation. In 2015, Mengniu will focus on promoting Just Yoghurt ( 纯甄 ), a high-end UHT yoghurt and to broaden the product portfolio of Milk Deluxe ( 特仑苏 ). Despite intensifying competition versus imported UHT, the Company does not intend to cut ASP directly but to launch promotional campaigns more frequently. The launch of pasteurized milk is in the pipeline of Mengniu s long term development plan but the Company is unlikely to launch such products nationally in the short run. Milk beverages did not perform well in 2014 and the Company will also increase promotional efforts to boost volume growth of such products. In addition, Mengniu will continue to launch healthy dairy products as the Company believes more consumers will become more health conscious in the long run. Mengniu launches products made from raw milk in New Zealand and Denmark. The Company also introduces nutrition products such as plant-based protein beverages ( 植物蛋白饮料 ). We are slightly worried that Mengniu act as a follower of UHT yoghurt and the Company may not enjoy as much benefit as other peers. In addition, competition against imported peers remains extremely fierce and price competition is unavoidable. The speed up of development and launch of pasteurized raw milk is a must in order to minimize negative impact from intensifying competition versus imported UHT dairy products. Though rising health conscious matters, tastiness of new products is also very important which we think the Company forgets. Thus, volume growth is expected to remain relatively weak in Figure-1: Dairy Products Production Volume Growth Figure-2: Dairy Industry Revenue and EBT YTD Growth 20% 40% Revenue - YTD Growth EBT - YTD Growth 15% 30% 10% 5% 20% 0% -5% 10% -10% YoY Growth YTD Growth 0% Jan&Feb-13 Mar-13 Apr-13 May-13 Jun-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan&Feb-14 Mar-14 Apr-14 May-14 Jun-14 Aug-14 Sep-14 Oct-14 Nov-14 Jan&Feb-13 Mar-13 Apr-13 May-13 Jun-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan&Feb-14 Mar-14 Apr-14 May-14 Jun-14 Aug-14 Sep-14 Oct-14 Source: National Bureau of Statistics of China. Source: National Bureau of Statistics of China. See the last page for disclaimer Page 2 of 7

3 Mild Fall in Raw Milk Procurement Price in Possibly due to high level of inventories of milk powder and weak sales volume growth expectation, Mengniu expects total procurement volume of raw milk to stay flat in As the Company focuses on eco-system that hopes its suppliers to work with Mengniu to enjoy benefits, raw milk procurement price of the Company is expected to fall slightly only in 2015 in order to avoid dairy farmers to kill their dairy cows leading to a sharp fall in raw milk supply. Despite expected raw milk procurement volume by Mengniu to stay flat in 2015, we still expect the Company to increase raw milk procurement from China Modern Dairy (01117 HK) and YuanShengTai (01431 HK) and procures less raw milk from individual dairy farmers. We expect Mengniu s raw milk procurement cost in 2015 to fall by roughly 5%, of which partial benefit is expected to be taken away by increasing proportion of raw milk procurement from large-scale dairy farming companies, which charge higher ASP on better quality. No Further Impairment on Milk Powder to be Made in 2H14. Mengniu s 2014 year-end inventories are not expected to fall significantly HoH due to abundant milk powder inventories. Therefore, the management admits that the Company does not plan to purchase milk powder in In addition, the Company also expects no further impairment of milk powder to be made in 2H14. Mengniu is unlikely to enjoy huge benefits from low milk powder price given abundant inventories of high-cost milk powder. However, we are glad that the Company chooses to use raw milk as primarily raw materials for producing dairy products, which helps to support dairy farming industry in China. Figure-3: Nationwide Raw Milk Price RMB / kg 4.5 Figure-4: Whole Milk Powder Price US$ / tonne 6, , ,000 3, , , Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jan-14 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jan-14 Source: Ministry of Agriculture of the PRC. Source: Global Dairy Trade. Start-Off from the Better One ( 从更好的自己出发 ). The new slogans for Mengniu in 2015 are Start-Off from the Better One and Better than Ever, Higher than Ever. In addition to weak consumer sentiment faced by the Company and its peers, we expect that internal co-operation between people from different background in Mengniu is holding the key for success to regain market share from the peers. Although it still takes time, we believe Mengniu is on the right track of enjoying sustainable growth as its partners show huge confidence in Mengniu by direct investment in the Company. See the last page for disclaimer Page 3 of 7

4 Earnings Forecast Assumptions and Revisions: Table-1: 2H14 Interim Results and 2014 Annual Results Preview RMB million F YoY 1H13 1H14 YoY 2H13 2H14F YoY Revenue 43,357 49, % 20,668 25, % 22,689 24, % COGS (31,660) (34,657) 9.5% (15,149) (17,454) 15.2% (16,511) (17,203) 4.2% Gross Profit 11,697 15, % 5,519 8, % 6,178 6, % Other income & gains % % % Distribution costs (8,168) (10,278) 25.8% (3,807) (5,897) 54.9% (4,361) (4,381) 0.4% Administrative expenses (1,606) (1,884) 17.3% (801) (962) 20.0% (804) (922) 14.6% Other expenses (360) (725) 101.4% (136) (553) 306.9% (224) (173) -23.0% Operating Profit 1,852 2, % 894 1, % 958 1, % Finance income, net % % % JV & associates % % % Profit before tax 2,205 3, % 1,022 1, % 1,182 1, % tax (367) (515) 40.5% (186) (253) 36.0% (181) (263) 45.2% Non-controlling interests (231) (300) 30.0% (101) (180) 78.7% (130) (120) -7.8% Discontinued Operation 24 (0) n.a. 14 (0) n.a % Profit 1,631 2, % 749 1, % 881 1, % Gross Margin 27.0% 30.5% 3.5 ppt 26.7% 32.4% 5.7 ppt 27.2% 28.3% 1.1 ppt Operating Margin 4.3% 5.3% 1.1 ppt 4.3% 4.7% 0.4 ppt 4.2% 6.0% 1.8 ppt Margin 3.8% 4.7% 0.9 ppt 3.6% 4.1% 0.4 ppt 3.9% 5.4% 1.5 ppt Source: the Company, Guotai Junan International. Revise Down Earnings in on Lower Earnings Contribution from China Modern Dairy and Yashili. Our revenue and earnings forecasts for Mengniu in 2014 are generally remain unchanged as the negative impact of weak sales volume growth is offset by absence of milk powder impairment in 2H14. We revise down Mengniu s revenue and earnings in as the Company s shareholdings in Yashili (01230 HK) will fall from 68.1% to 51.0% following Danone s share subscription. To conclude, we revise up Mengniu s EPS in 2014 by 0.7% but cut the Company s EPS by 3.2% and 3.7% in , respectively on lower earnings expectation of China Modern Dairy and lower earnings contribution from Yashili. Mengniu s EPS is expected to be RMB1.208, RMB1.412 and RMB1.573 in , respectively, up 33.7%, 16.9% and 11.4% YoY, respectively. The earnings growth in 2015 is expected to be mainly attributable to expected absence of inventories and receivables impairments. Table-2: Earnings Estimate Revisions RMB million NEW OLD CHANGE 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F Revenue 49,839 53,349 57,933 50,987 55,097 59, % -3.2% -2.8% Gross Profit 15,183 17,359 18,896 16,614 18,269 19, % -5.0% -3.8% Operating Profit 2,663 3,091 3,379 2,700 3,300 3, % -6.3% -8.3% Profit 2,341 2,813 3,133 2,325 2,905 3, % -3.1% -3.7% EPS (RMB) % -3.2% -3.7% Gross Margin 30.5% 32.5% 32.6% 32.6% 33.2% 32.9% -2.1 ppt -0.6 ppt -0.3 ppt Operating Margin 5.3% 5.8% 5.8% 5.3% 6.0% 6.2% SAME -0.2 ppt -0.3 ppt Margin 4.7% 5.3% 5.4% 4.6% 5.3% 5.5% 0.1 ppt SAME -0.1 ppt Source: Guotai Junan International. See the last page for disclaimer Page 4 of 7

5 Upgrade to Accumulate but Cut TP to HK$ Mengniu s current share price fell by more than 30% from its peak. Current valuation is comparable with that of Yili ( CH) and its historical low 12-month forward mean valuation during With possibility of profitability improvement (Mengniu s revenue in 2015 is expected to be 15% less than that of Yili and net margin is expected to be 3.3 ppt lower than that of Yili), we believe current valuation is attractive. Therefore, we upgrade Mengniu s investment rating from Neutral to Accumulate. However, TP is lower from HK$37.30 to HK$33.00 due to weak investor sentiment on dairy industry. The new TP represents 21.6x 2014 PER, 18.5x 2015 PER and 16.6x 2016 PER. Figure-5: Mengniu Current Year PER Band High PER (x) - Avg : 30.7x Mean PER (x) - Avg : 24.5x Low PER (x) - Avg : 18.6x Figure-6: Mengniu 12-Month Forward PER Band 50 High PER (x) - Avg : 26.9x Mean PER (x) - Avg : 21.4x 40 Low PER (x) - Avg : 16.0x F F Source: the Company, Bloomberg, Guotai Junan International. Source: the Company, Bloomberg, Guotai Junan International. Table-3: Peers Comparison Company Ticker $ HSI Members Consumer Staples Share Price Market Cap (HK$ mn) PER (x) PBR (x) Yield (%) ROE (%) FY13 FY14 FY15 FY16 FY14 FY14 FY14 Mengniu HK HK$ , Want Want HK HK$ , Hengan HK HK$ , Tingyi HK HK$ , Simple Average Weighted Average China-Listed Dairy Companies Yili CH RMB , Bright Dairy CH RMB , Simple Average Weighted Average Source: Bloomberg, Guotai Junan International. See the last page for disclaimer Page 5 of 7

6 Financial Statements and Ratios Statement Balance Sheet Year end Dec (RMB m) FY12A FY13A FY14F FY15F FY16F As at 31 Dec (RMB m) FY12A FY13A FY14F FY15F FY16F Revenue 36,000 43,357 49,839 53,349 57,933 Property, plant and equipment 7,739 9,246 10,620 11,141 11,442 Cost of sales (27,050) (31,660) (34,657) (35,989) (39,037) Construction in progress 597 1, Gross Profit 8,950 11,697 15,183 17,359 18,896 Other intangible assets 224 1,612 1,597 1,582 1,567 Other income and gains Land use rights 801 1,049 1,208 1,375 1,538 Distribution costs (6,223) (8,168) (10,278) (12,005) (13,053) s in JV & associates 78 2,843 4,319 4,652 5,070 Administrative expenses (1,175) (1,606) (1,884) (2,210) (2,401) Goodwill & Others 1,629 7,992 9,420 9,726 10,064 Other expenses (194) (360) (725) (369) (394) Non-current assets 11,069 24,018 28,012 29,091 30,225 Operating Profit 1,608 1,852 2,663 3,091 3,379 Finance cost, net Inventories 1,363 2,577 4,273 2,958 2,933 Profit from associates (53) Trade and other receivables ,108 Profit before tax 1,734 2,205 3,157 3,694 4,101 Prepayments and deposits 1,384 2,485 2,492 2,667 2,897 tax (245) (367) (515) (610) (672) Cash 2,918 3,355 5,137 5,448 6,320 Minority interest (186) (231) (300) (270) (296) Time deposits & Others 3,327 7,150 6,500 6,800 7,130 Discontinued Operation 0 24 (0) 0 0 Current assets 9,847 16,321 19,289 18,860 20,388 Profit 1,303 1,631 2,341 2,813 3,133 Account payables 3,629 4,761 5,222 5,423 5,866 EPS (RMB) Other payables 2,551 4,355 5,222 5,177 5,333 DPS (RMB) Short term loans 599 8,554 3,000 2,000 1,000 Others Cash Flow Statement Current liabilities 6,857 18,063 13,975 13,079 12,633 Year end Dec (RMB m) FY12A FY13A FY14F FY15F FY16F Non-current liabilities 938 4,265 8,726 6,829 6,942 Profit before tax 1,734 2,229 3,157 3,694 4,101 Finance cost, net (179) (199) (182) (270) (304) Minority interest 632 2,650 2,951 3,221 3,517 Depreciation and amortisation 995 1,218 1,425 1,561 1,623 Shareholders' equities 12,489 15,361 21,649 24,821 27,521 Profit from associates 53 (154) (312) (333) (418) BPS (RMB) Share-based payment Others (136) (116) Financial Ratio Working capital change (288) 517 (446) 1, FY12A FY13A FY14F FY15F FY16F paid (17) (134) (351) (300) (245) Tax paid (300) (281) (515) (610) (672) Revenue Growth (%) (3.7) Operating cash flow 1,881 3,284 3,090 5,237 4,609 Gross Profit Growth (%) (6.7) Operating Profit Growth (%) (15.2) Purchase of non-current assets (2,567) (3,941) (1,620) (2,000) (2,000) Profit Growth (%) (18.0) Purchase of biological assets (144) (364) (200) 0 0 Acquisition of MI, subsidiary & associate (40) (10,128) (3,719) (600) (660) Gross Margin (%) Change in time deposits (671) (1,207) EBITDA Margin (%) received Operating Margin (%) Others Margin (%) Investing cash flow (3,225) (15,269) (4,168) (2,015) (2,096) ROA (%) ROE (%) Proceeds from share issuance , Dividend paid to shareholders (350) (290) (367) (527) (633) Inventory turnover days Debt change ,711 (1,697) (3,000) (1,000) Account receivable days Others (82) 1, Account payable days Financing cash flow (59) 12,331 2,910 (2,861) (1,591) Cash conversion cycle (20.3) (18.9) (3.5) (18.3) (20.5) Change in cash and cash equivalents (1,402) 346 1, Current ratio (x) Foreign exchange effect (2) 148 (50) (50) (50) gearing (%) Cash Cash Cash Cash balance at year end 2,918 3,355 5,137 5,448 6,320 interest cover (x) Source: the Company, Guotai Junan International. See the last page for disclaimer Page 6 of 7

7 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for Shandong Chenming Paper Holdings Limited-H shares (01812), China All Access (Holdings) Limited (00633), Sinopec Shanghai Petrochemical Company Limited-H shares (00338), Guangshen Railway Company Limited-H shares (00525), Guotai Junan International Holdings Limited (01788) and Binhai Investment Company Limited (02886), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 7 of 7