August 13, 2016
China: Consumer Staples
Equity Research Dairy in a ‘new normal’; execution drives divergence; Initiate: Buy Yili
China dairy enters a ‘new normal’ with milk prices remaining weak In our view, the once fast-growing China dairy market has entered a ‘new HOW OUR VIEWS DIFFER FROM STREET 1: We expect China dairy growth to be slower for normal’ of low single-digit growth. High-income consumers have reached longer: penetration not as low as it looks, dairy still saturation point for dairy, with consumption in tier 1/2 cities now on a par not a necessity with Japan and Korea. Meanwhile, we expect low-end consumer demand 2: Functional, high protein products to lead growth will be subdued, due to the economy cooling and given that dairy is not a – Yogurt the next five-year bright spot daily staple for this cohort of the population. 3: Yili’s margin expansion undervalued – strong branding and distribution drive better product mix We forecast only 3% milk volume CAGR to 2020, against which we expect the China raw milk price to remain weak — at Rmb3.4/kg. Even though we YOGURT TO DOUBLE TO RMB22 BILLION BY 2020 expect global oversupply to balance out over the next 18 months, with the ASP CAGR Dairy Market Size 2015-2020E (US$) 5.0% 2015 2020E China milk price 30% above international prices, we expect imports will Yog urt , 4.0% also play a role in keeping a lid on the domestic price. 12bn ->22bn 3.0% Ice Cream
Flavored Milk UHT milk 13bn->17bn Pasteurized Valued-added product to drive growth; Yogurt to thrive 2.0% 13bn->12bn 1.0% In this slow growth stage, we expect earnings growth to come from: (1) 0.0% IMF The shift in consumer preference to functional, high-protein products in tier 17bn-18bn 1/ 2 cities; (2) Gradual increase in milk drinking in lower-tier cities. We -1.0% Volume CAGR -2.0% expect yogurt, which is increasingly regarded as nutritional and good for -5.0% -3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% digestion, will outperform all other categories to grow at double-digit Source: Euromonitor, Goldman Sachs Global Investment Research. CAGR, and almost double in size to Rmb22bn. Overall, we forecast the China dairy profit pool to rise by a smaller 1.6X to US$5.8bn in 2020. COVERAGE SNAPSHOT – RESUMING COVERAGE Market Company Cap (USD Target Upside / 2017E Execution is now key; Initiate coverage, Buy Yili, Sell Want Want Ticker name mn) Price Rating Downside P/E 600887.SS Yili 17,387 Rmb 21.5 Buy 18% 18.2 1112.HK Biostime 1,644 HK$ 26.9 Neutral 14% 15.0 With greater competition and the slower growth environment, execution 2319.HK Mengniu 5,770 HK$ 12.9 Neutral -3% 19.4 1117.HK CMD 620 HK$ 1.05 Neutral -5% 10.7 will be key for winning market share. In this regard, Yili (Buy) stands out: 600597.SS Bright Dairy 2,856 Rmb 13.2 Neutral -11% 36.8 its flat one-tier distribution network enables it to better gauge changing 0151.HK Want Want 8,455 HK$ 4.2 Sell -15% 17.5 Source: Bloomberg, Goldman Sachs Global Investment consumer demand; it has leading product offerings, effective branding and Research. a proven management team that we expect to drive high returns, of sector leading 13% EPS CAGR over 2015-18E. We expect it to gain market share UPCOMING EVENTS with its premium products and believe the share price is not factoring in 2Q16/1H16 Company Results: mid to late Aug strong margin improvement (170bps higher operating margin by 2018).
We see Want Want (Sell) as being poorly positioned for these industry trends, with its product mix skewed to less healthy flavored milk and its conservative approach to marketing and distribution leading to market share losses and falling earnings. We also initiate coverage of Mengniu, Bright Dairy, Biostime and China Modern Dairy with Neutral ratings.
Lincoln Kong, CFA +852-2978-6603 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with Joshua Lu companies covered in its research reports. As a result, +852-2978-1024 [email protected] Goldman Sachs (Asia) L.L.C. investors should be aware that the firm may have a conflict of Kevin Li interest that could affect the objectivity of this report. Investors +65-6654-5190 [email protected] Goldman Sachs (Singapore) Pte should consider this report as only a single factor in making Xufa Liao, CFA +86(21)2401-8902 [email protected] Beijing Gao Hua Securities Company Limited their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research August 13, 2016 China: Consumer Staples
Contents
Our thesis in 6 charts 4 China dairy enters a ‘new normal’ stage; milk price to remain weak 5 Slower growth for longer 5 Global milk price recovering in 2017, but China raw milk price to remain weak 7 Next growth driver: high protein, functional; Yogurt the bright spot 11 China profit pool to increase 1.6X by 2020 to Rmb5.8bn 11 Yogurt will be the bright spot 13 Execution is now the key: Yili stands out on distribution, branding 16 Products, branding, distribution, mgmt. comparison 16 Dairy 2020: Yili to gain market share in key product categories 24 Valuation: Yili our top pick, Want Want overvalued 29 Yili (Buy): A long-term stand-out leader; fastest sales/EPS growth 33 Want Want (Sell): Weaker brand could lead to further sales drop 40 Mengniu (Neutral): Sales recovering, but margin drags earnings 46 Biostime (Neutral): Swisse offset by weak IMF; Policy the key focus 51 Bright Dairy (Neutral): Stalled sales, GPM expansion offset by ANP 57 CMD (Neutral): Weak upstream to persist, brand expansion slower 62 Appendix: China dairy overview 68 Disclosure Appendix 74 Prices as of August 9, 2016 close, unless otherwise stated.
Exhibit 1: Comp Sheet (China and Global dairy)
BBG Ticker Name Mkt Cap Last GS Target List ReportPrice EPS 15-17 PE PE PEG EV/EBITDA EV/EBITDA P/B P/B Div Yield Div Yield ROE ROE Close Rating Price Crncy Crncy 6M Chg CAGR CY16 CY17 2Yr CY16 CY17 CY15 CY16E CY16E CY17E CY16E CY17 US$m Price L.C. L.C. L.C. % % (X) (X) CAGR (X) (X) (X) (X) % % % % China Dairy 600887 CH Yili 16,700 18.3 Buy 21.5 CNY CNY 37.0 13.5 20.5 18.1 1.5 13.4 11.6 5.6 5.0 2.9 3.3 25.5 25.9 2319 HK Mengniu 6,894 13.6 Neutral 12.9 HKD CNY 19.2 2.6 20.4 19.4 7.7 12.3 11.8 2.0 1.9 1.0 1.0 8.3 8.1 600597 CH Bright Dairy 2,770 15.0 Neutral 13.2 CNY CNY 40.1 7.8 38.8 36.3 5.0 13.3 13.0 4.1 3.8 1.2 1.3 8.7 8.7 151 HK Want Want China 8,345 5.1 Sell 4.2 HKD USD (5.2) (5.8) 16.7 17.9 (2.9) 9.7 10.2 4.5 4.1 0.4 0.4 26.0 22.2 1117 HK Modern Dairy^ 759 1.1 Neutral 1.05 HKD CNY (20.7) (14.4) 16.2 8.7 (1.1) 26.5 15.8 0.6 0.7 - - (7.1) (0.2) Average 35,468 20.9 19.5 1.9 12.6 11.5 4.4 4.0 1.7 1.9 20.3 19.7
China IMF 1112 HK Biostime 1,918 23.6 Neutral 26.9 HKD CNY 9.0 89.5 16.7 15.4 0.2 9.4 8.8 3.4 2.8 1.3 1.4 19.2 17.4 1230 HK Yashili 1,046 1.7 NC N/A HKD CNY (4.5) 54.4 40.7 23.6 0.7 17.3 9.8 NA 1.1 1.0 0.8 3.0 4.6 002570 CH Beingmate 1,909 12.4 NC N/A CNY CNY 13.9 31.5 100.9 71.7 3.2 32.8 27.8 NA 3.4 0.2 0.1 1.5 4.5 Average 59,110 54.8 39.2 1.5 20.3 16.5 3.4 2.7 0.8 0.8 8.8 9.6
Global leaders BN FP Danone 50,334 68.8 NR N/A EUR EUR 16.0 4.1 22.7 21.5 5.5 12.5 12.1 3.5 3.5 2.4 2.5 14.5 14.9 NESN VX Nestle 247,695 78.0 Sell 65.0 CHF CHF 7.0 4.4 23.1 21.6 5.2 15.0 14.1 NA 3.6 3.0 2.8 16.2 16.7 FSF NZ Fonterra 6,673 5.8 NC N/A NZD NZD (0.2) 15.5 10.9 10.7 0.7 7.9 7.6 NA 1.3 6.9 7.2 12.5 12.5 ALMARAI AB Almarai 11,733 55.0 Buy 72.0 SAR SAR 6.9 10.7 21.5 17.6 2.0 15.9 13.8 4.2 3.8 2.1 2.1 17.8 19.5 CHR DC CHR Hansen 8,455 427.8 Neutral 452.0 DKK EUR 8.9 13.2 37.6 34.1 2.8 25.0 21.6 33.2 25.2 0.2 0.2 78.8 57.7 MJN US Mead Johnson 16,363 88.6 Neutral 96.0 USD USD 25.3 6.0 25.2 23.0 4.2 16.8 15.6 NA NA 2.1 2.4 (114.5) (101.9) 2269 JP Meiji 14,849 9,850.0 Neutral 12,000.0 JPY JPY 6.7 6.8 20.3 20.3 3.0 11.7 10.9 3.8 3.3 1.0 1.4 15.7 14.6 Average 341,253 22.2 20.7 4.7 14.1 13.2 21.9 3.8 2.6 2.6 11.0 11.4
China F&B/FMCG 322 HK Tingyi 5,382 7.5 Neutral 6.4 HKD USD (12.5) (4.2) 24.3 18.8 (5.8) 7.8 6.8 1.8 1.8 0.2 0.3 5.6 6.9 220 HK UPC 3,470 6.2 Neutral 6.5 HKD CNY 24.6 17.5 23.7 20.3 1.4 9.1 8.0 1.9 1.9 0.7 0.9 8.2 8.9 168 HK Tsingtao 5,522 28.6 Sell 24.3 HKD CNY (0.3) (1.2) 26.0 24.9 (22.6) 12.3 11.8 2.0 1.9 1.0 1.1 7.8 7.7 600519 CH Kweichow Moutai 59,606 315.4 Buy 332.3 CNY CNY 54.7 16.1 22.2 19.0 1.4 13.2 11.1 6.2 5.4 2.3 2.6 25.1 25.4 1044 HK Hengan 10,455 66.9 NC N/A HKD HKD (0.4) 6.1 18.6 17.9 3.1 11.6 11.1 NA 4.3 3.3 2.8 23.8 22.8 288 HK WH Group 11,332 6.0 Buy* 7.4 HKD USD 39.5 9.2 12.2 10.8 1.3 6.3 5.7 2.1 1.9 0.3 0.5 14.2 14.2 Average 8,851 21.0 18.3 (0.2) 11.7 10.2 4.9 4.3 1.9 2.1 21.0 21.2 ^ Excl. biological FV chg gain / (loss) *Conviction list, NC: Not Covered, NR: Not Rated.
Source: Bloomberg, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 2 August 13, 2016 China: Consumer Staples
PM Summary
Slower growth for longer China’s dairy industry was worth US$64bn in 2015, up from US$42bn in 2011. Although total per capita consumption is still low vs. DM countries (20kg vs. 200kg in the US), we think the market has entered a slower growth stage — and we estimate only 3% volume CAGR over 2015-2020.
The slower growth is due to: 1) tier 1 and 2 cities already have similar penetration rates as Japan/Korea and 2) economic slowdown is impacting low-end consumer demand (dairy is not a staple for most low-end consumers).
Our GS proprietary global dairy Supply and Demand model (including all major milk production and consumption countries globally) indicates a gradual recovery in the milk price in 2017. (GSe: New Zealand Whole Milk Power price to reach US$2,700/ton by end 2017, 30% increase from now) as milk output has started to slow in both NZ and the EU.
In China, however, with the slower demand growth, our milk supply-demand model suggests the supply gap will be filled by higher imports (given a still large price gap), and therefore we see China raw milk prices remaining flat out to 2020 (GSe: around Rmb3.40/kg).
Growth to come from value-added products, Yogurt to outperform With slower volume growth, we see growth coming from the shift in consumer preferences away from sweeter products like flavored milk towards functional, high protein products – like probiotic yogurt.
Within all dairy subcategories, we expect yogurt will outperform the rest and almost double in size by 2020. With further distribution expansion, we see low temp yogurt continuing to deliver mid-teen growth whereas we expect UHT yogurt to be more of a short-term product before gradually tapering off as distribution infrastructure improves and consumers shift to fresher, healthier products. In all, we expect the China dairy profit pool to grow 1.6X by 2020 to US$5.8bn over 2015, driven by growth in value-added products and margin improvement at dairy companies (due to the change in product mix).
To capture the step change in the growth profile of the industry, we derive our 12-month target prices from our returns-based Director’s Cut methodology (2017E EV/GCI vs. CROCI/WACC).
Buy Yili on better execution; Sell Want Want We think a successful downstream expansion strategy is the key for dairy players to win market share. In this regard, Yili stands out. It has led on this front for the last three years, and we expect it to extend this leadership out to 2020. Yilli is best positioned in the higher growth categories and offers more targeted marketing to cater to young consumers. It also has a more comprehensive distribution network and a prudent, proven management team.
We initiate with Buy and 12-month Rmb21.5. We expect it to deliver fastest 14% EPS CAGR and highest cash return of 27% over 2015-17E vs. peers in an 8-15% range.
In contrast, we think Want Want stands to lose market share and register negative growth as its product offerings of flavored milk and rice crackers are less innovative and positioned in declining categories. We expect -4% EPS (Rmb terms) CAGR over 2015-18E.
Goldman Sachs Global Investment Research 3 August 13, 2016 China: Consumer Staples
Our thesis in 6 charts
Exhibit 1: China dairy market enter a new normal (slow Exhibit 2: We expect China’s raw milk price to stay low low single digit growth) for the next three years China Raw milk supply excess/(shortage)
Total Supply Excess/(Shortage) Domestic Raw Milk Price (RMB/kg, RHS) Dairy consumption growth CAGR (LME) China raw milk excess/ China domestic raw milk (shortage) incl. imports, K tons price , RMB/kgr 25% 22% 6,000 4.50 4.03 20% Melamine Global 4,000 Over‐supply 4.00 15% 3.53 3.48 3.48 3.45 3.45 3.43 3.40 3.37 3.36
10% 3.24 6% 2,000 3.20 3.50 5% 3%
2% 2.89 2.79 2.79 0% 0 3.00 Global Supply Global production
2.45 Shocks cuts on lower prices -5% -2,000 2.50 -10% -8% 2000-07 2008-09 2010-13 2014-16E 2016E-20E -4,000 2.00 *LME: liquid milk equivalent 2008 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E2019E2020E
Source: USDA, dairy Association, Goldman Sachs Global Investment Research. Source: DCANZ, Wind, Goldman Sachs Global Investment Research
Exhibit 3: We see yogurt registering the highest growth Exhibit 4: We expect Yili to gain further market share in of all categories the yogurt category Forecasted dairy growth by category Yogurt market share (%)
Yili Mengniu Bright Dairy 35
30 28.7 28.0 25 26.9
20 19.3
15 14.2 10 10.8
5
0 2012 2013 2014 2015 2016E 2017E 2018E
Source: Euromonitor, Goldman Sachs Global Investment Research Source: Euromonitor, Goldman Sachs Global Investment Research
Exhibit 5: Yili has been improving its product mix, Exhibit 6: We expect Yili to show the highest EPS growth bringing 330bps higher gross margin by 2018E Company EPS 2015-2020 CAGR Yili product mix and GPM
Company EPS growth YoY Mid to low end products % sales 40.0% High end products % sales GPM 30.0% 100% 45.0% 20.0% 40.0% Yili, 13% 80% CAGR 35.0% 10.0% 30.0% Mengniu, 6% 60% 25.0% 0.0% Bright, 7% 20.0% 40% -10.0% Want Want, -4% 15.0% -20.0% 20% 10.0% 5.0% -30.0% 0% 0.0% 2012 2013 2014 2015 2016E 2017E 2018E -40.0% 2014 2015 2016E 2017E 2018E 2019E 2020E
Source: Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 4 August 13, 2016 China: Consumer Staples
China dairy enters a ‘new normal’ stage; milk price to remain weak
We see China dairy industry growth having entered a ‘new normal’ stage and expect low single digit volume growth over the next 3-4 years. Per capita diary penetration for high tier cities is already comparable with levels in Japan and Korea level and in our view therefore has reached equilibrium. On the other hand, demand in lower tier cities are more a function of economic growth as dairy is not yet a staple among lower-income Chinese.
With the slower demand, we see the China raw milk price remaining weak even though we expect the global S/D backdrop to gradually recover. In light of this, we are cautious on upstream dairy farming companies.
As the industry shift from high growth to low growth, we see the earning growth driver for dairy companies also changing. It is more difficult for companies to grow if they simply expand their distribution network or push new products into existing channels. Going forward we think execution will be the key to winning market share, Yili stands out with strong results in the past years.
Slower growth for longer China dairy: double digit volume growth before 2014, but subdued in past 2 years
The China dairy market has grown nine-fold in the past 15 years with a total addressable market of US$64bn currently. Before 2014, dairy demand growth average 12% for more than 10 years, with Yili and Mengniu growing their sales six-fold.
Exhibit 7: China dairy market enter a slow growth stage Exhibit 8: China dairy market volume comparable with US/W. Europe
Dairy consumption growth CAGR (LME) Total Dairy Market Volume ('000 Tonnes) 40,000 25% 22% 34,205 35,000 20% 30,000 27,386 15% 25,000 19,347 10% 20,000 6% 15,000 5% 2% 3% 10,000 0% 3,964 5,000 1,419 -5% 0 Western USA China Japan S. Korea -10% -8% Europe 2000-07 2008-09 2010-13 2014-16E 2016E-20E
Source: Euromonitor Source: Euromonitor
Per capita comparison not always correct, high tier city consumption already on par with overseas peers
Compared with US/EU, China’s per capita consumption is low (roughly 20kg per person vs. 200kg in the US). Among staples categories, dairy is also one of the least penetrated at only avg. 22% of US/EU level. However, in light of their different dietary habits, we think US/EU’s dairy consumption is not a good comparable for China and think Japan/Korea are better benchmarks.
Exhibit 10 shows that for liquid milk (fresh + UHT milk), China per capita is about 46% of the Japan/Korea avg. and if we include the flavored milk, then China is already 76%. This is higher than the relative penetration for RTD tea or instant noodles.
Goldman Sachs Global Investment Research 5 August 13, 2016 China: Consumer Staples
Looking at per capita by different tier cities, more developed regions and tier 1 cities are closer to Japan/Korea already. This suggests that high tier city consumers have developed the milk drinking appetite and future volume growth may be more muted. (Exhibit 11)
Exhibit 9: China per capita consumption of dairy still has Exhibit 10: …but smaller vs Japan/Korea large gap vs US/EU level China per Capita consumption vs Japan/Korea China per Capita consumption vs US/West Europe
Volume per capita as % of Volume per capita as % of US/W.Europe volume per capita Japan/Korea volume per capita
0% 50% 100% 150% 200% 250% 0% 50% 100% 150% 200% 250% 300% 0 0
Milk Milk Formula1 Formula1 92% 240%
Flavoured Flavoured2 2 Milk Milk 234% 276%
Yoghurt Yoghurt 3 3 45% 51%
Liquid + Liquid + Flavoured4 Flavoured4 Milk 32% Milk 76%
Liquid Milk Liquid Milk5 5 (Fresh+UHT) (Fresh+UHT) 18% 46%
Source: Euromonitor, Goldman Sachs Global Investment Research Source: Euromonitor, Goldman Sachs Global Investment Research
Exhibit 11: Urban China’s liquid LME consumption is Exhibit 12: East/South China (wealthier regions) have closer to Japan than to Rural China similar dairy consumption vs Japan/Korea Liquid milk per capita, Urban and Rural Per capita by region
Dairy per capita consumption by region Liquid Milk Equivalent per capita (kg) 45 Yoghurt/Sour Milk Milk Flavored Milk 38 40 39kg 40 35 34kg 35 31kg 30 30 26kg 23 25 25
20 20 Kg/Capita
15 15 12kg
10 7 10 5 5
0 0 Northwest Southwest Mid China North and East China South China Japan Korea Urban China Rural China Japan N/E
Source: Goldman Sachs Global Investment Research Source: Euromonitor
We expect weak volume demand: Economy and high ASP impact low-end demand
We see the main reasons that demand has been weak for past 2 years are:
1) Dairy not yet a staple for lower-end consumers: Chinese consumers’ tastes have diverged as income growth has diverged. While for higher income consumer we may see continued trade-up, lower income consumers are more deeply affected by the overall slowdown in income growth. Dairy is still not a staple product for many Chinese families, and so if the economy slows, many may switch to inexpensive alternatives (eg: soy milk etc.)
We run an affordability analysis on major milk products (Exhibit 14). This indicates that compared to US, liquid milk/yogurt is still a relatively expensive products for
Goldman Sachs Global Investment Research 6 August 13, 2016 China: Consumer Staples
Chinese’s hourly earnings, especially for the urban mass (annual income of US$2,500-4,000.)
Additionally, spending on food is already over indexed in China vs. other developed countries, and so as income grow, the incremental money spent on food will be proportionally less than overall income growth.
2) High-tier city close to saturation: Although overall per capita consumption still has growth potential, urban consumption, especially in tier 1 cities has already reached a similar level as in Japan, and so we think the incremental volume growth there will be more subdued.
In conclusion, we see China dairy demand growth to be slower for longer at about 3.5% volume CAGR over 2015-2020E.
Exhibit 13: Tier 2 and below cities have seen higher growth in disposable income and have greater spending power Per capita income by tier city
Urban Tier 1 Tier 2 Tier 3 and Below Rural Population (mn) 767.5 70.2 234.2 463.1 606.0 2015 Urban avg. disp. Income/cap (RMB) 31,194.8 48,352.2 36,031.6 27,046.4 11,812.3
2013-15 2yr CAGR 8.8% 9.7% 7.7% 10.7% Spending Power (RMB bn) 3,395.7 8,437.6 12,525.2 7,158.1
Source: Wind
Exhibit 14: For China Urban Mass, many yogurts remain expensive Affordability analysis
Source: Euromonitor, Goldman Sachs Global Investment Research
Global milk price recovering in 2017, but China raw milk price to remain weak The global milk price (often referred to the New Zealand Whole Milk Powder [WMP] auction price) has corrected since peaking in mid-2013 and has remained at the weak US$2,000/ton level in past year. The down cycle is being driven by weaker-than-expected China demand over 2014-15 and accelerating production in the EU as the milk quota was lifted. The current milk price of US$2,100/ton is already below NZ farmers’ all-in cash cost of US$2,700/ton as well as Europe’s milk cost.
Our GS proprietary supply-demand model (includes the detail production, consumption forecast for the major exporting/importing countries, NZ, EU, US, China, Brazil, etc.) suggests that:
The EU will see 3% production growth in 2016, as since the milk quota was lifted in Apr 2015, many farmers reared new heifers, and these have only become milkable in the past 6 months. With the still lackluster EU domestic consumption, this will
Goldman Sachs Global Investment Research 7 August 13, 2016 China: Consumer Staples
lead to higher export volume for EU in 2016. From 2017 we estimate EU farmers will slow their pace production with flat growth, given the milk price is not high enough to cover their production costs.
NZ has set a target to reduce milk production by 3-4% in 2016/17 season, on top of the 2% decline last season. The US is also reducing export volume as domestic demand is stronger than expected.
Net net, for 2016 we expect the exports from these three major markets combined will still grow at just over 4% in 2016 but then gradually taper off in 2017-18. (Exhibit 16).
For 2016-2020, we think the oversupply issue will gradually balance out starting in 2017, driving 2015-2020 consumption and production from major countries at a similar 1.2% CAGR.
Exhibit 15: We forecast that milk powder prices will reach US$2,700 by 2017E, driven by gradual S/D balancing Milk powder price and Global Production/Consumption forecast
US$/ton NZ Global Dairy Trade Wholemilk Powder Auction Price (US$/ton) 6,000 Over Supply: Moderate reduction in supply: - NZ returns to good weather - Europe quota lifted April 15 - NZ cutting supply on lower prices - Reaction to high prices - Europe still seeing supply growth 5,000 - China modern farms slow supply Demand shocks: - Lower oil, corn costs - China austerity measure, economy slows, de-stocking Still weak demand: - Russia shut imports from - China demand remains slow but August 2014 de-stocking largely finished 4,000
2018E :US$3,000 3,000 2017E: US$2,700
2016E: 2,300
2,000 Supply shortage:
- NZ Drought - Europe Quota - China cow disease and culling on high crop cost 1,000 Robst Demand: - Robust China demand, stock-piling - Russia 2nd largest importer in cheese globally - Feb-18 Feb-17 Feb-16 Feb-15 Feb-14 Feb-13 Feb-12 Feb-11 Feb-10 Feb-09 Aug-18 Nov-18 Aug-17 Nov-17 Aug-16 Nov-16 Aug-15 Nov-15 Aug-14 Nov-14 Aug-13 Nov-13 Aug-12 Nov-12 Aug-11 Nov-11 Aug-10 Nov-10 Aug-09 Nov-09 Aug-08 Nov-08 May-18 May-17 May-16 May-15 May-14 May-13 May-12 May-11 May-10 May-09
5-yr mn tons 5-Yr CAGR mn tons 2015-20 Global Milk Consumption 2015-20 Global Milk Production CAGR 2015-20 Production (mn tons) 2015-20 5-yr Production CAGR 2015-20 Incremental Consumption (mn tons, LHS) 2015-20 5-yr Consumption CAGR (RHS) 25.0 2.8% 3.0% 22.7 20.0 4.0% 18.4 2.5% 18.0 3.4% 20.0 2.0% 3.5% 2.0% 16.0 1.5% 3.0% 15.0 1.5% 14.0 1.2% 2.5% 1.0% 12.0 1.0% 10.0 8.2 0.4% 10.0 2.0% 7. 4 0.5% 1.5% 8.0 1.4% 4.9 6.8 1.5% 5.0 3.6 0.0% 1.1% 6.0 4.9 0.5% 1.0% 0.5 -0.5% 4.0 3.3 2.7 - -1.0% 0.4% 0.3% 0.5% -1.1%-0.4 -1.0% 2.0 -1.4 0.5 0.2 - 0.0% -5.0 -1.5% EU US Russia Brazil China Japan Top 6 EU US Russia Brazil China NZ Japan Top 7
Source: USDA, DCANZ, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 8 August 13, 2016 China: Consumer Staples
Global milk price to recover: Although China demand has not yet picked up, with the more radical supply side reduction, we estimate NZ WMP price will slowly recover starting 2H16 and reach US$2,700/ton by the end of 2017 (NZ farmer’s breakeven point).
Exhibit 16: We expect exports from EU/US/NZ to grow at Exhibit 17: China’s raw milk continues to trade at a 4% for 2016E then taper off to 0.9% in 2018E premium against Global milk prices Export growth by EU/US/NZ China raw milk price vs. Global
Dairy Export Market (3 major exporters) China raw milk price (Rmb/Kg) Mn Tonnes EU US NZ yoy growth NZ WMP equivalent price (auction only) 80.0 75.5 76.2 18% 6.00 73.7 NZ WMP equivalent price (auction plus transport, VAT) 15.7% 70.9 5.50 68.6 16% 70.0 5.00 60.0 61.3 14% 60.0 57.0 12.0% 4.50 52.6 12% 4.00 50.0 45.5 45.5 10% 3.50 8.3% 40.0 8% 3.00
5.4% 6% 2.50 30.0 4.0% 3.3% 4% 2.00 20.0 2.1% 2.4% 1.50 0.9% 2% 1.00 10.0 -0.1% 0%
0.0 -2% 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: Goldman Sachs Global Investment Research, DCANZ Source: Bloomberg
China milk prices to flat line
For China, given demand has been weaker than expected in the past 2 years, milk oversupply has driven excess inventory and a lower milk price (down 20% from peaks). Our China supply-demand model estimates currently there’s about 3.3mn tons of liquid milk equivalent inventory in the market, vs. China’s annual demand of 37-38mn ton. The excessive inventory is mostly poured into milk powder format so it can be stored for more than 18 months.
Milk price has also been in a down cycle since 1H14 due to the industry oversupply. Following the smaller farmers exiting market last year, in 2016 we have started to see large scale farmers also sharply slowing down the dairy farm expansion and are having trouble selling raw milk. (China Modern dairy poured about 11% of its milk production into milk powder in 1H16). Therefore, we estimate in 2016 domestic supply will be reduced by 1.3%.
However, due to higher feed cost and land prices, China raw milk price has consistently been much higher than global prices. Currently it’s still running at 55% premium to global prices (Exhibit 17, including all transport, tariff expenses), thus we see the imports will continue to be strong and sufficient to fill the China supply gap. (Exhibit 18) This will drive China raw milk price to be lower for longer at around Rmb3.35-3.45/kg level, in our view.
We are cautious about upstream dairy companies, as they will continue to have very tight cash margin and will need to more aggressively expand into the branded milk market to earn cash flow.
Goldman Sachs Global Investment Research 9 August 13, 2016 China: Consumer Staples
Exhibit 18: We still see a glut of supply in China’s milk Exhibit 19: We expect China’s inventory surplus to persist market in 2016E China raw milk price and Inventory surplus China S/D (including imports)
China domestic production Imported Milk (Liquid+Milk Powder) China total demand Total Supply Excess/(Shortage) Domestic Raw Milk Price (RMB/kg, RHS) China raw milk excess/ China domestic raw milk Raw Milk Equivalent (shortage) incl. imports, K tons consumption (K tons) 2015 total supply price , RMB/kgr 2015 total demand: 6,000 4.50 55,000 39mn ton: 33.8mn 37mn tons RME
domestic production + 4.03 50,000 5.2mn ton Imports Melamine Global 45,000 Over‐supply Melamine 4,000 4.00 3.53
40,000 3.48 3.45 3.43 3.40 3.37 3.37 3.36 35,000 3.24 3.24 2,000 3.20 3.50 30,000
25,000 2.89 2.79 0 3.00 20,000 Global Supply Global production
15,000 2.45 Shocks cuts on lower prices
10,000 -2,000 2.50
5,000
0 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E -4,000 2.00 2008 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E2019E2020E
Source: China dairy Association, Goldman Sachs Global Investment Research Source: China dairy Association, Goldman Sachs Global Investment Research
Exhibit 20: We expect a milk supply excess up until 2020E, but only less than half of the current surplus China supply-demand model
China S/D model 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2015-20 CAGR Total supply (K ton) 35,821 34,333 33,380 34,995 37,768 35,916 39,844 39,000 39,428 40,626 41,872 43,700 45,151 yoy growth 1.2% -4.2% -2.8% 4.8% 7.9% -4.9% 10.9% -2.1% 1.1% 3.0% 3.1% 4.4% 3.3% 3.0% Total demand (K ton) 34,563 30,263 32,466 34,112 36,256 37,560 36,441 37,196 38,280 39,582 41,022 42,445 43,989 yoy growth -2.3% -12.4% 7.3% 5.1% 6.3% 3.6% -3.0% 2.1% 2.9% 3.4% 3.6% 3.5% 3.6% 3.4% Supply Excess/(Shortage) 1,258 4,070 913 883 1,512 (1,645) 3,403 1,804 1,147 1,044 849 1,256 1,162 Estimated Inventory 1,256 5,328 4,983 1,796 2,395 (132) 1,758 5,207 2,951 2,191 1,893 2,105 2,417 *Inventory: 2yr cumulative basis, due to majority of inventory are in milk powder format and can last for 18 months.
Source: China Dairy Association, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 10 August 13, 2016 China: Consumer Staples
Next growth driver: high protein, functional; Yogurt the bright spot
China profit pool to increase 1.6X by 2020 to Rmb5.8bn If we look at the liquid milk equivalent (LME) — i.e. transfer each dairy product to LME based on its contents — then we see penetration in China is actually still low at 16kg per person per year vs. Japan 38kg (excluding cheese). This is because of the much higher portion of flavored milk consumption in China vs. other countries.
Therefore, we see future growth potential may not come from the dairy volume growth, but from consumers’ shifting between dairy categories — chiefly from demand for higher protein, functional products.
Going forward, we see demand drivers varying between different tiered cities.
Tier 1 and 2: per capita demand near saturation, growth will mainly come from product premiumization and consumers shifting to more value-added products (Yogurt etc.)
Tier 3-4: per capita demand still has room to grow, future growth will depend on increased frequency in milk drinking and awareness of healthier products (shift from flavored milk to UHT milk and yogurt)
County and Rural areas: very limited per capita dairy demand currently, future growth depend on development of milk drinking habits and income growth (beneficial products could still be basic UHT milk and UHT yogurt)
Exhibit 21: 20% of China’s dairy consumption is flavored Exhibit 22: In contrast Japan consumes a lot less flavored milk milk China dairy Per cap Consumption (LME) Japan dairy Per cap Consumption (LME)
China per capita consumption breakdown Japan per capita consumption breakdown
Flavoured Milk , 1.4%, Flavoured 1kg/cap Yoghurt and Milk , 21.4%, Sour Milk , 4kg/cap Yoghurt and 29.7%, Sour Milk , 5kg/cap 33.2%, Total LME 13kg/cap Total per Cap: LME per 16 cap: 38
Milk, 65.3%, 25kg/cap
Milk, 48.9%, 8kg/cap
Source: Euromonitor Source: Euromonitor
Profit pool to increase on product mix; high protein products drive increase
We estimate China’s dairy total profit pool is about US$3.6bn in 2015, implying c.6% industry avg. margin. For 2015-2020, we see the total industry size growing at 6.6% CAGR to US$82bn, driven by 3% volume CAGR and 2% ASP growth. With consumers’ preference for value added products, we see company margins also increasing from mid-single digit to high single digit, driving the overall profit pool to increase 1.6X to US$5.8bn in 2020.
As we mentioned earlier, we see consumers, especially the high tier city consumers, will prefer more functional and high protein content products. In the past 2 years, yogurt has been the fastest growth category, and we see this trend continuing.
Goldman Sachs Global Investment Research 11 August 13, 2016 China: Consumer Staples
Exhibit 23: We forecast Yogurt to be the fastest growing category with double digit volume growth, driving the China profit pool to increase by 1.6X by 2020 Market size, volume, profit pool forecast by category
Source: Euromonitor, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 12 August 13, 2016 China: Consumer Staples
By subcategory, we see the yogurt segment nearly doubling its market size to US$22bn in 2020, driven by strong volume growth. UHT milk will continue to be the dominant liquid milk product given its convenience and consumers’ established drinking habits; hence we see the similar volume growth as the industry average and expect roughly US$17bn in annual sales by 2020.
On the other hand, we see flavored milk and IMF as the two categories that will shrink over next few years. China’s flavored milk penetration is already one of highest in the world, and with the increasing awareness of healthy and less sweet preference, we expect the size of flavored milk to shrink by 1.3%.
For IMF, China is among the world’s largest market with annual sales of US$16bn in 2015. This is due to per baby penetration is on par with world average and average IMF product ASP is 50% above the EU/NZ level. For the next 5 years, we see IMF pricing remaining under pressure with the proliferation of online and cross border channels. Absolute ASP for IMF products, especially premium products will decline yoy, in our view; however this will be partially offset by the product mix upgrade, driving about 1% ASP fall yoy to 2020. The impact from the removal of the ‘one child’ policy”, initiated in 2016 will start to kick in from the end of year, however given the trend of number of new births and increasing promotion of breast feeding, we expect IMF volume growth to be more muted in the next 5 years at low single digits.
Yogurt will be the bright spot In beverages, we have seen a clear trend of consumers moving to healthier, less-sweet and functional products. In the past two years, Sports drink and Water recorded mid-to-high single digit growth vs. Carbonates and RTD tea posting negative growth.
We expect a similar trend in dairy products. Specifically, yogurt in China is usually considered a healthier product, and beneficial to health. In China, the perception of yogurt is different from Western style or Greek yogurt. In China, low temp yogurt (Exhibit 24, fourth column) is what consumers typically perceive as real ‘Yogurt’, which is usually the drinkable yogurt. It generally has higher sugar content than Greek yogurt.
In the past few years, hot categories have been 1) Drinking yogurt and 2) UHT yogurt. The former has been led by Japanese brand Yakult and promoted as ‘good for digestion’, while the latter became very popular only from 2014, led by Bright Dairy, Yili and Mengniu products, advertised as high nutrition and easy to carry yogurt. As it is stored and consumed at room temperature, UHT yogurt can be rapidly and easily distributed into lower tier cities and has gained popularity as the big dairy companies aggressively promote them.
Similar to beverages, we expect consumers to gradually turn to less-sweet and more functional products, i.e. move towards the low temp yogurt or the Western style yogurt (eg: Bright Dairy introduced a plain yogurt last year called ‘Rushi’) Thus, we expect low temp yogurt to record rapid 13% sales CAGR for 2016-2020E, but for yogurt drinks to show limited growth as consumers switch.
Goldman Sachs Global Investment Research 13 August 13, 2016 China: Consumer Staples
Exhibit 24: Consumer taste shifts towards less sweet, functional products – we see similar trends for Beverage and Milk Beverage and dairy products Comparison
Source: Company data, Goldman Sachs Global Investment Research.
UHT yogurt grew from a niche product in 2012 to an Rmb20bn market in 2015, due to the products being easy to carry and perceived as healthy (although there’s no ‘active’ Lactobacillus in UHT yogurt). The product caters to new demand in locations that lack sophisticated cold chain logistics and replaces some of the flavored milk and yogurt drink demand, in our view. Bright Dairy is the leader of this category with star products Momchilian, followed by Yili and Mengniu.
UHT yogurt is a new product category and many people are worried about the lifecycle of the product. However, we note consumer purchase frequency of this product has only reached 50% of that for Want Want’s “Hot kid milk”, which at its peak in 2013 was the best-selling single SKU dairy product in China. Therefore we think UHT yogurt growth has another 1-2 years of rapid growth ahead. That said as consumers start to realize the difference between UHT and low temp yogurt, as well as with development of logistics in low tier cities, we expect UHT yogurt growth to taper off and be outpaced by low temp yogurt.
Goldman Sachs Global Investment Research 14 August 13, 2016 China: Consumer Staples
Exhibit 25: UHT yogurt not yet near the purchase Exhibit 26: Liquid milk has seen higher growth in lower frequency of Hot Kid Milk during its peak in 2013 tier cities Purchase frequency Liquid milk growth by category
Products Hot Kid Milk UHT Yoghurt UHT Yoghurt Year 2013 2015 2018E Liquid milk growth yoy by tier Sales Value (Rmb bn) 18.7 19.7 35.6 8.0% 7. 5 % 6.9% ASP (RMB/L) 17.3 22.0 22.0 7.0% 6.3% Sales Packs (bn) 4.3 4.5 8.1 6.1% 6.0% Typical consumers 5-15 yrs 15-35yrs 15-35yrs Frequency (Pack/person/yr) 29.2 10.9 19.7 5.0% 4.5% 4.1% 4.3% 4.0% 2014 2015 3.0% 2.8%
2.0%
1.0%
0.0% Tier 1 Tier 2 Tier 3 Tier 4 and below
Source: Euromonitor, Company data. Source: Nielsen.
Exhibit 27: We forecast low temp yogurt to take share Exhibit 28: We expect low temp/UHT yogurt to grow from UHT yogurt and yogurt drink shares post 2016 13%/8% four-year CAGR, respectively Yogurt market breakdown by type 4 year CAGR by Category
Low temp Yogurt Yogurt Drinks UHT yogurt UHT yogurt Yogurt drink Low temp yogurt 100% Flavor milk UHT milk 90% 100% 86% 80% 90% 70% 80% 70% 60% 60% 50% 50% 40% 40% 30% 30% 23% 20% 13% 20% 10% 7% 8% 10% 3% 2% 6% 10% 0% 0% -10% -1% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2012-2016E 2016E-2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 15 August 13, 2016 China: Consumer Staples
Execution is now the key: Yili stands out on distribution, branding
Since the 2008-2009 melamine incident, China consumers’ demand for quality milk has increased substantially. Yili and Mengniu’s premium UHT milk products all gained market share with strong growth after that event.
However, in past two years, China dairy demand has been weaker than expected and posted subdued volume growth. But upstream dairy supply is still growing rapidly, leading to high milk inventory in the market and increasing competition. Mengniu saw greater challenge to its growth and its stock price corrected as much as 50% during 2014-15.
As the China dairy market has now entered a slower growth stage, individual companies’ performances have diverged more and more. The future growth and market share dynamics depend on each company’s specific strategy on product offering, marketing and branding and their effective execution.
We compare in detail the 4 downstream branded dairy companies and conclude that Yili as industry leader is set to extend its leading position and gain further market share in most categories.
Products, branding, distribution, mgmt. comparison
#1: Products: Yili and Mengniu better exposed to high-growth categories
Yili and Mengniu, as leading national players, have key products in most categories. They both have more than 50% of their sales in the higher growth UHT milk and yogurt, with the rest in milk beverage and milk powder. Both companies have been gaining market share in the yogurt category.
In comparison, Want Want’s sales are more skewed to flavored milk sales, accounting for 50% with the rest rick crackers or snacks. Therefore Want Want’s dairy sales are under significant pressure as the flavored milk market continues to shrink and the company faces more competition from Yili/Mengniu’s children’s milk products.
Bright Dairy is a more of a regional player focusing on East China and pasteurized milk. In the past 3 years it has successfully launched and led the UHT yogurt market with its star product Momchilovtsi. However, as competition intensifies in the UHT yogurt market, we see Bright’s growth coming under pressure from its dependence on a single SKU product. (We estimate in 2016 Yili’s UHT yogurt Ambrosial will surpass the scale of Bright Dairy’s UHT yogurt sales).
Goldman Sachs Global Investment Research 16 August 13, 2016 China: Consumer Staples
Exhibit 29: Yili has outperformed Mengniu in the past two year slow growth period Yili and Mengniu 2004-2016
2004-07: Expansion 2008-09: Melamine 2010-13: Demand for quality 2014-15: Divergent consumer, Mengniu: expanded liquid milk / yogurt Mengniu, Yili both hit Premium milk stands out as consumers Slower growth facilities aggressively and increased but recovered quickly demand safety and quality Yili: cater well to the changing promotion (sponsor 'Super Girl'), in 2009 Yili: outperform on sales/margin due to consumers demand; invest in the surpassed Yili in size in 2007 Mengniu: COFCO strong premium products, higher brand brand Yili: Chairman Pan stepped in and invested, Founder investment Mengniu: hit by high inventory gradually built each region's network- mgmt team gradually Mengniu: focus on growing size after and slowing demand, started to flat distribution and high control on retail left the company COFCO and new mgmt came in; increase direct control of the end (ZhiWang plan in 2006) Acquired IMF, invest in upstream distribution network farming and JV with Danone
60,360 60,000 Yili Mengniu Sales Rmb mn 49,027 50,000
40,000
30,000
20,000 8,735 10,000 7,214
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
12.0% Yili OPM Mengniu OPM OPM 7.9% 8.0% 6.0%
4.0% 5.2% 4.4%
0.0%
-4.0%
-8.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1600 Index to 100 as Stock Performance of July 2004 1400 Yili, 12X
1200
1000 2012 Apr: Mengniu changed CEO to 2009 July: Ms. Sun 800 mid 2008: COFCO invested Melamine in Mengniu Mengniu, 6X 600 2008: Mr. Pan elected Yili 400 Chairman/CEO
200
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 17 August 13, 2016 China: Consumer Staples
Exhibit 30: Yili and Mengniu has biggest exposure to Yogurt Sales by product type (2015)
Sales Exposure by Category
UHT Milk Milk Beverage Yogurt IMF Others Past. Milk 100% 4% 10% 8% 90% 9% 80% 37% 27% 51% 18% 70%
60%
20% 50% 28% 26%
40%
30% 49% 20% 42% 36% 37%
10%
0% Yili Mengniu Want Want Bright
Source: Company data.
#2: Branding: more effective and targeted branding crucial for young consumers
For dairy products, typical consumers are children/ students for flavored milk and teenagers or millennials for yogurt etc. Hence we think marketing and branding aimed at younger consumers will become more important for dairy companies. From 2013, we have seen increasing number of dairy companies investing in the popular TV or entertainment programs.
Yili, starting from 2014, has greatly increased its A&P expenses as they promote their star products. Its A&P ratio reached 12% in 2015 and we expect it to continue to rise over 2016- 18E vs. Mengniu’s 8-9% and Want Want and Bright at less than 4%. Yili has invested in television programs with higher viewership (avg. 3.0 rating vs. Mengniu’s 1.5) and has greater presence on social media (sponsoring online video program and engaging in WeChat events).
Also Yili spends about 60% more on advertising and roughly Rmb1bn on TV sponsorship each year. This has translated into higher sales growth for the last two years (Exhibit 34).
Want Want on the other hand, spent less than 4% of sales on A&P, as it relies rely more on distributors’ effort to push products. In our opinion this puts them at a disadvantage to win market share.
Goldman Sachs Global Investment Research 18 August 13, 2016 China: Consumer Staples
Exhibit 31: Yili’s higher spending on A&P has led to Exhibit 32: Most of Yili’s selling expenses are advertising higher incremental sales growth 2015 Yili vs Mengniu Selling Expenses Breakdown A&P comparison
A&P as % of Sales 16.0% Yili Selling Expenses Breakdown
Yili, 13.6% Yili Mengniu 14.0% Rmb mn
12.0% 8,000 7,276 7,000 10.0% Mengniu, 8.9% 6,000
8.0% 5,000 4,085 4,000 6.0% 3,139 2,994 3,000 2,183 2,310 4.0% Want Want, 3.6% 2,000 Bright, 3.6% 806 789 2.0% 1,000 233 427 0 0.0% Salary Advertising Transportation Rental Others 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data
Exhibit 33: Yili sponsored TV programs have had higher Exhibit 34: Yili’s higher ANP spending has led to higher ratings than Mengniu’s sales growth vs Mengniu TV program sponsorship Yili/Mengniu A&P ratio vs Abs. sales increase
A&P expenses on TV program sponsorship A&P as % of Sales vs Abs. Sales increase Rmb mn Rmb mn Rating pts. 16% 10,000 Mengniu Yili Mengniu ratings (RHS) Yili ratings (RHS) Yili Abs Sales Increase Mengniu Abs. Sales Increase Yili Mengniu 1,400 4 3.5 1275 14% Yili, 13.7% 3.3 8,000 1,200 3.5
12% 976 3 1,000 6,000
2.5 10% Mengniu, 8.9% 800 2.0 4,000 2 1.6 610 600 8% 1.3 1.5 430 2,000 390 400 6% 1
0 200 150 0.5 4%
0 0 2% -2,000 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: tvtv.hk Source: Company data, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 19 August 13, 2016 China: Consumer Staples
Exhibit 35: Yili sponsored TV shows are some of the most popular ones in China Yili, Mengniu and Bright Dairy sponsor list
2015 TV Sponsorship Company 2015 TV Shows Dates on Air Brand Expense (rmb mn) Avg. Ratings Mengniu 花儿与少年（ Flower and Teenager) April - July 2015 ZhenGuoLi 60 1.25 蒙面歌王 (Hidden Singer) July - Sep 2015 Just Yogurt N/A 1.10 偶像来了（ Here Comes Idol) Aug- Oct 2015 Just Yogurt 400 1.81 十二道鋒味 (Nicolas Tse Show) Aug- Oct 2015 Mengniu N/A 1.00 全员加速中（ Full Speed) Nov 2015 - Present Just Yogurt 150 1.13 Mengniu Total 610 1.26 Yili 最强大脑 2 (Largest Brain 2) Jan - March 2015 Satine 250 4.17 奔跑吧兄弟 2 (Running Man 2) April - July 2015 Ambrosial 216 4.76 爸爸去那兒 3 (Dad, where to? 3) July - Oct 2015 QQ Star 500 2.30 奇葩说 2 (QiPa Shuo 2) June - Present GuLiDuo 10 2.1 Yili Total 976 3.33
2016 TV Sponsorship Company 2016 TV Shows Dates on Air Brand Expense (rmb mn) Avg. Ratings Mengniu 2016超级女声 (Super Voice) March - Present SuanSuanRu 150 N/A 全员加速中 2（Full Speed 2) April - Present Just Yogurt 200 1.16 我是模王 (I am MoWang) Apr-16 Yoyi C 80 N/A 迪士尼神奇之旅 (Disney Land) May-16 Future Star Mengniu Total 430 1.16 Yili 我是歌手 4 (I am Singer 4) Jan - April 2016 Satine 600 1.96 奔跑吧兄弟 4 (Running Man 4) April - July 2016 Yili 500 2.20 挑战者联盟２ (Challenger's Leauge 2) Summer 2016 ChangYi 里约奥运会《中国骄傲》 (Rio Olympics)Summer 2016 Yili 175 N/A Yili Total 1,275 2.08 Bright Dairy 极限挑战 2 (Extreme Challenge) April-June 2016 Momchilovtsi N/A N/A
Source: tvtv.hk
#3: Distribution: Yili has flat distribution network and better control of the retail end
Both Yili and Mengniu have national production facilities and distribution networks, so they can roll out the new products more quickly than the regional players.
By comparison, Yili employs a lot more sales people than Mengniu (Exhibit 36, 30% more) as it has a flat one-tier distribution network. Its sales person contacts their tier 1 distributor and then the distributor directly reaches out to the retail end. They have 8K plus distributors, whereas Mengniu and other peers have less than 5K. Under this network, Yili will be able to more efficiently adapt to the changes at the retail end and get up-to-date information from consumers.
Goldman Sachs Global Investment Research 20 August 13, 2016 China: Consumer Staples
Exhibit 36: Yili is more directly involved in each POS, vs Exhibit 37: Want Want still has limited exposure in Mengniu’s distributor driven model modern trade channel vs. other large staples companies Yili vs Mengniu sales employees (2015) Sales by channels (2015)
# of Employees Total employees Sales employees Traditional channel Modern trade Online and others 70,000 100% 57,971 90% 60,000 80% 50,000 70% 39,683 60% 40,000 50% 95% 30,000 40% 30% 20,000 15,604 50% 55% 11,905 20% 45% 45% 10,000 5,372 10% 1,834 0% 0 WW Mengniu Yili Tingyi UPC Yili Mengniu Bright Dairy
Source: Company data Source: Company data, Goldman Sachs Global Investment Research.
With its wider distribution system, Yili has greater presence in lower tier cities and traditional channels than Mengniu.
Mengniu, due to its relatively higher exposure in tier 1 and 2 cities, will face more intense competition vs. upstream dairy players or import player on the premium UHT milk side. This is because smaller, newer players usually have fewer resources to distribute products into low tier city and therefore focus on premium end products. In past 12 months, Mengniu has also started to reform its distribution network by increasing the portion of direct selling and simplifying its layers of distributors. We think this will take time to have a material impact on the company.
Want Want has been in China since the early 1990s and hence is well penetrated into traditional channels. However, it is having difficulty penetrating into new channels such as supermarkets or convenience stores in the past decade. More than 90% of its sales still come through traditional channels as they want to protect their distributor margin. However this makes Want Want less effective in launching new products or catering to young consumers, in our view.
Exhibit 38: Yili has greater premium milk market share in Exhibit 39: Mengniu has a greater share in offline tier 3 and below cities channels than Yili Market share in different tier cities Market share by channels
(%) Yili Mengniu (%) Yili Mengniu 100 100 90 90 80 80 70 70 50.6 60 54.8 60 47.8 47.9 42.3 57.9 50.1 50 39.9 50 37.4 40 40 30 30 20 39.7 32.7 35.2 33.2 29.9 20 36.2 38.2 10 28.8 31.7 10 0 0 Hypermarket Supermarket Small Convenience Brick and Tier 1 Tier 2 Tier 3 Tier 4 and below supermarket store Mortar
Source: Modern Dairy. Source: Modern Dairy.
Goldman Sachs Global Investment Research 21 August 13, 2016 China: Consumer Staples
Exhibit 40: Greater competition in the premium UHT market – Yili and upstream players are catching up Premium UHT milk sales (ex-factory level)
Yili JinDian Mengniu Milk Deluxe Modern Dairy Shengmu Rmb mn
18,000
16,000 1,656 Shengmu:134% cagr 1,502 14,000 Modern 739 Dairy:116% cagr 832 12,000 303 Mengniu: 11% 10,000 321 8,136 cagr 7,533 8,000
6,000 6,550 5,706 4,000 4,877 Yili: 37% cagr
2,000 3,048
0 2013 2014 2015
Source: Company data, Goldman Sachs Global Investment Research.
#4: Management team: Yili more prudent and incentivized management. team
Both Yili and Mengniu have explicit mgmt. incentive scheme through either share awards or share options. For Yili, as much as 30% of annual incremental earnings growth can be allocated to the mgmt. team. This compares to Want Want and Bright which have share incentive plan in place but none has been awarded since it began.
Yili mgmt. has been with the company for more than 10 years and has deep experience in the industry. The team has focused on both growth and returns, and subsequently in our view Yili has proven prudent in its capex expansion. It has also focused more on organic expansion rather than M&A, which could potentially dilute company value.
Exhibit 41: Yili provides a comprehensive performance linked incentive scheme Incentive schemes and remuneration comparison
Company Yili Mengniu Want Want Bright Share Award Scheme Share Award Scheme Discretionary Bonus Share Award Scheme - 30% of incremental Adopted in 2013 Type of Incentives increase in net income Share Option Scheme - Share Option Scheme Share Option Scheme no options have been ended in 2013 granted since adoption Total Remuneration (2015) 5,148 3,439 3,828 1,325
Sales (2015) RMB mn 59,863 49,027 23,407 20,385
Remuneration as % of Sales (2015) 8.6% 7.0% 16.4% 6.5%
2015 Average Employees 59,178 38,100 52,000 4,459
Average Monthly Remuneration RMB'000 6.5 7.2 5.4 22.9
Source: Company data
Goldman Sachs Global Investment Research 22 August 13, 2016 China: Consumer Staples
Exhibit 42: Yili has one of the highest free floats of all China dairy companies, while mgmt. still holds nearly 8% Share ownership of each company
Dairy Companies Ownership Structure
Yili Mengniu Sun Yi Hohhot China Security Ping*(CEO), Investment, Fund, 3.0% 0.4% 7. 5 % China Securities Finance, 4.3%Founder COFCO Dairy Gang Pan, 3.9% Invst. (JV of Other COFCO, Arla, Executives, Danone), 31.5% 4.1% Public Investors, 68.1%
Public Investors, 77.2% Want Want Bright Dairy
Public Public Investors, 40.2% Tsai Eng Meng Investors, (Chairman), 43.6% Bright Food 49.8% Group, 54.4%
IWATSUKA CONFECTIONE JPMORGAN , RY , 5.0% 5.0%
Source: Bloomberg
Compared with China and Global dairy companies, Yili has the highest CROCI (26%) due to its high asset turnover. It deploys a light asset model due to years of prudence on capex and working capital. Over 2011-2015, Yili’s CROCI grew from 15% to 26% on the back of 70% increase in Gross Cash Invested (GCI). Most of the incremental capital growth has come from PPE investment or organic capacity expansion. We expect Yili to retain its high CROCI of c.27% over 2016-18E.
This compares to Mengniu’s 3X higher GCI, which mainly come from higher intangibles and working capital, as the company made a series of acquisitions in last 3 years and also saw inventory levels go up due to milk oversupply.
Exhibit 43: Yili has highest CROCI among of peers, mainly driven by higher asset turnover 2015 CROCI breakdown comparison
2015 CROCI Breakdown Comparison
CROCI Asset Turnover EBITDA Margin Cash Conversion
30% 4.0x
26% 3.5x 25% 22%
15% 3.0x 0.9x 0.7x 20% 8% 2.5x 11.2% 8% 1.0x
15% 28.7% 2.0x 6% 7.4% 0.8x 0.8x 1.5x 10% 2.3x 8.3% 0.6x 9.8% 1.0x 2.0x 1.1x 5% 17.2% 1.2x 1.0x 0.5x 0.6x
0% 0.0x Danone Meiji Yili Mengniu Want Want Bright
Source: Company data, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 23 August 13, 2016 China: Consumer Staples
Exhibit 44: Yili’s increase in GCI driven by Fixed Asset Exhibit 45: Mengniu’s acquisition in last few years investments, leading to higher CROCI increased its intangibles, but brought down its CROCI Yili CROCI/GCI breakdown Mengniu CROCI/GCI breakdown
Yili (Historical) Gross Cash Invested & Cash Return on Cash Invested Mengniu (Historical) Gross Cash Invested & Cash Return on Growth Cash Invested Growth 30,000 30% 45,000 25% 10,740 25,805 6,015 41,342 372 0 526 40,000 CROCI, 20.7% 25,000 25% * Due to CROCI, 26.2% 4,209 20% 35,000 negative Net Operating WC 6,975 20,000 20% 30,000 15% CROCI, 14.9% 25,000 10,595 15,000 15% 20,000 Rmb mn Rmb Rmb mn Rmb CROCI, 8.0% 10% 15,000 13,548 10,000 10%
10,000 14,168 5%
5,000 5% 5,000
0 0% 0 0% 2011 GCI Fixed Gross Net Others 2015 GCI 2011 Fixed Assets Gross Net Others 2015 GCI Assets Intangibles Operating Intangibles Operating WC WC
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Dairy 2020: Yili to gain market share in key product categories For next 3 years, as the dairy market enters slow growth stage, we expect Yili will continue to gain market share on the back of its better execution.
We expect Yili to maintain its dominant market share in UHT milk and flavored milk, and shrink the gap vs. Mengniu in the yogurt segment. We think Yili’s UHT yogurt will take No.1 position in the market due to its wide-spread branding and strong distribution, and that Yili’s low temp yogurt products can catch up with Mengniu from better logistics and further penetration. In the IMF segment, with the further influx of overseas IMF, we expect foreign brands to continue taking share from domestic brands.
We expect Mengniu to face intense competition in the UHT milk segment; especially the premium UHT as more upstream and import companies compete with them in the tier 1 and 2 cities.
Exhibit 46: We expect Yili to maintain market share and Exhibit 47: We expect Yili to gain market share Mengniu to further lose in UHT milk market Market share – Yogurt Market share – UHT milk
Yili UHT Mengniu UHT Yili Mengniu Bright Dairy 35 39.0 28.7 28.4 28.3 28.0 36.6 36.4 36.6 30 37.0 36.2 23.4 34.6 34.9 25 21.9 26.9 35.0 21.2 26.0 33.6 19.3 24.2 20 33.0 34.5 34.3 17.9 33.9 15.9 13.0 31.0 15 11.3 11.4 14.2 13.7 12.6 31.2 11.5 10.8 29.0 30.3 10 29.3 29.0 27.0 5
25.0 0 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 24 August 13, 2016 China: Consumer Staples
Exhibit 48: We expect Yili and Mengniu to gain market Exhibit 49: We expect Yili to maintain its leading share, but Yili to gain more domestic position Infant Milk Formula market Market share – Flavored milk Market share – IMF
Yili Mengniu Want Want Yili Mengniu
40 7.0 6.3 36.1 6.0 6.0 6.0 5.6 34.0 6.0 5.4 5.3 5.3 35 32.3 5.3 31.6 4.7 4.8 5.0 4.5 30 28.1 4.1 25.4 26.1 4.0 25 22.5 21.2 21.3 3.0 20.3 20.0 20.4 20.8 20 2.0
15 1.0 0.4
0.0 10 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Earnings forecasts: Yili to deliver 13% EPS 3-year CAGR while Want Want will be in negative territory
We expect Yili to deliver the fastest 7% sales 3yr CAGR 2015-2018E, driven by stronger Yogurt and UHT premium product growth. We expect Yili to take over Bright Dairy to have the No.1 UHT yogurt position in 2016 and narrow the gap between Mengniu for premium UHT and yogurt products.
Margin wise, with the lower upstream raw milk price, we expect most downstream companies to have lower raw milk procurement cost vs. 2015 (Exhibit 52). Mengniu will benefit less vs. Yili and Bright due to its tighter connections with upstream companies (China Modern Dairy etc.) so they need to protect their raw milk suppliers’ interest to some extent. We expect Yili to deliver a strong 330bps GPM improvement from a better product mix and further benefit from lower raw milk prices.
With more promotions being rolled out, there was high competitive intensity starting from 2H15 as companies aimed to clear up their excessive inventory. YTD, however, our channel checks show that for UHT milk, especially premium milk, the discount has been reduced (about 5% now vs. 20% in 3Q15). This suggests market inventory levels are not getting worse in 2016. For UHT yogurt categories, there have been significant discounts, of up to 35% this year to its original price.
Net net, we expect Yili to deliver the strongest 12% CAGR 2015-2020E, vs. Mengniu’s 6% and Want Want’s 4% decline.
Goldman Sachs Global Investment Research 25 August 13, 2016 China: Consumer Staples
Exhibit 50: UHT milk discounts have gradually reduced Exhibit 51: UHT yogurt saw more discounts from 3Q15 to from 3Q15 to Aug 2016 Aug 2016 Premium UHT milk discount to standard price UHT yogurt discount
UHT Milk Discount from Original price UHT Yoghurt Discount from Original price
Yili Satine Mengniu Milk Deluxe Yili, Ambrosial Bright, Momchilovtsi Mengniu, Just Milk 0% 0% 0% -2% 0%
-2% -5% -8% -6% -9% -5% -7% Mengniu: Buy -10% up to Rmb66, -9% -13% -9% get Rmb15 -10% off -12% -15% -15% -19% -19% -15% -20% -15% -16% -20% -20% -25% -29% -20% -22% -31% -24% Discount from original price -30%
Discount from original price original from Discount -33% -25% Yili: Buy 1 get -35% 2nd box half -34% -35% price -36% -30% -40% 3Q15 4Q15 May-16 Jun-16 Jul-16 Aug-16 3Q15 4Q15 May-16 Jun-16 Jul-16 Aug-16
Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.
Exhibit 52: We expect downstream companies to benefit Exhibit 53: We forecast Yili’s margins to further benefit from lower raw milk cost for 2016E vs 2015 from better product mix and low raw milk prices Raw milk procurement cost (RMB/kg) Company OPM
4.9 Company OPM 25.0% 4.7
20.0% 4.5 Want Want, 17.5%
4.3 Yili 15.0% Mengniu 4.1 Yili, 10.7% Bright Dairy 10.0% 3.9
Mengniu , 5.1% 3.7 5.0%
Bright, 4.3% 3.5 2014 1H15 2H15 1H16 2H16E 0.0% 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 26 August 13, 2016 China: Consumer Staples
Exhibit 54: We expect Yili to almost triple its sales by 2018E from 2010, but Mengniu only to double Dairy 2010-18E Financial Comps
Company 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 15-18E CAGR Yili 29,665 37,451 41,991 47,779 54,436 60,360 63,492 68,117 72,933 6.5% Mengniu 30,265 37,388 36,079 43,357 50,049 49,027 51,586 54,589 57,582 5.5% Sales (Rmb mn) Bright 9,572 11,789 13,775 16,291 20,385 19,373 19,885 20,606 21,464 3.5% WW 15,187 19,042 21,190 23,470 23,260 21,538 20,859 20,640 20,279 -2.0% Yili 22.0% 26.2% 12.1% 13.8% 13.9% 10.9% 5.2% 7.3% 7.1% Mengniu 17.7% 23.5% -3.5% 20.2% 15.4% -2.0% 5.2% 5.8% 5.5% Sales yoy growth Bright 20.5% 23.2% 16.8% 18.3% 25.1% -5.0% 2.6% 3.6% 4.2% WW 29.9% 25.4% 11.3% 10.8% -0.9% -7.4% -3.2% -1.0% -1.7% Yili 30.0% 28.7% 29.1% 28.2% 32.8% 36.0% 38.2% 38.9% 39.3% Mengniu 25.7% 25.7% 25.0% 27.0% 30.8% 31.4% 32.0% 31.8% 31.8% GPM Bright 34.0% 32.9% 34.6% 34.2% 34.2% 35.6% 36.8% 36.9% 37.0% WW 37.6% 34.8% 39.5% 41.5% 40.2% 43.9% 45.7% 44.5% 43.7% Yili 1.9% 3.9% 3.9% 5.3% 8.7% 8.5% 9.2% 9.8% 10.3% Mengniu 5.3% 5.1% 4.6% 4.9% 6.2% 5.2% 5.5% 5.2% 5.1% OPM Bright 2.6% 2.4% 3.7% 4.2% 4.5% 4.3% 4.2% 4.3% 4.3% WW 17.7% 15.6% 19.8% 21.1% 18.6% 18.8% 19.5% 18.1% 17.5% Yili 20% 133% -5% 86% 30% 12% 16% 14% 12% 13.8% Mengniu 14% 13% -19% 19% 31% 4% 1% 5% 7% 4.4% Earnings Growth Bright 43% 32% 32% 12% 59% -34% 9% 7% 7% 7.4% WW 14% 12% 29% 21% -9% -11% -3% -6% -3% -4.0% Yili 14.8% 19.1% 17.0% 22.8% 26.4% 26.2% 27.1% 27.3% 27.5% Mengniu 23.4% 20.7% 15.2% 12.6% 10.9% 8.0% 9.1% 8.6% 8.2% CROCI Bright 12.1% 11.9% 11.5% 12.4% 13.5% 15.2% 12.0% 11.4% 10.6% WW 29.9% 29.9% 30.2% 29.7% 22.8% 22.1% 19.6% 16.7% 14.6%
Source: Company data, Goldman Sachs Global Investment Research
Exhibit 55: We forecast Yili to have highest EPS growth Exhibit 56: We forecast Yili to have highest EPS growth till 2020E out to 2020E Company EPS 2014-20E CAGR (RMB term) Company CROCI
Company EPS growth YoY 40.0% CROCI 35% 30.0% 30% Yili, 27.5% 20.0% Yili, 13% CAGR 25% 10.0% Mengniu, 6% 20% Want Want, 0.0% Bright, 7% 14.6% 15% -10.0% Want Want, -4% Bright, 10.6% 10% -20.0% 5% Mengniu, -30.0% 8.2% 0% -40.0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
GS vs. Consensus: Yili above on margin, Want Want below on lower topline
For Yili, we are about 2-3% above Bloomberg consensus due to our higher margin assumptions. Given the slower industry growth outlook, we see Yili delivering 7% sales CAGR for next 3 years, or 2% slower than consensus. However, we see the strong product mix increase and continued weak raw milk cost will drive Yili’s GPM and OPM 330bps and 170bps higher over 2015-2018E. Net net we look for 13% EPS 3-year CAGR.
Goldman Sachs Global Investment Research 27 August 13, 2016 China: Consumer Staples
For Want Want we are 8-12% below consensus on 2017-18E sales assumptions. This is driven by our more cautious view on Want Want’s dairy segment growth. With slower growth and negative operating leverage, we expect Want Want to post 4% EPS decline CAGR over 3years, or about 10-25% below 2016-18E consensus.
Exhibit 57: We expect Yili to post 6%/13% yoy growth for Sales/NPAT for 2Q16 Interim forecasts
Quarterly Results Ticker Company name 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E Sales 14,992.2 15,158.9 15,728.4 14,480.4 15,326.1 16,092.4 yoy 14% 6% 8% 17% 2% 6% 600887.SS Yili (Rmb mn) NPAT 1,303 1,359 975 994 1,554 1,536 yoy 20% 12% -23% 70% 19% 13% Sales 5,075.0 5,152.2 4,892.1 4,253.9 4,994.2 5,255.3 yoy 10% -2% -10% -16% -2% 2% 600597.SS Bright Dairy (Rmb mn) NPAT 98 103 45 172 118 105 yoy 39% -26% -77% 6% 21% 2%
Semi- Annual Results Ticker Company name 1H14 2H14 1H15 2H15 1H16E Sales 25,836 24,213 25,564 23,462 26,533 yoy 25% 7% -1% -3% 4% 2319.HK Mengniu (Rmb mn) NPAT 961 1,211 1,310 946 1,301 yoy 24% 37% 36% -22% -1% Sales 1,853 1,923 1,817 1,610 1,644 yoy 6% -7% -2% -16% -10% 0151.HK Want Want (USD mn) NPAT 318 302 286 257 263 yoy 4% -20% -10% -15% -8% Sales 2,189.0 2,542.6 1,962.9 2,855.7 3,120.9 yoy 6% 2% -10% 12% 59% 1112.HK Biostime (Rmb mn) NPAT 316.1 507.2 205.0 25.9 400.2 yoy -35% -8% -35% -95% 95% Sales 2,584.5 2,442.2 2,437.3 2,389.0 2,203.1 yoy 86% 28% -6% -2% -10% 1117.HK Modern Dairy (Rmb mn) NPAT 604.7 447.8 663.2 102.0 -5.0 yoy 179% 31% 10% -77% nmf
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 58: We are 2-3% above consensus on Yili due to higher margin assumptions GSe vs. Consensus
Sales EPS GS vs. Bloomberg cons GS vs. Bloomberg cons Company name FY1 FY1 FY2 FY3 FY1 FY2 FY3 600887.SS Yili Industrial (1%) (3%) (6%) 3% 2% 0% 1112.HK Biostime International Holdings 1% 5% 4% 3% 5% 6% 600597.SS Bright Dairy (5%) (7%) (5%) (5%) (13%) (14%) 2319.HK Mengniu Dairy 1% (0%) (2%) (7%) (13%) (15%) 0151.HK Want Want China Holdings (4%) (8%) (12%) (10%) (20%) (25%) 1117.HK China Modern Dairy Holdings (11%) (8%) (2%) nmf (4%) 1%
Source: Bloomberg, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 28 August 13, 2016 China: Consumer Staples
Valuation: Yili our top pick, Want Want overvalued
We use an EV/GCI vs. CROCI/WACC (Director’s Cut) framework to value the China dairy sector names. In our view, this methodology is appropriate because:
Investors tend to compare the dairy stocks against each other.
As the dairy industry growth slows, relative returns have grown in importance;
Dairy stocks historically tend to have high correlation under our framework (R squared of 0.9).
We compare the five downstream companies (Yili, Mengniu, Bright Dairy, Want Want and Biostime) under the framework, and value Modern dairy using DCF as it is an upstream business and more capital intensive.
We make these key assumptions:
1) WACC: 9%/9.5% cost of equity for A/H share (per GS strategy team), 3.5%-7.5% cost of debt according to each company’s different profile and recent debt issuance. Based on this, our WACC ranges from 7%-8.5% for the six companies.
2) Premium on consistently 1st quartile CROCI company: we assign 10% premium to Yili. Historically Yili has traded at a discount to industry peers, but in the past four years the discount has shrunk to about 5% as of 2016 from about 50% in 2013 (each year shrinking by an avg. 15%). Given Yili has consistently recorded 1st quartile and growing CROCI in the past and we expect it relative valuation to improve out to 2018, we see by 2017 the company should trade at 10% premium to peers (improve another 15% from 2016’s 5% discount).
Under our 2017 Director’s Cut, Yili looks undervalued whereas Want Want is trading above the industry line (overvalued). On our estimates, Yili should see its CROCI increase over 2015-18 but Want Want’s will decline sharply.
Exhibit 59: We forecast Yili to continue posting top quartile CROCI performance vs our coverage CROCI quartiling
CROCI CROCI CROCI CROCI CROCI CROCI Avg 2016E- Ticker Company name 2013 2014 2015 2016E 2017E 2018E 2018E 600887.SS Inner Mongolia Yili 22.8% 26.4% 26.2% 27.1% 27.3% 27.5% 27.3% 0151.HK Want Want China Holdings 29.7% 22.8% 22.1% 19.6% 16.7% 14.6% 17.0% 1112.HK Biostime International Holdings Limited 28.1% 26.0% 9.0% 14.5% 14.5% 14.8% 14.6% 0288.HK WH Group Ltd. 12.4% 14.6% 13.9% 14.1% 14.3% 14.1% 14.2% 600597.SS Bright Dairy 12.4% 13.5% 15.2% 12.0% 11.4% 10.6% 11.3% 0220.HK Uni-President China Holdings Ltd. 8.1% 7.9% 9.2% 10.9% 11.2% 11.4% 11.1% 0322.HK Tingyi (Cayman Islands) Holdings 12.9% 9.9% 8.2% 8.0% 9.3% 9.6% 9.0% 2319.HK Mengniu Dairy 12.6% 10.9% 8.0% 9.1% 8.6% 8.2% 8.6% 1117.HK China Modern Dairy Holdings 9.0% 17.1% 12.0% 8.7% 8.1% 7.4% 8.1% 0168.HK Tsingtao Brewery (H) 9.4% 9.9% 7.0% 8.1% 7.9% 8.0% 8.0%
Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 29 August 13, 2016 China: Consumer Staples
Exhibit 60: Yili looks undervalued on our 2017E Director’s Exhibit 61: Want Want’s declining CROCI and high Cut plot EV/GCI suggest it is overvalued 2017E Director’s Cut valuation 2015-17E Director’s Cut valuation
Director's Cut 2017 Director's Cut 2017 vs 2015 2017 Linear (2017) 2017 2015 Linear (2017) 3.5 y = 0.90x 4.5 R² = 0.90 WW, 15 4.0 3.0 Yili y = 0.90x Yili, 15 3.5 2.5 3.0 Yili, 17 Want Want 2.0 2.5 Biostime WW, 17 Bright, 15
EV/GCI Bright 2.0
1.5 EV/GCI Biostime, 17 1.5 Mengniu, 15 1.0 Mengniu Bright, 17 1.0 0.5 Mengniu, 17 0.5
0.0 0.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 CROCI/WACC CROCI/WACC
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
We derive our 12-month target prices using 2017E EV/GCI vs CROCI/WACC. Yili offers the highest upside and Want Want’s TP implies downside to the current stock price.
Our target prices imply roughly 21X 2017E PE for Yili and 15X PE for Want Want.
Exhibit 62: Our 2017E EV/GCI vs CROCI/WACC valuation yields Yili as our top Buy pick and Want Want as our Sell 2017E EV/GCI vs CROCI/WACC
Company Name Yili Mengniu Bright Want Want Biostime Ticker 600887.SS 2319.HK 600597.SS 0151.HK 1112.HK Pricing/Reporting Currency Rmb/Rmb HKD/RMB Rmb/Rmb HKD/USD HKD/RMB CROCI (2017E) 27.1% 8.6% 11.4% 16.7% 14.5% WACC 7% 7% 7% 8% 7% CROCI/WACC (X) 3.7x 1.2x 1.6x 2.0x 2.0x Sector Val-ratio 0.9x 0.9x 0.9x 0.9x 0.9x Valuation premium/discount 10% 0% 0% 0% 0% Adjusted Val-ratio (Y) 1.0x 0.9x 0.9x 0.9x 0.9x Target EV/GCI (=X*Y) 3.7x 1.1x 1.5x 1.8x 1.8x GCI (pricing currency mn, 2017E) 32,902 53,887 11,887 28,121 12,416 Target EV (pricing currency mn, 2017E) 122,044 57,290 17,419 49,985 22,061 Less: Net debt (pricing currency mn) 8,328 (1,042) (267) 3,461 (5,430) Less: MI (pricing curr mn 2017E) (218) (5,506) (911) (52) (687) Implied equity value (Pricing Currency) 130,155 50,742 16,241 53,394 15,944 Number of shares (mn) 6,065 3,921 1,231 12,654 614 Director's cut TP (Pricing Currency) 21.5 12.9 13.2 4.2 SOTP Current price 18.1 13.0 14.7 4.8 24.2 Potential upside / (downside) 19% -1% -10% -13% Rating Buy Neutral Neutral Sell Neutral TP implied 2017E P/E 21.4 18.1 32.1 14.7 17.3 Current 2017E P/E 18.0 18.3 35.6 16.9 15.5
Source: Datastream, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 30 August 13, 2016 China: Consumer Staples
Crosscheck with PE framework suggests similar result
We also crosscheck the dairy companies using our PE framework. We benchmark our PE multiple against global staples companies. Under this method, we look at the average P/E multiple during normalized EPS growth and cash return periods in DM countries and position the China companies according to a similar growth and return profile.
We look at the global top 50 staples companies in size and their median avg. EPS growth, CROCI and PE multiple over 2010-2015. Given the China staples sector growth has also slowed to avg. single digit levels and companies have now become more prudent in expansion, we think it is appropriate to compare China with DM countries. We divide the global peers into nine different sets based on EPS growth (2%, 10% thresholds) and CROCI (10%, 15% thresholds), we then apply the avg. PE for each set as the benchmark for China staples companies.
Yili also has 1st quartile EPS growth among the China staples companies while Want Want is at bottom due to its EPS decline (4% CAGR in Rmb terms).
Under this PE framework, with 13% EPS CAGR and 27% CROCI, we apply a 22X 2017E PE to Yili, which gives a valuation (Rmb22.2) similar to our 12-month Director’s Cut-based target price of Rmb21.5. For Want Want we apply a PE of 16X, which also gives a result similar to Director’s Cut.
The main outlier on PE is Bright Dairy, which is currently trading at 33X 2017E PE, or about a 60% premium to Yili. We believe this because it is more a small to mid-cap A share company, which consistently trade at 40% premium vs. A-share large cap companies and H-share consumer companies. Also Bright Dairy has high financing expenses due to its upstream exposure and hence a lower net margin. We think a returns based valuation is therefore more appropriate for Bright, especially relative to its downstream milk-staples peers.
Exhibit 63: Yili is in the 1st quartile of EPS growth within Exhibit 64: P/E implied valuation yields similar results to our coverage Director’s Cut EPS growth quartiling PE framework based on PE and CROCI
2015-18E EPS (2016E-18E cagr) 2017E PE Ticker Company name EPS CAGR 0220.HK Uni-President China Holdings Ltd. 16% 20%
600887.SS Inner Mongolia Yili 13% UPC, 21X Yili, 22X 0288.HK WH Group Ltd. 10% 1112.HK Biostime 7% 600597.SS Bright Dairy 7% 10% Biostime, 20X 2319.HK Mengniu Dairy 4% Mengniu 18X 0168.HK Tsingtao Brewery (H) 2% Bright Dairy 1117.HK China Modern Dairy Holdings 0% 2% 0322.HK Tingyi (Cayman Islands) Holdings -1% Want Want, 0151.HK Want Want China Holdings -4% Tsingtao, 15X Tingyi, 16X CROCI (2018E) 1st quartile -10% 2nd quartile 5% 10% 15% 20+% 3rd quartile 4th quartile *Want Want EPS is RMB basis.
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 31 August 13, 2016 China: Consumer Staples
Exhibit 65: Yili, Mengniu and WW have valuations under PE framework in line with our Director’s Cut derived target prices PE implied value per share
Implied Target 2017 Valuation Company Crosscheck methology Currency 2017 PE EPS per share Yili Target PE (global peers) RMB 22 1.01 22.2 Mengniu Target PE (global peers) RMB 18 0.61 12.6 Want Want Target PE (global peers) USD 16 0.037 4.6 Bright Dairy Target PE (global peers) RMB 20 0.41 8.2
Source: Goldman Sachs Global Investment Research.
A and H share premium is not significant for staples sector
For the China staples sector, there’s is no significant difference in trading multiple between A and H share listed companies. H shares have since 2007 traded at an average of 23X fwd PE (the data set includes large cap staples companies under our coverage), and A share large cap staples at 23.5X. Therefore, we see there is no need to assign different premium/discount for A and H share companies, and value them under the same DC framework.
Exhibit 66: H shares staples median PE is trading near Exhibit 67: A shares large cap staples trade near 24X 20X forward PE, while small to mid-caps are near 31X H share staples median PE A share staples median PE
Staples sector average P/E -1STDEV Historical Avg. +1STDEV A- Shares Staples Median PE 39.9 40 Large cap median PE Small to Mid cap median PE 60 35 Large cap avg. PE: 23.5X 50 Small to mid cap avg PE: 31X 30 45.8
41.9 40 40.2 25 Historical avg. 23.1X
33.4 33.0 33.2 20.2 28.930.9 28.6 31.0 31.3 20 30 26.0 23.5 22.9 25.5 24.6 17.7 21.3 18.7 15 20 16.2 16.8 13.9 13.8
10 10
5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15
Source: Bloomberg Source: Wind
Industry risks Industry supply-demand: we expect the global S/D gradually balancing over 2017E. However, a faster/slower rebalancing in the industry and will drive higher/lower milk prices globally.
Competition: we have seen new players (importers and upstream companies etc.) entering the market over the past year. Higher than expected competition would likely drive greater promotion activities in the market and impose pressure on company margins.
Goldman Sachs Global Investment Research 32 August 13, 2016 China: Consumer Staples
Yili (Buy): A long-term stand-out leader; fastest sales/EPS growth
Source of opportunity Investment Profile We believe Yili offers the most attractive risk-reward among China dairy Low High sector stocks. We expect the company will extend its market leadership Growth Growth Returns * Returns * with strong new product offerings, effective branding and better control Multiple Multiple of retail stores. With the dairy industry entering a slower growth stage, Volatility Volatility we expect Yili will continue to gain market share across key product Percentile 20th 40th 60th 80th 100th categories and deliver 7% sales 3yr CAGR. Also, with the continued Yili Industrial (600887.SS) premiumization and Yili’s star products to account for a higher portion Asia Pacific Consumer Peer Group Average * Returns = Return on Capital For a complete description of the investment of sales, we expect a higher-than-peer 13% EPS 2015-18E CAGR, and profile measures please refer to the disclosure section of this document. expect it to improve its CROCI by another 50bps to 27.5% by 2018. Our
12m target price is Rmb21.5, implying 18% upside. We initiate coverage Key data Current with a Buy rating. Price (Rmb) 18.16 12 month price target (Rmb) 21.50 Market cap (Rmb mn / US$ mn) 110,136.8 / 16,579.6 Catalyst Foreign ownership (%) -- The stock has rallied c.15% in the past 3 months, in our view on 12/15 12/16E 12/17E 12/18E expectation of strong margin improvement and broader A-share staples EPS (Rmb) 0.780.891.011.13 EPS growth (%) 11.4 13.9 13.2 12.0 multiple expansions. We see further upside from here on: EPS (diluted) (Rmb) 0.78 0.89 1.01 1.13 EPS (basic pre-ex) (Rmb) 0.76 0.89 1.01 1.13 1. Yili’s strong margin expansion is underappreciated by the market: P/E (X) 21.0 20.3 18.0 16.0 P/B (X) 5.0 5.0 4.5 4.0 we expect Yili to see 120bps OPM expansion in 2015-17E due to EV/EBITDA (X) 13.7 13.3 11.5 10.0 Dividend yield (%) 2.7 2.9 3.3 3.7 continued product mix improvement. We see Yili’s high-end products ROE (%) 24.6 25.7 26.1 26.3 accounting for 57% of total sales by 2018 vs. 47% in 2015, mostly driven CROCI (%) 26.2 27.1 27.3 27.5 by high growth in the premium UHT milk and Yogurt segments.
Additionally, the company’s flexible raw milk procurement policy makes it a great beneficiary in the upstream down cycle. Price performance chart 19 4,200
2. Strong 2Q16 result: we expect Yili to deliver 13% 2Q16 or 16% 1H16 18 4,000 EPS growth, due to further GPM expansion from lower raw milk price 17 3,800 (down by high single digit yoy) and better product mix. We think its UHT 16 3,600 yogurt product is set to deliver strong sales and surpass Bright Dairy to 15 3,400 14 3,200 be the best-selling brand in 2Q16. 13 3,000
12 2,800 Valuation Aug-15 Nov-15 Feb-16 May-16 Yili Industrial (L) Shanghai - Shenzhen 300 (R) Our target price is based on 2017E EV/GCI vs. CROCI/WACC. We assign a 10% premium to the sector cash return ratio of 0.9x to Yili on the basis of its sustainable first quartile CROCI (in line with the average premium Share price performance (%) 3 month 6 month 12 month that top-performing CROCI companies have enjoyed). Our target price Absolute 17.7 35.9 1.4 Rel. to Shanghai - Shenzhen 300 12.2 24.6 27.5 implies 21X 2017E PE. Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/11/2016 close.
Key risks Slower than expected liquid milk sales, weaker margin from higher marketing expenses.
INVESTMENT LIST MEMBERSHIP Asia Pacific Buy list
Coverage View: Neutral
Goldman Sachs Global Investment Research 33 August 13, 2016 China: Consumer Staples
Premium products growth drive strong margin increase
We expect Yili to deliver a strong 170bps OPM increase over 2015-18E due to continued product mix improvement. We see Yogurt products outperforming in the liquid milk segment with double digit growth over next 3 years. This will be driven by rapid growth in UHT yogurt in 2016-17 and sustained high growth of low temp yogurt. We now expect Yili to surpass Bright Dairy to be No.1 UHT yogurt player in 2016 and extend its market share to 36%.
With the rapid growth of star products, we expect Yili’s high-end products will account for 57% of total sales vs. 47% in 2015.
Exhibit 68: We expect Yili’s yogurt sales to grow at high Exhibit 69: Yili has been improving its product mix to double digits till 2018E higher end ones, driving higher margins Yili liquid milk sales growth by type Yili Product Mix
Yili Liquid Milk sales growth yoy Mid to low end products % sales High end products % sales 90% GPM 100% 45.0% 75% 40.0% 70% 80% 35.0% UHT milk 30.0% 50% 49% 60% Milk beverage 25.0% Yogurt 20.0% 30% 40% 22% 15.0% 15% 10% 20% 10.0% 5.0%
-10% 0% 0.0% 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 70: We expect Yili to surpass Bright Dairy to be Exhibit 71: Yili’s advertisement caters to a younger the No.1 UHT yogurt player in 2016 demographic UHT yogurt market share Yili’s ads on UHT yogurt
100% 90% 80% 9% 70% 60% Others 26% 50% 36% Chunzhen 38% 38% Ambrosial 40% 77% 30% Momchilovtsi 20% 44% 32% 28% 26% 10% 0% 2014 2015 2016E 2017E 2018E
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data.
Goldman Sachs Global Investment Research 34 August 13, 2016 China: Consumer Staples
Exhibit 72: Yili has production bases across China Yili production bases distribution
Yili - Bases across China
Dairy Products Production/Sales Chilled Drinks Production/Sales Milk Powder
*Each color represents different sales region.
Source: Company data.
Exhibit 73: Yili mgmt team have been with the company for ~10 years Yili Management Bio
Yili Management/Board Bio Name Position Bio Joined Yili in July 1992
1999 appointed as assistant to CEO
2002 asssumes role as Liquid Milk segment General Manager
Pan Gang Chairman & CEO June 2005 assumes role as Board member and CEO/Chairman of Group at the age of 35
Originates from Inner Mongolia
Other roles: All China Federation of Industry and Commerce Vice President and Party Member
Previous roles include Liquid Milk segment Deputy General Secretary
June 2005 assumes current role as Vice President Chun-hai Liu Vice President of Group
Experienced in agricultral/food/beverage industry within Inner Mongolian region
Previous roles in Yili include GM of Financial dept
March 2007 assumes role as Vice President & Cheng-xia Zhao Vice President & CFO CFO
Experienced in agricultral/food/beverage industry within Inner Mongolian region
Accreditation: Senior Accountant
Li-Ping Hu Vice President & Board Secretary March 2005 assumes current role as General Secretary
Source: Company data.
Goldman Sachs Global Investment Research 35 August 13, 2016 China: Consumer Staples
Financials: 14% EPS 2yr CAGR from further market share gain and GPM expansion
Income Statement Sales: We expect Yili to deliver 7% sales CAGR over 2015-18E, driven by continued market share gain in the liquid milk segment. For 2016, we expect 5.4% sales or 8% organic growth (Yili disposed of the Youran Farming in 1Q16).
Liquid milk: expect 9% sales three-year CAGR driven by the rapid yogurt growth and recovery of UHT milk.
For yogurt, we see company’s UHT yogurt will surpass Bright Dairy to become No.1 selling brand in 2016 and reach close to RMB8bn scale by 2017. Over the longer term, we see low temp yogurt will be the bright spot with above 20% CAGR as consumers shift to functional products.
For UHT milk, we see Satine to continue the strong low teen growth and close its gap with Mengniu’s Milk Deluxe over next 3yrs. With the smaller discount in 2016-17, we expect also sales recovery for other UHT products.
Milk powder: we expect sales to drop by 9% in 2016 due to higher competition and consumer’s shift to online channels.
Margin: we expect Yili’s GPM to further increase by 220bps/70bps in 2016/17E, driven by lower raw milk price and product mix improvement. We see a 4% drop in raw milk price in 2016. Therefore, despite the increase in SG&A expenses (mainly higher A&P spend), we see company will still have 120bps OPM increase over 2015-17E.
Net net, we look for 14%/13%/12% recurring EPS growth for 2016-18E, and 2-3% above consensus for 2016-17E.
Cash Flow Statement Capex: expect stable capex trend over 2016-17E with Rmb3.5-3.6bn/year, as the company does not have an aggressive plant expansion plan in near term.
FCF: with improved profit margin, we see Yili will deliver stronger free cash flow each year, from Rmb3.2bn in 2016 to Rmb6.4bn in 2018.
Balance Sheet Net cash: Yili has strong cash position and current net cash is close to Rmb7bn in 2015. We see further net cash increase given no massive capex plan. Potential M&A may also be an option for the company.
ROE and CROCI: expect company’s return to slightly increase over next 3yrs, driven by improved margin and slower capital base increase.
Goldman Sachs Global Investment Research 36 August 13, 2016 China: Consumer Staples
Expect 14% EPS growth in 2016, 13% in 2Q16, still attractive valuation We expect Yili to deliver 13% EPS yoy growth in 2Q16, driven by continued GPM expansion. Yili is now trading at 20X fwd PE, lower than historical avg. level despite the recent rally. Expect the 14% EPS two-year CAGR and higher return to drive re-rating.
Exhibit 74: We expect 13% yoy EPS growth in 2Q16 Exhibit 75: Yili is currently trading at 20X fwd 12m P/E, vs Yili quarterly earnings avg of 23X Yili 12m fwd P/E
Fwd 12m P/E NPAT (RMB mn) YoY growth (RHS) 50.0 EPS Growth 150% 1,800 140% 43.5 45.0 1,600 120% 100% 40.0 1,400 100% +2SD 35.0 1,200 80% 50% 30.0 +1SD+ 1 1,000 60% 25.0 STDV Historical 0% 800 40% avg: 23.4X Hi t 19.7 20.0 600 20% -1SD -50% 400 0% 15.0 -1 -2SD 10.0 STDV 13.9 200 -20% -2 -100% - -40% 5.0 STDV 0.0 -150%
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research.
Key risks
Weaker than expected sales growth: more intense competition and slower industry growth will hamper Yili’s ability to grow topline. Milk powder will also be a drag for company Higher selling expenses: Yili raised its A&P ratio rapidly over past 2yrs and we have already built in another 160bps increase over 2015-17E. However higher than expected selling expenses will have negative impact on operating profit if it fails to translate into topline.
Goldman Sachs Global Investment Research 37 August 13, 2016 China: Consumer Staples
Exhibit 76: We expect a 9% 15-17E 2yr sales CAGR for Yili’s liquid milk segment, more than enough to offset a weaker IMF segment
Yili Industrial Group (600887.SS) Rmb millions 15-'17E 2yr 15-'20E 5yr Divisional P/L FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E CAGR CAGR Revenues (external only) Liquid milk (inc. Yogurt) 37,116 42,406 47,151 51,606 56,053 60,551 65,016 69,831 9.0% 8.2% 17,963 19,153 20,709 21,698 22,423 24,728 24,217 27,389 Frozen dairy 4,243 4,284 4,098 4,180 4,263 4,349 4,436 4,569 2.0% 2.2% 2,811 1,432 3,040 1,243 2,990 1,108 2,990 1,190 Milk powder and products 5,512 6,013 6,447 5,892 5,952 6,106 6,330 6,620 -3.9% 0.5% 2,788 2,724 3,041 2,972 3,336 3,111 2,902 2,990 Mixed feed 583 783 1,058 212 212 212 212 212 -55.3% -27.5% 298 285 305 478 524 534 157 54 Others 325 950 1,605 1,723 1,799 1,904 2,066 2,217 5.9% 6.7% 162 163 375 575 879 727 1,153 570 47,779 54,436 60,360 63,612 68,279 73,121 78,059 83,448 6.4% 6.7% 24,021 23,758 27,471 26,966 30,151 30,209 31,419 32,193
Gross Profit Liquid milk 9,684 13,071 16,069 19,046 21,290 23,372 25,598 27,784 5,124 4,560 6,429 6,643 7,324 8,746 9,154 9,892 Forzen dairy 1,391 1,501 1,489 1,527 1,557 1,588 1,620 1,669 937 454 1,123 378 1,137 351 1,136 391 Milk powder and products 2,414 2,743 3,609 3,180 3,153 3,173 3,226 3,308 1,234 1,180 1,395 1,348 1,736 1,872 1,451 1,729 Mixed feed 66 122 212 42 42 42 42 42 36 30 38 84 139 73 31 11 Others 141 599 606 774 803 858 968 1,064 83 58 237 361 342 264 376 398 13,696 18,036 21,984 24,569 26,845 29,034 31,454 33,867 11.8% 9.0% 7,413 6,283 9,223 8,814 10,678 11,306 12,148 12,421
YoY Growth (%) FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E Revenues (external only) Liquid milk 15% 14% 11% 9% 9% 8% 7% 7% 18% 12% 15% 13% 8% 14% 8% 11% Frozen dairy -1% 1% -4% 2% 2% 2% 2% 3% -3% 3% 8% -13% -2% -11% 0% 7% Milk powder and products 23% 9% 7% -9% 1% 3% 4% 5% 6% 46% 9% 9% 10% 5% -13% -4% Mixed feed -15% 34% 35% -80% 0% 0% 0% 0% -6% -23% 2% 68% 72% 12% -70% -90% Others 28% 192% 69% 7% 4% 6% 8% 7% 67% 4% 132% 252% 134% 26% 31% -22% 14% 14% 11% 5.4% 7.3% 7.1% 6.8% 6.9% 13% 14% 14% 14% 10% 12% 4% 7%
Gross Profit Liquid milk 7% 35% 23% 19% 12% 10% 10% 9% 25% -9% 25% 46% 14% 32% 25% 13% Forzen dairy 0% 8% -1% 3% 2% 2% 2% 3% -7% 19% 20% -17% 1% -7% 0% 11% Milk powder and products 36% 14% 32% -12% -1% 1% 2% 3% 7% 92% 13% 14% 24% 39% -16% -8% Mixed feed -40% 85% 74% -80% 0% 0% 0% 0% -14% -56% 7% 176% 263% -12% -77% -85% Others 3% 324% 1% 28% 4% 7% 13% 10% 31% -21% 187% 518% 44% -27% 10% 51% 10% 32% 22% 12% 9% 8% 8% 8% 17% 3% 24% 40% 16% 28% 14% 10%
Margins FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E ppt ppt 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E Gross Profit Liquid milk 26.1% 30.8% 34.1% 36.9% 38.0% 38.6% 39.4% 39.8% 3.9% 5.7% 28.5% 23.8% 31.0% 30.6% 32.7% 35.4% 37.8% 36.1% Forzen dairy 32.8% 35.0% 36.3% 36.5% 36.5% 36.5% 36.5% 36.5% 0.2% 0.2% 33.3% 31.7% 36.9% 30.4% 38.0% 31.7% 38.0% 32.8% Milk powder and products 43.8% 45.6% 56.0% 54.0% 53.0% 52.0% 51.0% 50.0% -3.0% -6.0% 44.2% 43.3% 45.9% 45.4% 52.0% 60.2% 50.0% 57.8% Mixed feed 11.3% 15.6% 20.1% 20.1% 20.1% 20.1% 20.1% 20.1% 0.0% 0.0% 12.0% 10.6% 12.5% 17.5% 26.5% 13.7% 20.0% 20.2% Others 43.4% 63.0% 37.7% 44.9% 44.6% 45.1% 46.8% 48.0% 6.9% 10.3% 51.2% 35.8% 63.3% 62.9% 38.9% 36.3% 32.6% 69.9% 28.7% 33.1% 36.4% 38.6% 39.3% 39.7% 40.3% 40.6% 2.9% 4.2% 30.9% 26.4% 33.6% 32.7% 35.4% 37.4% 38.7% 38.6%
15-'17E 2yr 15-'20E 5yr Consolidated P/L (Rmb mn) FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E CAGR CAGR
Revenue 47,779 54,436 60,360 63,612 68,279 73,121 78,059 83,448 6.4% 6.7% 24,021 23,758 27,471 26,966 30,151 30,209 31,419 32,193 COGS -34,083 -36,400 -38,376 -39,043 -41,434 -44,087 -46,604 -49,581 -16,608 -17,475 -18,248 -18,152 -19,473 -18,902 -19,149 -19,893 GP 13,696 18,036 21,984 24,569 26,845 29,034 31,454 33,867 10.5% 9.0% 7,413 6,283 9,223 8,814 10,678 11,306 12,269 12,300 SG&A (excl. other rev/exp) (10,938) (13,094) (16,581) (18,465) (19,877) (21,205) (22,740) (24,320) -5,955 -4,983 -6,706 -6,388 -7,364 -9,218 -8,819 -9,647 Selling Exp. (8,546) (10,075) (13,258) (14,963) (16,118) (17,253) (18,521) (19,893) -4,806 -3,741 -5,222 -4,853 -6,015 -7,243 -7,370 -7,593 Admin Exp. (2,392) (3,020) (3,323) (3,502) (3,759) (3,953) (4,220) (4,427) -1,149 -1,242 -1,484 -1,535 -1,349 -1,974 -1,448 -2,054 OP 2,758 4,942 5,403 6,104 6,967 7,829 8,714 9,547 13.6% 12.1% 1,459 1,300 2,516 2,426 3,314 2,088 3,451 2,653 Other income/expenses (264) (505) (398) (368) (398) (426) (450) (477) -163 -101 -141 -221 -155 (242.97) -150 -218 EBIT (reported) 2,495 4,437 5,005 5,736 6,569 7,403 8,265 9,070 14.6% 12.6% 1,296 1,199 2,375 2,205 3,160 1,845 3,301 2,436 D&A (1,143) (1,479) (1,781) (1,998) (2,281) (2,538) (2,786) (3,050) -544 -599 -1,100 300 -924 -857 - -1,998 EBITDA 3,637 5,916 6,786 7,735 8,850 9,941 11,051 12,119 14.2% 12.3% 1,840 1,798 3,475 1,905 4,084 2,702 3,301 4,434
Net Finance Exp. 33 -155 -297 -118 -86 -81 -67 -38 7 26 52 -207 -214 (83.48) -47 -71 Other Non-Op Income 533 504 816 758 764 792 821 853 192 340 258 103 242 573 400 358 Profit Before Tax 3,060 4,786 5,524 6,376 7,247 8,114 9,019 9,885 14.5% 12.3% 1,495 1,565 2,684 2,101 3,188 2,335 3,654 2,722 Tax 141 -619 -869 -955 -1086 -1216 -1352 -1482 251 -110 -378 -241 -514 -355 -551 -405 Minority Interest -14 -22 -23 -26 -30 -34 -37 -41 -8 -6 -13 -9 -12 -11 -13 -13 NPAT Attributable to S/holders 3,187 4,144 4,632 5,394 6,131 6,864 7,629 8,362 15.0% 12.5% 1,738 1,449 2,293 1,851 2,662 1,970 3,090 2,304 One-off's after tax -552 171 125 23 ------34 -69 -94 -16 -11 34 Recurring NPAT 2,635 4,315 4,756 5,416 6,131 6,864 7,629 8,362 13.5% 11.9% 1,738 1,449 2,259 1,920 2,756 2,000 3,101 2,315
WA Shares - Basic 3,642 6,129 6,065 6,065 6,065 6,065 6,065 6,065 3,642 6,129 6,129 6,129 6,065 6,129 6,065 6,065 WA Shares - Diluted 3,642 6,129 6,065 6,065 6,065 6,065 6,065 6,065 3,642 6,129 6,129 6,129 6,129 6,129 6,065 6,065
EPS - Basic (Rmb/Sh) 0.88 0.68 0.76 0.89 1.01 1.13 1.26 1.38 0.48 0.24 0.37 0.30 0.44 0.32 0.51 0.38 EPS - Diluted (Rmb/Sh) 0.88 0.68 0.76 0.89 1.01 1.13 1.26 1.38 15.1% 12.5% 0.48 0.24 0.37 0.30 0.43 0.33 0.51 0.38
Growth Sales 14% 14% 11% 5% 7.3% 7.1% 6.8% 6.9% 13% 14% 14% 14% 10% 12% 4% 7% GP 10% 32% 22% 12% 9% 8% 8% 8% 17% 3% 24% 40% 16% 28% 15% 9% SG&A 3% 20% 27% 11% 8% 7% 7% 7% 8% -2% 13% 28% 10% 44% 20% 5% Operating profit (GP less SG&A) 45% 79% 9% 13% 14% 12% 11% 10% 73% 23% 73% 87% 32% -14% 4% 27% EBIT 52% 78% 13% 15% 15% 13% 12% 10% 89% 26% 83% 84% 33% -16% 4% 32% Recurring NPAT 54% 64% 10% 14% 13% 12% 11% 10% 128% 52% 30% 33% 22% 4% 13% 16%
Margins GP margin 28.7% 33.1% 36.4% 38.6% 39.3% 39.7% 40.3% 40.6% 2.9% 4.2% 30.9% 26.4% 33.6% 32.7% 35.4% 37.4% 39.1% 38.2% Operating profit (GP less SG&A) 5.8% 9.1% 9.0% 9.6% 10.2% 10.7% 11.2% 11.4% 1.3% 2.5% 6.1% 5.5% 9.2% 9.0% 11.0% 6.9% 11.0% 8.2% EBIT margin 5.2% 8.2% 8.3% 9.0% 9.6% 10.1% 10.6% 10.9% 1.3% 2.6% 5.4% 5.0% 8.6% 8.2% 10.5% 6.1% 10.5% 7.6% Recurring NPAT margin 5.5% 7.9% 7.9% 8.5% 9.0% 9.4% 9.8% 10.0% 1.1% 2.1% 7.2% 6.1% 8.2% 7.1% 9.1% 6.6% 9.9% 7.2%
SG&A/Sales -22.9% -24.1% -27.5% -29.0% -29.1% -29.0% -29.1% -29.1% -1.6% -1.7% -24.8% -21.0% -24.4% -23.7% -24.4% -30.5% -28.1% -30.0% Effective Tax Rate 5% -13% -16% -15% -15% -15% -15% -15% ` 17% -7% -14% -11% -16% -15% -15% -15%
Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 38 August 13, 2016 China: Consumer Staples
Exhibit 77: Yili Summary Financials
Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E
Total revenue 60,359.9 63,611.8 68,278.7 73,121.1 Cash & equivalents 13,083.7 13,447.2 14,557.3 17,188.0 Cost of goods sold (38,626.6) (39,307.1) (41,717.9) (44,391.0) Accounts receivable 841.3 1,061.0 1,325.9 1,419.9 SG&A (16,581.5) (18,465.2) (19,877.4) (21,205.4) Inventory 4,663.1 4,960.7 5,493.5 5,845.5 R&D 0.0 0.0 0.0 0.0 Other current assets 1,198.9 1,198.9 1,198.9 1,198.9 Other operating profit/(expense) (146.6) (103.2) (114.0) (122.2) Total current assets 19,787.1 20,667.8 22,575.6 25,652.3 EBITDA 6,786.0 7,734.7 8,850.4 9,940.7 Net PP&E 15,340.6 16,876.5 18,063.6 18,660.5 Depreciation & amortization (1,780.8) (1,998.4) (2,281.0) (2,538.0) Net intangibles 967.1 976.2 995.9 1,017.8 EBIT 5,005.1 5,736.3 6,569.4 7,402.6 Total investments 1,107.3 1,275.6 1,460.1 1,662.6 Interest income 32.0 65.4 67.2 72.8 Other long-term assets 2,428.9 2,484.2 2,527.4 2,567.1 Interest expense (329.1) (183.4) (153.4) (153.4) Total assets 39,631.0 42,280.3 45,622.7 49,560.3 Income/(loss) from uncons. subs. 5.8 5.8 5.8 5.8 Others 809.8 751.7 758.0 785.9 Accounts payable 9,852.7 9,810.9 10,184.0 10,836.5 Pretax profits 5,523.5 6,375.8 7,246.9 8,113.6 Short-term debt 6,190.0 6,190.0 6,190.0 6,190.0 Income tax (869.1) (955.5) (1,086.2) (1,216.2) Other current liabilities 2,159.3 2,621.7 3,042.6 3,474.6 Minorities (22.6) (26.4) (30.0) (33.5) Total current liabilities 18,202.0 18,622.5 19,416.6 20,501.1 Long-term debt 0.3 0.3 0.3 0.3 Net income pre-preferred dividends 4,631.8 5,393.9 6,130.8 6,863.9 Other long-term liabilities 1,282.7 1,282.7 1,282.7 1,282.7 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,283.0 1,283.0 1,283.0 1,283.0 Net income (pre-exceptionals) 4,631.8 5,393.9 6,130.8 6,863.9 Total liabilities 19,485.1 19,905.6 20,699.6 21,784.1 Post-tax exceptionals 124.5 22.5 0.0 0.0 Net income 4,756.3 5,416.4 6,130.8 6,863.9 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 19,984.4 22,186.8 24,705.2 27,524.8 EPS (basic, pre-except) (Rmb) 0.76 0.89 1.01 1.13 Minority interest 161.5 187.9 217.8 251.4 EPS (basic, post-except) (Rmb) 0.78 0.89 1.01 1.13 EPS (diluted, post-except) (Rmb) 0.78 0.89 1.01 1.13 Total liabilities & equity 39,631.0 42,280.3 45,622.7 49,560.3 DPS (Rmb) 0.45 0.53 0.60 0.67 Dividend payout ratio (%) 57.4 58.9 58.9 58.9 BVPS (Rmb) 3.30 3.66 4.07 4.54 Free cash flow yield (%) 5.9 2.9 4.0 5.8
Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth 10.9 5.4 7.3 7.1 ROE (%) 24.6 25.7 26.1 26.3 EBITDA growth 14.7 14.0 14.4 12.3 ROA (%) 12.0 13.2 13.9 14.4 EBIT growth 12.8 14.6 14.5 12.7 CROCI (%) 26.2 27.1 27.3 27.5 Net income growth 11.8 16.5 13.7 12.0 Inventory days 45.7 44.7 45.7 46.6 EPS growth 11.4 13.9 13.2 12.0 Receivables days 4.9 5.5 6.4 6.9 Gross margin 36.0 38.2 38.9 39.3 Payable days 86.3 91.3 87.5 86.4 EBITDA margin 11.2 12.2 13.0 13.6 Net debt/equity (%) (34.2) (32.4) (33.6) (39.6) EBIT margin 8.3 9.0 9.6 10.1 Interest cover - EBIT (X) 16.8 48.6 76.2 91.8
Valuation 12/15 12/16E 12/17E 12/18E Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 4,631.8 5,393.9 6,130.8 6,863.9 P/E (analyst) (X) 21.0 20.4 18.0 16.1 D&A add-back 1,780.8 1,998.4 2,281.0 2,538.0 P/B (X) 5.0 5.0 4.5 4.0 Minorities interests add-back 22.6 26.4 30.0 33.5 EV/EBITDA (X) 13.7 13.4 11.6 10.0 Net (inc)/dec working capital 2,621.5 (558.9) (424.6) 206.5 Dividend yield (%) 2.7 2.9 3.3 3.7 Other operating cash flow 479.8 (5.8) (5.8) (5.8) Cash flow from operations 9,536.5 6,854.0 8,011.4 9,636.2
Capital expenditures (3,652.1) (3,607.8) (3,531.0) (3,196.5) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 26.4 0.0 0.0 0.0 Others 138.8 (162.5) (178.8) (196.6) Cash flow from investments (3,486.9) (3,770.3) (3,709.8) (3,393.1)
Dividends paid (common & pref) (2,659.0) (2,729.2) (3,191.5) (3,612.4) Inc/(dec) in debt (2,585.7) 0.0 0.0 0.0 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows (1,034.4) 0.0 0.0 0.0 Cash flow from financing (6,279.0) (2,729.2) (3,191.5) (3,612.4) Total cash flow (243.9) 363.5 1,110.1 2,630.7 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 39 August 13, 2016 China: Consumer Staples
Want Want (Sell): Weaker brand could lead to further sales drop
Source of opportunity Investment Profile Want Want is one of the largest flavored milk and snack companies in Low High China. We think the company’s products will lose ground in the Growth Growth Returns * Returns * consumer up-trade trend: (1) expect flavored milk category to have Multiple Multiple negative growth over the next 3 years as consumers shift to less-sweet Volatility Volatility and functional products. (2) company’s conservative stance in investing Percentile 20th 40th 60th 80th 100th in the brand (less than 4% A&P ratio) and distribution channel (still 95% Want Want China Holdings (0151.HK) is through traditional channel) put Want Want in a negative position Asia Pacific Consumer Peer Group Average * Returns = Return on Capital For a complete description of the investment relative to the competition. Net net, we expect 6% EPS decline and profile measures please refer to the disclosure section of this document. 540bps fall in cash returns for 2015-17E. We are 15%/22% below consensus for 2016-17E. Initiate with a Sell rating and 12-month target Key data Current price of HK$4.20, implying 15% downside. Price (HK$) 4.97 12 month price target (HK$) 4.20 Market cap (HK$ mn / US$ mn) 65,584.2 / 8,455.8 Catalyst Foreign ownership (%) -- 1) Want Want to record sales falls over 2015-17E (-5% decline CAGR): 12/15 12/16E 12/17E 12/18E we expect Want Want to see challenged sales and further market share EPS ($) 0.040.040.040.04 EPS growth (%) (12.0) (4.6) (6.9) (2.7) losses in the dairy segment. For all its dairy products, Want Want uses EPS (diluted) ($) 0.04 0.04 0.04 0.04 imported milk powder to reconstitute milk. This has helped it maintain EPS (basic pre-ex) ($) 0.04 0.04 0.04 0.04 P/E (X) 24.0 16.2 17.4 17.9 its high 25% OPM over past years, however with consumers now P/B (X) 6.8 4.1 3.7 3.4 EV/EBITDA (X) 13.0 9.7 10.1 10.3 tending to focus more on health and function, we have observed that Dividend yield (%) 1.9 3.1 2.9 2.8 ROE (%) 27.7 26.1 22.2 19.7 Want Want’s “Hot Kid Milk” is less popular with teenagers and CROCI (%) 22.1 19.6 16.7 14.6 Millennial mums. In addition, Want Want continues to introduce new products each year, although due to lack of distribution in Modern trade channels, we think it will be difficult for the new products to gain traction Price performance chart with customers. 8.0 11,500
7.5 11,000
2) 1H16 net profit to fall 8% yoy in USD term: We expect 10% drop in 7.0 10,500 sales in 1H due to weaker dairy sales (1H overall demand was weaker 6.5 10,000 and flavored milk sales to decline) and RMB depreciation. The sales fall 6.0 9,500 5.5 9,000 will be partially offset by stronger margin as the company benefit from 5.0 8,500 lower milk powder prices (about 6-9month lag in milk inventory). 4.5 8,000 4.0 7,500 Want Want has introduced some new products YTD (yogurt drink in Aug-15 Nov-15 Feb-16 May-16 Want Want China Holdings (L) Hang Seng China Ent. Index (R) April and UHT yogurt in Aug) and also plans to launch premium UHT milk by end 2016. This shows company’s plan to diversify its product portfolios. However we see limited contribution to company sales due to Share price performance (%) 3 month 6 month 12 month 1) the new products are still using reconstituted milk, 2) company is Absolute (15.6) (7.6) (34.3) cautious on brand investment and distribution. Rel. to Hang Seng China Ent. Index (23.3) (20.0) (20.6) Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/09/2016 close.
Valuation INVESTMENT LIST MEMBERSHIP Our 12-month target price is based on 2017E EV/GCI vs. CROCI/WACC. Asia Pacific Sell list The target price implies 15x 2017E PE. Our target price suggests 15% downside to the current price. Coverage View: Neutral Key risks Stronger-than-expected sales growth, higher margin improvement.
Goldman Sachs Global Investment Research 40 August 13, 2016 China: Consumer Staples
Financials
Income Statement Growth: We expect Want Want to record 7%/3%/2% sales fall (in US$ term) yoy over 2015- 18E, driven by the continued challenge in the dairy segments. We expect the flavored milk market to shrink and for WW to lose market share due to its thin promotion and advertising. The decline will more than offset the slight increase in sales from the rice cracker and snack food segments. 2016E sales decline also include a 4% depreciation in the RMB (as forecast by our macro team). Margin: We forecast WW to see 180bps OPM decline over 2016-18E, driven by the tapering off of raw material cost benefit and negative operating leverage. We expect the global milk powder price to gradually recover over the next two years and this will increase WW’s cost base starting 2017E. WW tends to be cautious on spending A&P expenses; however, we expect a higher SG&A /Sales ratio given the declining sales over the the next two years.
Cash Flow Statement Capex: we expect WW to reduce its annual Capex in 2016-18E as it slows plant expansion. We expect US$120-150mn capex vs. about US$230-350mn in 2012-2015. However, with lower operating cash flow, we estimate WW’s free cash flow to be lowered to US$450mn/year vs. 2015’s US$580mn. Dividend and share buyback: the company has bought back a total of 160mn shares in total YTD (1.3% of its share capital) and we expect further buyback over 2016-17 as the company has sufficient cash flow and no near term M&A plans. With this, we expect a more prudent dividend payout ratio of 50% over 2016-17E.
Balance Sheet Gearing: WW has been cash rich given its strong free cash flow generation and cautious stance on capex/M&A. We expect company to have net cash of US$259mn/441mn over 2016-17E, implying 13%/20% net cash /equity ratio. ROE and CROCI: compared to peers, WW has relatively higher return due to its high operating margin. However, as we expect WW to post declining sales and margins over next 3 years, we forecast its ROE to erode from 28% to 20% and CROCI to drop from 22% to 14.6% over 2015-18E.
Exhibit 78: We expect Want Want revenue to shrink in Exhibit 79: Hot Kid Milk sales peaked in 2013 and we 2017/18E expect years of decline ahead Want Want Revenue Forecast (in Rmb terms) Want Want Hot Kid Milk sales forecast
Want Want Revenue (Rmb mn) Hot Kid Milk sales (US$mn) YoY growth (RHS) Revenues YoY Growth % (USD terms) YoY growth % (Rmb terms)
22,500 0% 2,000 60.0% 0% -1% 1,800 50.0% 22,000 21,937 -2% -1% 1,600 -3% -2% -2% 40.0% -3% 1,400 21,500 21,316 -3% -3% 1,200 30.0% -4% 21,000 1,000 20.0% 20,771 -5% 800 10.0% 20,500 20,408 600 20,239 20,230 -6% 0.0% -7% 400 20,000 -8% -7% 200 -10.0% -8% 19,500 0 -20.0% -9% -9% 19,000 -10% 2015 2016E 2017E 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 41 August 13, 2016 China: Consumer Staples
Exhibit 80: We expect Want Want to see margins contract Exhibit 81: We expect milk powder price to rebound over Want Want Margin Forecast 2016-18E and put pressure on WW’s GPM Milk powder price
US$/ton NZ Global Dairy Trade Wholemilk Powder Auction Price (US$/ton) GP Margin OP 6,000 50.0%
45.0% 5,000 45.6% 43.9% 44.5% 43.8% 40.0% 42.9% 42.0% 4,000 35.0% 2018E :US$3,000 30.0% 3,000 2017E: US$2,700 25.0% 18.8% 19.5% 2,000 2016E: 2,300 20.0% 18.1% 17.5% 16.5% 15.5% 15.0% 1,000 10.0%
5.0% -
0.0% Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Aug-08 Nov-08 Aug-09 Nov-09 Aug-10 Nov-10 Aug-11 Nov-11 Aug-12 Nov-12 Aug-13 Nov-13 Aug-14 Nov-14 Aug-15 Nov-15 Aug-16 Nov-16 Aug-17 Nov-17 Aug-18 Nov-18 2015 2016E 2017E 2018E 2019E 2020E May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18
Source: Company data, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
Exhibit 82: Polyethylene price has high correlation with Exhibit 83: Sugar price are on an up-trend YTD crude oil China sugar price Polyethylene price
Index to 100 Crude Oil LDPE LLDPE Sugar price (RMB/ton) yoy growth (RHS) as Jan 2008 9,000 60% 170 8,000 50% 40% 150 7,000 30% 130 6,000 20% 110 5,000 10% 90 4,000 0% -10% 70 3,000 -20% 50 2,000 -30% 30 1,000 -40% Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16
Source: Bloomberg. Source: Bloomberg.
Exhibit 84: Packaged material and milk powder account Exhibit 85: Expect stable per ton GP over 2016-18E for more than 50% COGS Per ton COGS and GP split WW COGS breakdown (2015)
US$/ton 2,500 Salary expense, Other, 19% 11.7% Depreciation , 2,000 4.4% Others 1,500 D&A Sugar, 9% 838 759 770 776 Labor Packaging, 1,000 Raw material 30% Milk powder, GP 500 26% 858 877 875 882
0 2015 2016E 2017E 2018E
Source: Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 42 August 13, 2016 China: Consumer Staples
Exhibit 86: Want Want has 95% of sales in Traditional Exhibit 87: Want Want spends the least on ANP due to Trade Channels conservative branding strategy Distribution Channel Breakdown comparison Want Want ANP/Sales comparison
Traditional channel Modern trade Online and others ANP / Sales ratio
100% 16.0% 13.6% 90% 14.0% 80% 12.0% 10.9% 70% 10.2% 60% 10.0% 8.6%
50% 95% 8.0% 40% 6.0% 30% 3.8% 50% 55% 4.0% 20% 45% 45% 10% 2.0% 0% 0.0% WW Mengniu Yili Tingyi UPC WW Mengniu Tingyi UPC Yili
Source: Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 88: Want Want is now trading at 17X fwd PE, Exhibit 89: WW is still trading at 17X 2018E PE due to its lower than avg. declining EPS 12m fwd PE PE calculation
35 Want Want fwd 12m P/E EPS Growth 40% US$mn 2016E 2017E 2018E Current Equity value 7,840 + 2 STDV 30% 30 NPAT 502.8 465.3 453.6 27.2 Current PE (X) 15.6 16.8 17.3 + 1 STDV 20% Net cash 259 441 652 25 Ex-cash PE (X) 15.1 15.9 15.8 10% Average = 22.5x Target price implied PE (X) 13.6 14.6 15.0 -1 STDV 20 17.9 0% -2 STDV 15 -10% 13.2
10 -20% Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Source: Bloomberg, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.
Key risks Stronger than expected dairy growth: if flavored milk growth were stronger or WW’s new products contributed to higher profit, there would be upside risk to our sales forecasts.
Higher margin: we expect no benefit from raw material cost after 2016; however if milk or sugar prices fell further, WW would likely see higher margins than we expected.
Potential M&A: WW has more than US$400mn net cash and potential M&A in the industry could boost its sales and earnings.
What would make us more positive on the stock Company more actively invested in branding and distribution: If WW started to invest more in A&P and cater to younger consumers, and if it were more focused on expanding into the modern trade channel, then although its short term profit margin might narrow, it would be positive for sales in the mid-to-longer term.
Goldman Sachs Global Investment Research 43 August 13, 2016 China: Consumer Staples
Exhibit 90: We expect Want Want’s dairy product segment to suffer a -11% 15-17E 2-yr Sales CAGR Want Want Summary Financials
Want Want (151.HK) USD mn Divisional P/L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E 2Yr CAGR
Revenues Rice crackers 320.1 589.8 304.3 507.6 335.4 499.5 324.2 503.7 909.9 811.9 834.9 827.9 849.0 860.3 872.2 884.7 1% Dairy Products and Beverages 942.2 1,056.7 986.8 1,006.1 935.7 785.3 793.3 703.2 1,998.9 1,993.0 1,721.0 1,496.5 1,371.9 1,286.0 1,230.0 1,199.1 -11% Snack foods 488.2 411.6 557.7 405.1 539.8 321.5 520.4 324.0 899.8 962.8 861.3 844.4 864.1 881.6 896.7 909.6 0% Others 4.0 5.2 3.8 3.8 6.4 4.1 6.3 6.3 9.2 7.6 10.5 12.6 15.1 18.1 21.7 26.1 20% Total 1,754.5 2,063.3 1,852.6 1,922.7 1,817.3 1,610.4 1,644.3 1,537.2 3,817.7 3,775.3 3,427.7 3,181.4 3,100.2 3,046.0 3,020.7 3,019.4 -5%
Gross Profit Rice crackers 113.9 257.3 117.5 206.5 135.8 218.2 141.6 216.0 371.2 324.0 354.0 357.7 364.2 367.4 370.7 376.0 1% Dairy Products and Beverages 400.4 425.1 379.9 385.4 391.1 364.3 372.0 329.9 825.5 765.3 755.5 701.9 617.7 559.5 510.4 470.9 -10% Snack foods 208.5 178.4 252.1 180.2 248.3 150.5 244.6 146.4 386.9 432.3 398.8 391.0 396.6 402.9 409.8 415.7 0% Others 0.9 1.5 -2.3 -0.1 -3.7 -0.3 -2.0 4.0 2.4 -2.3 -4.0 2.0 2.0 2.0 2.0 2.0 Total 723.7 862.4 747.2 772.0 771.6 732.7 756.2 696.3 1,586.1 1,519.2 1,504.3 1,452.5 1,380.6 1,331.7 1,292.9 1,264.6 -4%
Operating Income Rice crackers 37.8 146.7 50.2 102.5 50.1 123.7 65.4 106.0 184.6 152.6 173.9 171.4 173.2 173.8 174.4 176.9 0% Dairy Products and Beverages 272.8 286.9 242.6 245.2 235.8 229.3 221.3 196.3 559.7 487.8 465.2 417.6 350.2 315.1 276.7 243.1 -13% Snack foods 116.9 87.5 137.9 77.4 132.1 52.3 114.5 62.1 204.4 215.3 184.4 176.6 178.0 188.6 199.8 209.9 -2% Others 0.6 -1.4 -3.3 -1.5 -6.7 -1.3 -4.0 -4.0 -0.8 -4.8 -8.0 -8.0 -8.0 -8.0 -8.0 -8.0 0% Segment Total 428.1 519.8 427.4 423.5 411.4 404.1 397.2 360.3 947.8 850.9 815.5 757.5 693.4 669.5 643.0 621.9 -8% Unallocated -30.8 -33.9 -32.6 -41.5 -40.4 -46.2 -40.8 -40.8 -64.7 -74.1 -86.6 -81.5 -81.5 -89.7 -98.6 -108.5 -3% Group EBIT 397.3 485.9 394.7 382.0 370.9 357.9 356.4 319.6 883.2 776.8 728.8 676.0 611.9 579.8 544.3 513.4 -8%
YoY Growth % (USD terms)
Revenues Rice crackers 15% 10% -5% -14% 10% -2% -3% 1% 12% -11% 3% -1% 3% 1% 1% 1% Dairy Products and Beverages 18% 16% 5% -5% -5% -22% -15% -10% 17% 0% -14% -13% -8% -6% -4% -3% Snack foods 8% 8% 14% -2% -3% -21% -4% 1% 8% 7% -11% -2% 2% 2% 2% 1% Others 6% 18% -6% -26% 70% 6% -2% 54% 13% -17% 38% 20% 20% 20% 20% 20% Total 15% 13% 6% -7% -2% -16% -10% -5% 14% -1% -9% -7% -3% -2% -1% 0%
Operating Income Rice crackers 10% 31% 33% -30% 0% 21% 30% -14% 26% -17% 14% -1% 1% 0% 0% 1% Dairy Products and Beverages 45% 17% -11% -15% -3% -6% -6% -14% 29% -13% -5% -10% -16% -10% -12% -12% Snack foods 15% 6% 18% -12% -4% -32% -13% 19% 11% 5% -14% -4% 1% 6% 6% 5% Others -236% 1084% -667% 6% 102% -12% -40% 208% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Total 32% 18% 0% -19% -4% -5% -3% -11% 24% -10% -4% -7% -8% -3% -4% -3%
Margins
GP Margin Rice crackers 35.6% 43.6% 38.6% 40.7% 40.5% 43.7% 43.7% 42.9% 40.8% 39.9% 42.4% 43.2% 42.9% 42.7% 42.5% 42.5% Dairy Products and Beverages 42.5% 40.2% 38.5% 38.3% 41.8% 46.4% 46.9% 46.9% 41.3% 38.4% 43.9% 46.9% 45.0% 43.5% 41.5% 39.3% Snack foods 42.7% 43.4% 45.2% 44.5% 46.0% 46.8% 47.0% 45.2% 43.0% 44.9% 46.3% 46.3% 45.9% 45.7% 45.7% 45.7% Others 21.4% 29.5% -60.0% -2.1% -57.3% -8.1% -32.0% 63.8% 26.0% -30.7% -38.2% 15.9% 13.2% 11.0% 9.2% 7.7% Total 41.2% 41.8% 40.3% 40.2% 42.5% 45.5% 46.0% 45.3% 41.5% 40.2% 43.9% 45.7% 44.5% 43.7% 42.8% 41.9%
EBIT Margin Rice crackers 11.8% 24.9% 16.5% 20.2% 14.9% 24.8% 20.2% 21.0% 20.3% 18.8% 20.8% 20.7% 20.4% 20.2% 20.0% 20.0% Dairy Products and Beverages 28.9% 27.2% 24.6% 24.4% 25.2% 29.2% 27.9% 27.9% 28.0% 24.5% 27.0% 27.9% 25.5% 24.5% 22.5% 20.3% Snack foods 23.9% 21.3% 24.7% 19.1% 24.5% 16.3% 22.0% 19.2% 22.7% 22.4% 21.4% 20.9% 20.6% 21.4% 22.3% 23.1% Others 14.7% -26.6% -88.2% -38.4% -104.6% -31.9% -63.6% -63.6% -8.7% -63.0% -76.3% -63.6% -53.0% -44.2% -36.8% -30.7% Total 24.4% 25.2% 23.1% 22.0% 22.6% 25.1% 24.2% 23.4% 24.8% 22.5% 23.8% 23.8% 22.4% 22.0% 21.3% 20.6%
Consolidated P&L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E 2Yr CAGR Sales 1,754.5 2,063.3 1,852.6 1,922.7 1,817.3 1,610.4 1,644.3 1,537.2 3,817.7 3,775.3 3,427.7 3,181.4 3,100.2 3,046.0 3,020.7 3,019.4 -4.9% COGS -1,030.8 -1,200.9 -1,105.4 -1,150.7 -1,045.7 -877.8 -888.0 -840.9 -2,231.7 -2,256.1 -1,923.5 -1,728.9 -1,719.6 -1,714.3 -1,727.8 -1,754.8 -5.4% Gross Profit 723.7 862.4 747.2 772.0 771.6 732.7 756.2 696.3 1,586.1 1,519.2 1,504.3 1,452.5 1,380.6 1,331.7 1,292.9 1,264.6 -4.2% SG&A -367.9 -413.1 -393.2 -422.6 -451.6 -408.4 -432.2 -400.0 -781.0 -815.8 -860.1 -832.2 -820.2 -799.3 -797.6 -801.9 -2.3% Operating Profit 355.7 449.3 354.0 349.5 320.0 324.2 324.0 296.3 805.0 703.5 644.2 620.3 560.4 532.4 495.3 462.6 -6.7% Other income/expenses 41.5 36.6 40.7 32.6 51.0 33.7 32.4 23.3 78.1 73.3 84.6 55.7 51.4 47.4 49.0 50.8 -22.0% Reported EBIT 397.3 485.9 394.7 382.0 370.9 357.9 356.4 319.6 883.2 776.8 728.8 676.0 611.9 579.8 544.3 513.4 -8.4% D&A -48.3 -57.3 -60.1 -62.1 -68.9 -185.5 -72.0 -72.0 -105.6 -122.2 -254.3 -144.0 -146.3 -147.3 -153.6 -160.2 -24.2% EBITDA 445.6 543.2 454.8 444.1 439.8 543.4 428.5 391.6 988.8 899.0 983.2 820.0 758.1 727.1 697.9 673.6 -12.2% Net finance income / (costs) 21.9 27.0 31.5 21.8 20.6 20.6 19.0 19.0 48.9 53.3 41.2 37.9 42.9 52.9 62.9 67.9 2.1% Other non-operating income (expense) 0.6 0.9 0.0 -0.5 -0.8 -0.5 0.0 0.0 1.6 -0.5 -1.3 0.0 0.0 0.0 0.0 0.0 -100.0% Pretax income 419.9 513.8 426.2 403.4 390.7 378.0 375.4 338.5 933.7 829.5 768.8 714.0 654.8 632.8 607.2 581.3 -7.7% Provisions for taxes -112.4 -134.7 -108.2 -101.8 -105.6 -121.6 -112.6 -98.4 -247.1 -210.0 -227.2 -211.0 -190.2 -180.7 -170.4 -160.2 -8.5% Minority interest (I/S item) 0.2 -0.9 0.5 0.5 0.4 0.1 0.2 0.2 -0.7 1.0 0.5 0.5 0.4 0.4 0.4 0.4 -7.4% Reported NPAT 307.6 378.2 318.5 302.1 285.5 256.5 263.0 240.4 685.8 620.5 542.1 503.4 465.0 452.5 437.3 421.5 -7.4%
EPS 0.023 0.029 0.024 0.023 0.022 0.020 0.021 0.019 0.052 0.047 0.041 0.039 0.037 0.036 0.035 0.033
YoY Growth % Sales 14.9% 12.7% 5.6% -6.8% -1.9% -16.2% -9.5% -4.6% 13.7% -1.1% -9.2% -7.2% -2.6% -1.7% -0.8% 0.0% GP 27.8% 13.2% 3.3% -10.5% 3.3% -5.1% -2.0% -5.0% 19.4% -4.2% -1.0% -3.4% -5.0% -3.5% -2.9% -2.2% SG&A 25.9% 11.1% 6.9% 2.3% 14.9% -3.3% -4.3% -2.1% 17.6% 4.4% 5.4% -3.2% -1.4% -2.5% -0.2% 0.5% OP 29.8% 15.2% -0.5% -22.2% -9.6% -7.2% 1.3% -8.6% 21.2% -12.6% -8.4% -3.7% -9.7% -5.0% -7.0% -6.6% EBIT 33.4% 17.7% -0.6% -21.4% -6.0% -6.3% -3.9% -10.7% 24.3% -12.0% -6.2% -7.2% -9.5% -5.2% -6.1% -5.7% NPAT 33.2% 17.1% 3.5% -20.1% -10.3% -15.1% -7.9% -6.3% 23.8% -9.5% -12.6% -7.1% -7.6% -2.7% -3.4% -3.6%
Margins GP 41.2% 41.8% 40.3% 40.2% 42.5% 45.5% 46.0% 45.3% 41.5% 40.2% 43.9% 45.7% 44.5% 43.7% 42.8% 41.9% EBIT 22.6% 23.6% 21.3% 19.9% 20.4% 22.2% 21.7% 20.8% 23.1% 20.6% 21.3% 21.2% 19.7% 19.0% 18.0% 17.0% OP 20.3% 21.8% 19.1% 18.2% 17.6% 20.1% 19.7% 19.3% 21.1% 18.6% 18.8% 19.5% 18.1% 17.5% 16.4% 15.3% NPAT 17.5% 18.3% 17.2% 15.7% 15.7% 15.9% 16.0% 15.6% 18.0% 16.4% 15.8% 15.8% 15.0% 14.9% 14.5% 14.0%
SG&A/Sales -21.0% -20.0% -21.2% -22.0% -24.9% -25.4% -26.3% -26.0% -20.5% -21.6% -25.1% -26.2% -26.5% -26.2% -26.4% -26.6% Effective tax rate (%) -27% -26% -25% -25% -27% -32% -30% -29% 26% 25% 30% 30% 29% 29% 28% 28%
Source: Company data, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 44 August 13, 2016 China: Consumer Staples
Exhibit 91: Want Want Summary financials
Profit model ($ mn) 12/15 12/16E 12/17E 12/18E Balance sheet ($ mn) 12/15 12/16E 12/17E 12/18E
Total revenue 3,427.7 3,181.4 3,100.2 3,046.0 Cash & equivalents 1,443.4 1,518.0 1,702.4 1,915.8 Cost of goods sold (1,923.5) (1,728.9) (1,719.6) (1,714.3) Accounts receivable 136.7 135.6 140.6 146.5 SG&A (860.1) (832.2) (820.2) (799.3) Inventory 441.8 411.3 423.2 426.6 R&D 0.0 0.0 0.0 0.0 Other current assets 111.9 111.9 111.9 111.9 Other operating profit/(expense) 84.6 55.7 51.4 47.4 Total current assets 2,133.7 2,176.8 2,378.1 2,600.8 EBITDA 983.2 820.0 758.1 727.1 Net PP&E 1,415.0 1,426.1 1,421.8 1,403.4 Depreciation & amortization (254.3) (144.0) (146.3) (147.3) Net intangibles 190.8 186.3 181.9 177.4 EBIT 728.8 676.0 611.9 579.8 Total investments 14.7 14.7 14.7 14.7 Interest income 62.0 60.0 65.0 75.0 Other long-term assets 51.1 53.4 55.7 58.2 Interest expense (20.8) (22.1) (22.1) (22.1) Total assets 3,805.3 3,857.3 4,052.1 4,254.5 Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0 Others (1.3) 0.0 0.0 0.0 Accounts payable 179.1 156.3 150.7 145.6 Pretax profits 768.8 714.0 654.8 632.8 Short-term debt 257.6 257.6 257.6 257.6 Income tax (227.2) (211.0) (190.2) (180.7) Other current liabilities 456.2 409.8 400.3 396.3 Minorities 0.5 0.5 0.4 0.4 Total current liabilities 892.9 823.6 808.6 799.5 Long-term debt 998.5 998.5 998.5 998.5 Net income pre-preferred dividends 542.1 503.4 465.0 452.5 Other long-term liabilities 41.7 41.7 41.7 41.7 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,040.2 1,040.2 1,040.2 1,040.2 Net income (pre-exceptionals) 542.1 503.4 465.0 452.5 Total liabilities 1,933.1 1,863.8 1,848.8 1,839.7 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 542.1 503.4 465.0 452.5 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 1,864.6 1,986.3 2,196.6 2,408.6 EPS (basic, pre-except) ($) 0.04 0.04 0.04 0.04 Minority interest 7.6 7.1 6.7 6.3 EPS (basic, post-except) ($) 0.04 0.04 0.04 0.04 EPS (diluted, post-except) ($) 0.04 0.04 0.04 0.04 Total liabilities & equity 3,805.3 3,857.3 4,052.1 4,254.5 DPS ($) 0.020.020.020.02 Dividend payout ratio (%) 45.0 50.0 50.0 50.0 BVPS ($) 0.150.160.170.19 Free cash flow yield (%) 4.5 5.7 5.5 5.7
Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth (9.2) (7.2) (2.6) (1.7) ROE (%) 27.7 26.1 22.2 19.7 EBITDA growth 9.4 (16.6) (7.5) (4.1) ROA (%) 13.4 13.1 11.8 10.9 EBIT growth (6.2) (7.2) (9.5) (5.2) CROCI (%) 22.1 19.6 16.7 14.6 Net income growth (12.6) (7.1) (7.6) (2.7) Inventory days 105.2 90.1 88.6 90.5 EPS growth (12.0) (4.6) (6.9) (2.7) Receivables days 14.3 15.6 16.3 17.2 Gross margin 43.9 45.7 44.5 43.7 Payable days 35.7 35.4 32.6 31.5 EBITDA margin 28.7 25.8 24.5 23.9 Net debt/equity (%) (10.0) (13.1) (20.3) (27.3) EBIT margin 21.3 21.2 19.7 19.0 Interest cover - EBIT (X) NM NM NM NM
Valuation 12/15 12/16E 12/17E 12/18E Cash flow statement ($ mn) 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 542.1 503.4 465.0 452.5 P/E (analyst) (X) 24.0 16.0 17.2 17.7 D&A add-back 254.3 144.0 146.3 147.3 P/B (X) 6.8 4.0 3.6 3.3 Minorities interests add-back (0.5) (0.5) (0.4) (0.4) EV/EBITDA (X) 13.0 9.5 10.0 10.1 Net (inc)/dec working capital 109.3 (37.7) (32.0) (18.4) Dividend yield (%) 1.9 3.1 2.9 2.8 Other operating cash flow (100.8) (2.2) (2.4) (2.5) Cash flow from operations 804.5 607.0 576.5 578.5
Capital expenditures (225.3) (150.7) (137.4) (124.5) Acquisitions (0.1) 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others 2.10.00.00.0 Cash flow from investments (223.4) (150.7) (137.4) (124.5)
Dividends paid (common & pref) (239.1) (246.4) (254.7) (240.6) Inc/(dec) in debt (152.1) 0.0 0.0 0.0 Common stock issuance (repurchase) (291.8) (135.3) 0.0 0.0 Other financing cash flows (104.6) 0.0 0.0 0.0 Cash flow from financing (787.7) (381.7) (254.7) (240.6) Total cash flow (206.6) 74.7 184.4 213.4 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 45 August 13, 2016 China: Consumer Staples
Mengniu (Neutral): Sales recovering, but margin drags earnings
Investment Profile Investment view Low High We expect Mengniu to see sales recovery over next 2 years, although Growth Growth we expect earnings to grow more slowly due to a flat margin and lower Returns * Returns * associate profit: Multiple Multiple Volatility Volatility Sales recovering to mid-single digit in 2016-17: post last year’s Percentile 20th 40th 60th 80th 100th decline, we expect a recovering of Mengniu’s sales from higher Mengniu Dairy (2319.HK) Asia Pacific Consumer Peer Group Average UHT sales and strong yogurt contribution. * Returns = Return on Capital For a complete description of the investment profile measures please refer to the Still-high inventory and higher share award will offset near- disclosure section of this document. term GPM gain: Mengniu’s recent milk inventory is still comparable to last year’s level, so we think the company will need Key data Current Price (HK$) 13.28 to continue offering high rebates to clear inventory in the near term. 12 month price target (HK$) 12.90 Market cap (HK$ mn / US$ mn) 52,067.0 / 6,712.6 Also Mengniu is set to allocate a Rmb200mn share based award to Foreign ownership (%) -- its mgmt. team in 2016. We think this will largely offset the benefit from lower raw milk cost. 12/15 12/16E 12/17E 12/18E EPS (Rmb) 0.580.580.610.65 EPS growth (%) (47.9) 0.3 5.0 7.1 Lower income from IMF and upstream business: We expect EPS (diluted) (Rmb) 0.61 0.57 0.61 0.65 Mengniu’s IMF subsidiary Yashili and upstream associate Modern EPS (basic pre-ex) (Rmb) 0.58 0.58 0.61 0.66 P/E (X) 23.8 19.6 18.7 17.5 Dairy to face continued earnings pressure in 2016 due to P/B (X) 2.4 1.9 1.7 1.6 EV/EBITDA (X) 15.4 12.1 11.7 11.0 competition and upstream pressure Dividend yield (%) 1.0 1.2 1.2 1.3 ROE (%) 10.9 9.7 9.7 9.6 Net net, we expect 3% 2015-17E EPS CAGR and a 60bps increase in cash CROCI (%) 8.0 9.1 8.6 8.2 returns. We initiate coverage with a Neutral rating and a 12-month target price of HK$12.90. Price performance chart Risks to the investment case 17 14,500 16 13,500
Stronger/weaker than expected margin improvement, better/weaker 15 12,500 than expected IMF business and associate profit. 14 11,500
13 10,500 Valuation 12 9,500 11 8,500 Our 12-month target price is based on 2017E EV/GCI vs. CROCI/WACC 10 7,500 framework. It implies 18x 2017E PE. Aug-15 Nov-15 Feb-16 May-16 Mengniu Dairy (L) Hang Seng China Ent. Index (R)
INVESTMENT LIST MEMBERSHIP Neutral Share price performance (%) 3 month 6 month 12 month Absolute 5.7 16.1 (20.5) Rel. to Hang Seng China Ent. Index (3.9) 0.5 (4.0)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/09/2016 close. Coverage View: Neutral
Goldman Sachs Global Investment Research 46 August 13, 2016 China: Consumer Staples
Financials
Income Statement Sales: we expect Mengniu 2016/17E sales to increase by 5.2%/5.8% yoy. This is driven by 2% UHT sales CAGR and 18% yogurt CAGR.
1) Yogurt: we expect Mengniu to maintain the leading position in yogurt market with its strong footprint in low temp yogurt and rapid growth of UHT yogurt over 2016- 17E. We expect Just Yogurt to reach Rmb4bn sales in 2016.
2) UHT: expect Milk Deluxe to maintain mid to high single digit sales growth, although we expect basic milk will continue to see subdued growth given the slower industry demand.
3) Milk Beverage: expect a smaller 3% sales drop in 2016 vs. 12.5% decline last year. The sequential better performance is due to company’s increased investment in SuanSuanRu etc. (sponsoring the Super Girl program this summer).
4) Milk powder: expect Yashili to see continued organic sales drop in 2016 due to the high competition.
Margin: we see Mengniu’s OPM to slightly decline by 40bps over 2015-17E, due to higher A&P expenses and larger restricted share expenses. This will more than offset the GPM expansion from lower raw milk prices.
Associate profit: we expect a Rmb230mn lower associate profit, mainly dragged down by Modern Dairy’s weak performance.
Cash Flow Statement Free cash flow: expect gradual improvement of FCF from 1) lower capex of Rmb1.6-1.8bn over the next two years, and 2) less working capital drag vs. 2015.
Dividend: expect stable payout ratio of 23% over next 3 yrs.
Balance Sheet Gearing: with slower capex and no major M&A expected over the next two years, we see Mengniu’s net gearing will gradually reduce to 25% in 2018E vs. 29% in 2015.
ROE and CROCI: expect 80bps ROE drop over 2015-18E due to lower margin and lower leverage ratio. CROCI is more flattish over three years.
Key risks to our rating, TP and earnings estimates 1. Stronger/Weaker than expected liquid milk sales: if the UHT milk or yogurt business saw stronger or weaker growth as the company gained/lost market share, it would has significant impact on company’s topline.
2. Slower turnaround of IMF and upstream dairy business: if the IMF business or upstream farming had further weakness before recovery, it might drag on Mengniu’s near term earnings.
Goldman Sachs Global Investment Research 47 August 13, 2016 China: Consumer Staples
Exhibit 92: We expect Mengniu sales to grow at 5-6% out Exhibit 93: We expect Mengniu margins to stay relatively to 2020 flat Mengniu Sales Forecast Mengniu Margins Forecast
Mengniu Sales (Rmb mn) GP OPM 70,000 7% 57,827 61,356 64,854 35% 54,589 6% 60,000 51,586 6.1% 5.8% 5.9% 30% 32.5% 33.1% 5.7% 5% 31.4% 32.0% 31.8% 31.9% 49,027 5.2% 50,000 4% 25%
3% 40,000 20% 2% 30,000 15% 1%
20,000 0% 10% 5.2% 5.5% 5.2% 5.1% 5.4% 5.7% -1% 5% 10,000 -2% -2% 0% 0 -3% 2015 2016E 2017E 2018E 2019E 2020E 2015 2016E 2017E 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Exhibit 94: We see intensifying competition in the Exhibit 95: IMF and Associate loss (upstream) is a near premium UHT market term drag for the company Premium UHT milk market share IMF and associate income
100% Liquid Milk Associate profit (CMD) Ice cream Milk powder
90% 4,500
80% 4,000 3,500 70% 12% 15% 3,000 18% 20% 22% 60% 22% Other domestic 2,500 2,000 20% Modern Dairy 50% 23% Imports 1,500 22% 1,000 40% 23% 23% 23% Yili JinDian 500 Mengniu Milk Deluxe 30% 0 -500 20% 43% 36% -1,000 32% 30% 28% 28% 2014 2015 2016E 2017E 2018E 10% 0% 2013 2014 2015 2016E 2017E 2018E
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research
Exhibit 96: We expect Mengniu EPS to fall 1% in 1H16 Exhibit 97: Mengniu is now trading at 20X 12m fwd Mengniu interim earnings growth yoy P/E Mengniu 12m fwd P/E
Mengniu Fwd 12m P/E EPS Growth Recurring NPAT yoy growth 80% 50% 36.0 36.0 60% 37% 40% 36.4% 40% 31.0 + 1 STDV 20% 30% 24% 26.0 0% 20% -20% Hist. avg 22x 21.0 19.5 -40% 10% 3.9% -1 STDV -60% -0.7% 16.0 0% -80% 1H14 2H14 1H15 2H15 1H16E 2H16E 11.0 12.2 -100% -10% 6.0 -120% -21.9% -20% Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 -30%
Source: Bloomberg Source: Bloomberg, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 48 August 13, 2016 China: Consumer Staples
Exhibit 98: We expect Mengniu’s 15-17E 2yr Sales CAGR to be 6% Mengniu Summary Financials
Mengniu (2319.HK) RMB mn Divisional P/L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E CAGR Revenue …UHT Milk 10,941 11,113 12,365 11,336 10,710 10,654 10,925 10,603 20,838 19,706 22,053 23,702 21,365 21,528 22,179 23,169 24,360 25,628 1.9% …Milk Bev 4,732 5,693 5,826 6,094 5,658 4,777 5,545 4,599 8,310 8,039 10,426 11,921 10,435 10,144 10,195 10,247 10,390 10,539 -1.2% …Yoghurt 2,590 2,834 3,573 3,841 5,573 5,955 6,687 7,300 4,554 4,592 5,424 7,414 11,527 13,987 16,026 17,829 19,228 20,427 17.9% Liquid Milk 18,263 19,640 21,765 21,271 21,941 21,386 23,156 22,502 33,701 32,336 37,903 43,036 43,327 45,659 48,399 51,245 53,978 56,593 5.7% Ice-Cream 1,954 1,069 1,988 728 1,644 497 1,445 482 3,259 3,171 3,023 2,716 2,141 1,927 1,848 1,809 1,809 1,808 -7.1% Milk Powder and Other Dairy 451 1,980 2,083 2,214 1,979 1,580 1,931 2,069 428 572 2,431 4,297 3,559 4,000 4,342 4,528 4,727 4,938 10.5% Yashili 1,499 1,546 1,271 1,162 1,600 1,494 1,557 1,499 2,816 2,762 3,051 3,325 3,449 3,582 3,722 Total Revenue 20,668 22,689 25,836 24,213 25,564 23,462 26,533 25,053 37,388 36,079 43,357 50,049 49,027 51,586 54,589 57,582 60,514 63,338 5.5%
YoY Growth % Revenue …UHT Milk 14% 10% 13% 2% -13% -6% 2% 0% 24% -5% 12% 7% -10% 1% 3% 4% 5% 5% …Milk Bev 19% 41% 23% 7% -3% -22% -2% -4% 13% -3% 30% 14% -12% -3% 1% 1% 1% 1% …Yoghurt 11% 25% 38% 35% 56% 55% 20% 23% 66% 1% 18% 37% 55% 21% 15% 11% 8% 6% Liquid Milk 15% 20% 19% 8% 1% 1% 6% 5% 25% -4% 17% 14% 1% 5% 6% 6% 5% 5% Ice-Cream -9% 6% 2% -32% -17% -32% -12% -3% 5% -3% -5% -10% -21% -10% -4% -2% 0% 0% Milk Powder and Other Dairy 269% 520% 362% 12% -5% -29% -2% 31% 52% 34% 325% 77% -17% 12% 9% 4% 4% 4% Total Revenue 13% 28% 25% 7% -1% -3% 4% 7% 24% -3% 20% 15% -2% 5.2% 5.8% 5.5% 5.1% 4.7% Organic Revenue 20% 18% 8% 0% -5% 3% 7% 24% -3% 16% 12.8% -2% 4.9% 5.6% 5.5% 5.1% 4.7%
Consolidated P&L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E CAGR Sales 20,668 22,689 25,836 24,213 25,564 23,462 26,533 25,053 37,388 36,079 43,357 50,049 49,027 51,586 54,589 57,582 60,514 63,338 5.5% COGS -15,149 -16,511 -17,454 -17,162 -17,422 -16,229 -17,976 -17,126 -27,796 -27,050 -31,660 -34,616 -33,651 -35,101 -37,238 -39,258 -41,095 -42,733 5.2% Gross Profit 5,519 6,178 8,382 7,052 8,143 7,233 8,557 7,927 9,592 9,029 11,697 15,434 15,375 16,485 17,351 18,325 19,419 20,605 6.2% SG&A -4,529 -5,041 -6,722 -5,610 -6,506 -6,328 -6,885 -6,783 -7,668 -7,381 -9,571 -12,332 -12,834 -13,668 -14,519 -15,401 -16,427 -17,352 6.4% Other income/(expense) -95 -180 -439 2 -165 272 -95 -38 -28 39 -275 -437 107 -133 -78 -44 11 -28 EBIT 894 958 1,221 1,444 1,472 1,176 1,577 1,106 1,896 1,687 1,852 2,665 2,648 2,683 2,755 2,880 3,003 3,224 2.0% D&A -580 -636 -636 -705 -699 -745 -788 -745 -864 -1,017 -1,216 -1,342 -1,444 -1,533 -1,557 -1,548 -1,666 -1,803 3.8% EBITDA 1,474 1,594 1,857 2,149 2,171 1,921 2,366 1,851 2,761 2,704 3,068 4,006 4,092 4,217 4,311 4,428 4,669 5,028 2.6% Net finance costs 99 100 78 130 139 105 106 106 112 179 199 208 245 213 223 238 238 248 -4.6% Other non-operating income (expense 30 125 183 95 143 -6 -69 -23 52 -53 154 278 138 -92 47 131 305 317 -41.7% Pretax income 1,022 1,183 1,481 1,669 1,754 1,276 1,615 1,189 2,061 1,813 2,205 3,150 3,030 2,804 3,024 3,249 3,546 3,790 -0.1% Provisions for taxes -186 -181 -253 -207 -321 -189 -288 -170 -276 -245 -367 -459 -510 -458 -494 -514 -544 -581 -1.6% Minority interest (I/S item) -101 -130 -180 -160 -94 -59 -49 -59 -195 -186 -231 -340 -153 -107 -131 -166 -203 -238 -7.4% Discontinued business 14100 0 0 0 0 0 00240000000 Reported NPAT 749 882 1,049 1,302 1,339 1,029 1,279 960 1,590 1,382 1,631 2,351 2,367 2,239 2,399 2,569 2,800 2,971 0.7% Net one-off's -26 -2 88 91 28 83 -23 -23 -137 -16 -28 179 111 -46 0 0 0 0 Recurring NPAT 776 884 961 1,211 1,310 946 1,301 983 1,726 1,398 1,659 2,172 2,256 2,284 2,399 2,569 2,800 2,971 3.1%
Reported EPS (basic) 0.43 0.49 0.49 0.62 0.34 0.24 0.33 0.25 0.99 0.79 0.92 1.12 0.58 0.58 0.61 0.66 0.71 0.76 2.7% Reported EPS (diluted) 0.43 0.48 0.49 0.62 0.34 0.24 0.33 0.25 0.98 0.79 0.91 1.11 0.58 0.58 0.61 0.65 0.71 0.76 2.6%
YoY Growth % Sales 13% 27% 25% 7% -1.1% -3.1% 3.8% 6.8% 24% -3% 20% 15% -2% 5.2% 5.8% 5.5% 5.1% 4.7% GP 19% 41% 52% 14% -2.9% 2.6% 5.1% 9.6% 23% -6% 30% 32% 0% 7% 5% 6% 6% 6% Operating profit (GP less SG&A) -1% 74% 68% 27% -1.4% -37.3% 2.2% 26.5% 19% -14% 29% 46% -18% 11% 1% 3% 2% 9% EBIT 3% 17% 37% 51% 20.6% -18.5% 7.2% -6.0% 30% -11% 10% 44% -1% 1% 3% 5% 4% 7% NPAT 16% 20% 40% 48% 27.7% -21.0% -4.5% -6.6% 28% -13% 18% 44% 1% -5% 7% 7% 9% 6% Recurring NPAT 3% 37% 24% 37% 36.4% -21.9% -0.7% 3.9% 13% -19% 19% 31% 4% 1% 5% 7% 9% 6%
Margins GP 26.7% 27.2% 32.4% 29.1% 31.9% 30.8% 32.3% 31.6% 25.7% 25.0% 27.0% 30.8% 31.4% 32.0% 31.8% 31.8% 32.1% 32.5% Operating profit (GP less SG&A) 4.8% 5.0% 6.4% 6.0% 6.4% 3.9% 6.3% 4.6% 5.1% 4.6% 4.9% 6.2% 5.2% 5.5% 5.2% 5.1% 4.9% 5.1% EBIT 4.3% 4.2% 4.7% 6.0% 5.8% 5.0% 5.9% 4.4% 5.1% 4.7% 4.3% 5.3% 5.4% 5.2% 5.0% 5.0% 5.0% 5.1% NPAT 3.6% 3.9% 4.1% 5.4% 5.2% 4.4% 4.8% 3.8% 4.3% 3.8% 3.8% 4.7% 4.8% 4.3% 4.4% 4.5% 4.6% 4.7% Recurring NPAT 3.8% 3.9% 3.7% 5.0% 5.1% 4.0% 4.9% 3.9% 4.6% 3.9% 3.8% 4.3% 4.6% 4.4% 4.4% 4.5% 4.6% 4.7% SG&A/Sales -21.9% -22.2% -26.0% -23.2% -25.4% -27.0% -25.9% -27.1% -20.5% -20.5% -22.1% -24.6% -26.2% -26.5% -26.6% -26.7% -27.1% -27.4% Effective tax rate (%) -18.2% -15.3% -17.0% -12.4% -18.3% -14.8% -17.8% -14.3% -13.4% -13.5% -16.6% -14.6% -16.8% -16.3% -16.3% -15.8% -15.3% -15.3%
Note: data includes share option/award expenses.
Source: Company data, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 49 August 13, 2016 China: Consumer Staples
Exhibit 99: Mengniu Summary financials
Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E
Total revenue 49,026.5 51,586.2 54,589.1 57,582.5 Cash & equivalents 7,931.2 8,658.9 10,157.4 11,956.5 Cost of goods sold (33,651.0) (35,101.5) (37,238.0) (39,258.0) Accounts receivable 1,426.3 1,642.1 1,887.2 1,990.7 SG&A (12,834.5) (13,668.4) (14,518.7) (15,401.2) Inventory 4,339.5 4,430.4 4,394.0 4,309.7 R&D 0.0 0.0 0.0 0.0 Other current assets 8,723.3 8,723.3 8,723.3 8,723.3 Other operating profit/(expense) (4.0) (87.4) (77.9) (43.5) Total current assets 22,420.4 23,454.7 25,162.0 26,980.2 EBITDA 3,981.3 4,262.1 4,311.2 4,428.1 Net PP&E 13,868.1 14,801.7 15,401.1 15,874.0 Depreciation & amortization (1,444.3) (1,533.2) (1,556.6) (1,548.3) Net intangibles 7,544.9 7,521.0 7,497.0 7,473.1 EBIT 2,537.0 2,729.0 2,754.6 2,879.8 Total investments 4,185.9 4,093.9 4,140.7 4,271.3 Interest income 563.3 550.0 560.0 570.0 Other long-term assets 2,633.3 2,633.3 2,633.3 2,633.3 Interest expense (318.6) (337.3) (337.3) (331.5) Total assets 50,652.5 52,504.6 54,834.1 57,231.9 Income/(loss) from uncons. subs. 137.7 (92.0) 46.8 130.6 Others 0.0 0.0 0.0 0.0 Accounts payable 2,984.8 3,017.2 3,200.9 3,374.5 Pretax profits 2,919.3 2,849.6 3,024.0 3,248.9 Short-term debt 6,080.8 6,080.8 6,080.8 6,080.8 Income tax (510.0) (458.0) (493.9) (514.4) Other current liabilities 6,910.9 6,910.9 6,910.9 6,910.9 Minorities (153.0) (107.2) (131.2) (165.7) Total current liabilities 15,976.4 16,008.9 16,192.5 16,366.1 Long-term debt 4,969.5 4,969.5 4,969.5 4,969.5 Net income pre-preferred dividends 2,256.3 2,284.5 2,398.9 2,568.8 Other long-term liabilities 3,091.5 3,091.5 3,091.5 3,091.5 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 8,061.0 8,061.0 8,061.0 8,061.0 Net income (pre-exceptionals) 2,256.3 2,284.5 2,398.9 2,568.8 Total liabilities 24,037.4 24,069.9 24,253.5 24,427.2 Post-tax exceptionals 110.8 (45.6) 0.0 0.0 Net income 2,367.2 2,238.9 2,398.9 2,568.8 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 22,136.2 23,848.6 25,863.2 27,921.6 EPS (basic, pre-except) (Rmb) 0.58 0.58 0.61 0.66 Minority interest 4,478.9 4,586.1 4,717.3 4,883.1 EPS (basic, post-except) (Rmb) 0.61 0.57 0.61 0.66 EPS (diluted, post-except) (Rmb) 0.61 0.57 0.61 0.65 Total liabilities & equity 50,652.5 52,504.6 54,834.0 57,231.8 DPS (Rmb) 0.14 0.13 0.14 0.15 Dividend payout ratio (%) 23.1 23.1 23.1 23.1 BVPS (Rmb) 5.68 6.06 6.58 7.10 Free cash flow yield (%) (1.9) 1.9 3.0 3.6
Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth (2.0) 5.2 5.8 5.5 ROE (%) 10.9 9.7 9.7 9.6 EBITDA growth 4.0 7.1 1.2 2.7 ROA (%) 4.8 4.3 4.5 4.6 EBIT growth 2.1 7.6 0.9 4.5 CROCI (%) 8.0 9.1 8.6 8.2 Net income growth 3.9 1.2 5.0 7.1 Inventory days 47.1 45.6 43.2 40.5 EPS growth (47.9) 0.3 5.0 7.1 Receivables days 9.1 10.9 11.8 12.3 Gross margin 31.4 32.0 31.8 31.8 Payable days 33.6 31.2 30.5 30.6 EBITDA margin 8.1 8.3 7.9 7.7 Net debt/equity (%) 11.7 8.4 2.9 (2.8) EBIT margin 5.2 5.3 5.0 5.0 Interest cover - EBIT (X) NM NM NM NM
Valuation 12/15 12/16E 12/17E 12/18E Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 2,256.3 2,284.5 2,398.9 2,568.8 P/E (analyst) (X) 23.8 19.6 18.7 17.4 D&A add-back 1,444.3 1,533.2 1,556.6 1,548.3 P/B (X) 2.4 1.9 1.7 1.6 Minorities interests add-back 153.0 107.2 131.2 165.7 EV/EBITDA (X) 15.4 12.1 11.6 11.0 Net (inc)/dec working capital 1,099.0 (274.2) (25.1) 154.5 Dividend yield (%) 1.0 1.2 1.2 1.3 Other operating cash flow (3,043.4) (282.5) (473.2) (656.0) Cash flow from operations 1,909.2 3,368.1 3,588.5 3,781.3
Capital expenditures (3,035.1) (2,442.9) (2,132.0) (1,997.3) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 949.7 22.7 22.7 22.7 Others 2,622.1 527.3 537.3 547.3 Cash flow from investments 536.6 (1,892.9) (1,572.0) (1,427.3)
Dividends paid (common & pref) (654.7) (547.6) (517.9) (555.0) Inc/(dec) in debt 881.7 0.0 0.0 0.0 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows 608.9 (200.0) 0.0 0.0 Cash flow from financing 835.9 (747.6) (517.9) (555.0) Total cash flow 3,281.7 727.6 1,498.5 1,799.0 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 50 August 13, 2016 China: Consumer Staples
Biostime (Neutral): Swisse offset by weak IMF; Policy the key focus
Investment Profile Investment view Low High Biostime is a leading Infant Milk Formula (IMF) and Health Food provider Growth Growth in China. After it acquired Swisse (an Australian brand) in Sep 2015, its Returns * Returns * health food business is the main growth driver of the company (50% of Multiple Multiple Volatility Volatility operating profit in 2016E). We expect: Percentile 20th 40th 60th 80th 100th 1. Swisse to maintain growth in 2016 but with uncertainty in 2017: Biostime International Holdings (1112.HK) Asia Pacific Consumer Peer Group Average We expect 18% sales 2015-17E CAGR (full-year basis) driven by * Returns = Return on Capital For a complete description of the investment continued China market share gain. The vitamin market still has low profile measures please refer to the disclosure section of this document. penetration in China and a majority of sales are made through direct selling channels. Therefore we see multi-year growth potential for Key data Current Swisse, although we see potential slowdown sequentially from 1) Price (HK$) 23.10 12 month price target (HK$) 26.90 greater competition as more small foreign brands are entering market, Market cap (HK$ mn / US$ mn) 14,181.7 / 1,828.4 2) the strong Swisse growth in past year led to considerable purchases Foreign ownership (%) -- of distributors, which has driven high inventory in the channel. 12/15 12/16E 12/17E 12/18E EPS (Rmb) 0.371.231.331.42 2. Cross border Ecommerce policy a major hurdle: we estimate about EPS growth (%) (72.3) 231.4 8.3 6.3 EPS (diluted) (Rmb) 0.40 1.23 1.33 1.42 30% of Swisse China sales is made through the Free Trade Zone (FTZ) EPS (basic pre-ex) (Rmb) 0.38 1.25 1.36 1.44 channel. A new policy introduced on Apr 8, 2016 stipulates that FTZ P/E (X) 45.7 16.1 14.8 14.0 P/B (X) 2.9 2.7 2.3 2.0 trade should be regarded the same as regular imports, which means EV/EBITDA (X) 23.6 9.4 8.8 8.0 Dividend yield (%) 0.6 1.6 1.7 1.8 distributors will need a full set of customs clearance documents. These ROE (%) 7.7 19.2 17.4 15.9 include Certificates of Origin, Inspection and Quarantine etc., which a CROCI (%) 9.0 14.5 14.5 14.8 majority of distributors do not have as they purchase from wholesalers.
Although the govt. has granted a one year grace period (to Apr 2017), we envision some there will remain uncertainty around how the policy Price performance chart will be implemented after the grace period. 35 12,500 30 11,500 3. IMF business will not recover near term: expect avg. 6% annual 25 10,500 sales decline for 2015-17E, driven by lower volume. The China IMF market faces intense competition from consumers shifting to online 20 9,500 channel. We think Biostime’s products are uncompetitive on retail ASP 15 8,500 vs. trending MNC brands such as Wyeth, Abbott etc. 10 7,500 Aug-15 Nov-15 Feb-16 May-16 Net net, we expect 8%% sales and 7% EPS 2016-18E CAGR. For 2016, we Biostime International Holdings (L) Hang Seng China Ent. Index (R) expect Swisse to contribute Rmb3bn in revenue. We initiate coverage of Biostime with a Neutral and a 12-month target price of HK$26.9.
Share price performance (%) 3 month 6 month 12 month Absolute (0.6) 7.2 53.6 Risks to the investment case Rel. to Hang Seng China Ent. Index (11.0) (12.9) 83.6 Stronger/weaker than expected IMF sales/margin, unfavorable policy on Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/11/2016 close.
Cross border Ecommerce related to Vitamin, faster/slower Swisse topline growth. INVESTMENT LIST MEMBERSHIP Neutral Valuation Our 12-month target price is based on a Sum of the Parts. We value IMF Coverage View: Neutral at 14X and Vitamins (Swisse) at 19X 2017E PE. Our target price implies 17.5X PE.
Goldman Sachs Global Investment Research 51 August 13, 2016 China: Consumer Staples
Exhibit 100: We expect 2016E sales to be boosted by Exhibit 101: We expect margins to start declining out to Swisse revenue 2020E Biostime Revenue Forecast Biostime Margins Forecast
Biostime Sales (Rmb mn) GP OP IMF revenue Swisse revenue YoY Growth % 70% 9,000 45% 60% 61.9% 8,000 38.4% 40% 59.9% 58.2% 56.6% 55.2% 7,000 35% 50% 53.8%
6,000 30% 4,049 40% 3,521 5,000 2,457 3,009 25% 30% 26.4% 25.7% 24.8% 4,000 20% 23.7% 22.7% 20% 3,000 15% 15.1% 3,596 9.4% 2,000 10% 3,969 3,660 10% 3,740 1,000 1.8% 6.7% 5% 0% 0 0% 2015 2016E 2017E 2018E 2019E 2020E 2015 2016E 2017E 2018E
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research Biostime IMF business
Exhibit 102: Newest IMF regulation aims to cut down on Exhibit 103: Newest Nutritional/Supplement regulation # of brands in market switches to a 2 tier (registration+ filing) system Recent Regulation on IMF Recent Regulation on Nutritional Supplements
IMF Key Regulations Nutritional Supplements Category Regulation Name Date Key Features Key Effects/Rationale Stage Date Key Features Notes * One manufacturer no more than 3 series and 9 *Two tier system (both registration and filing) formulas - Registration requires more paperwork/longer process, could take up to 2-3 yrs * The above applies to IMFRegistrationLaw imported/local products - Filing is a much quicker process than registration Enforcing on (婴幼儿配方乳粉产品配方注 8-Jun-16 * Finalized version stating enforcement stage Oct 1 册管理办法) * Clear, unambigious labels *Pre-approved ingredients list exempted from registration for 1st time import * Valid for 5 years 1-Jul-16 - This is a list of ingredients/raw materials that are * Enforced on July 1, 2016 * Violation will result in 3 year exempted from registration - even if it is a 1st time ban in applying import, only filing is needed
*Only products not on pre-approved list and 1st time imports of non-vitamins/minerals - will need to register
Source: CFDA Source: CFDA Biostime Vitamin business (Swisse)
Exhibit 104: We expect Swisse’s sales/margins to slowly Exhibit 105: Swisse achieved c.Rmb 54mn in sales for decline to 2020E June 16 on Tmall/Taobao Swisse Sales and margin forecast Tmall/Taobao sales
Tmall Sales Net margin (after MI) EBITDA margin Rmb mn BKL Swisse Healthy care GNC Swisse revenue growth yoy 70
45.0% 60 Swisse, Rmb 53.91 40.0% 50 35.0% 40 30.0% 25.0% 30
20.0% 20 GNC, Rmb 14.76 15.0% 20.8% 10 BKL, Rmb 13.66 15.6% 15.0% 10.0% 13.0% Healthy care, Rmb 8.30 5.0% 11.0% 0.0% 2016E 2017E 2018E 2019E 2020E
Source: Goldman Sachs Global Investment Research Source: Tmall/Taobao
Goldman Sachs Global Investment Research 52 August 13, 2016 China: Consumer Staples
Exhibit 106: Swisse has a 9% market share of vitamins Exhibit 107: ASP has been trending downwards for Tmall and supplements on Tmall Tmall/Taobao ASP trend Tmall/Taobao market share
Tmall Market Share by Value Market Share RMB200 ASP Trend 10% BKL Swisse Healthy care GNC 9% Swisse, 8.9% RMB180 8%
7% RMB160 6% Healthy care, 5% RMB140 Rmb133.48
4% BKL, Rmb129.78 RMB120 GNC, Rmb115.79 3% GNC, 2%
2% BKL, 2% RMB100 Swisse, Rmb 97.54 1% Healthy care, 1% 0% RMB80 May-… May-… Jul-15 Oct-15 Jan-16 Feb-16 Apr-16 Jan-15 Feb-15 Apr-15 Dec-15 Jun-16 Jun-15 Sep-15 Mar-16 Mar-15 Aug-15 Nov-15 BKL Swisse Healthy care GNC
Source: Tmall/Taobao Source: Tmall/Taobao
Exhibit 108: We value Biostime IMF and Vitamin business Exhibit 109: Biostime currently trading at 19X 12m fwd at 14X and 19X 2017E PE P/E, vs. avg of 18X since 2013 Biostime SOTP valuation Biostime 12m fwd PE
SOTP PE (RMB mn) 2017 NPAT Multiple Equity Value Biostime 12m fwd PE Infant milk formula 245 14.0x 3,429 30.0 Vitamin Supplements (83%) 588 19.0x 11,180 28.0 Total 833 17.5x 14,609 Diluted outstanding shares (mn) 625 26.0
Exchange rate: CNYHKD 1.15 24.0 Implied value per share (HK$) 26.9 22.0
20.0 Avg. 18X 18.0
16.0
14.0
12.0
10.0
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 53 August 13, 2016 China: Consumer Staples
Exhibit 110: We expect Biostime’s IMF segment to continue to be challenged, with a 15-17E 2yr -6% revenue CAGR Biostime Summary Financials
Biostime (1112.HK)
Divisional P/L (Rmb mn) 1H14 2H14 1H15 2H15 1H16E 2H16E 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-17E 2-yr CAGR
Revenues Probiotic Supplements 186 239 173 216 173 216 379 458 425 389 389 401 413 425 438 1% Infant Formula 1,859 2,123 1,698 1,658 1,528 1,522 2,715 3,752 3,982 3,356 3,050 2,971 3,073 3,200 3,332 -6% Dried Baby Food Products 71 81 43 71 41 67 135 199 151 114 108 108 113 119 125 -3% Baby Care Products 73 100 49 61 50 62 106 152 173 110 112 117 140 165 192 3% Subtotal 2,189 2,543 1,963 2,006 1,792 1,867 3,382 4,561 4,732 3,969 3,660 3,596 3,740 3,910 4,088 -5% Vitamin and Supplements (Swisse) 850 1,329 1,641 2,457 2,969 3,433 3,948 4,461 4,951 Total 2,189 2,543 1,963 2,856 3,121 3,508 3,382 4,561 4,732 6,426 6,629 7,029 7,688 8,370 9,039
Gross Profit Probiotic Supplements 133 170 110 148 114 143 295 360 304 259 257 277 297 306 316 3% Infant Formula 1,146 1,321 995 1,129 903 857 1,769 2,422 2,467 2,124 1,761 1,648 1,676 1,710 1,737 -12% Dried Baby Food Products 32 42 19 37 19 34 77 111 74 56 53 55 58 61 64 -1% Baby Care Products 34 48 18 7 18 9 58 82 82 25 28 31 40 51 59 12% Subtotal 1,346 1,581 1,143 1,321 1,913 2,055 2,229 2,975 2,927 2,985 2,099 2,011 2,072 2,128 2,176 -18% Vitamin and Supplements (Swisse) 1,485 1,869 2,078 2,282 2,489 2,688 Total 2,229 2,975 2,927 4,470 3,968 4,089 4,354 4,617 4,865
YoY Growth %
Revenues Probiotic Supplements -18% 4% -7% -9% 0% 0% 14% 21% -7% -8% 0% 3% 3% 3% 3% Infant Formula 11% 3% -9% -22% -10% -8% 61% 38% 6% -16% -9% -3% 3% 4% 4% Dried Baby Food Products 15% -41% -39% -13% -5% -5% 39% 47% -24% -25% -5% 0% 5% 5% 5% Baby Care Products 15% 13% -33% -39% 2% 2% 122% 44% 14% -37% 2% 4% 20% 18% 16% Vitamin and Supplements (Swisse) 93% 21% 16% 15% 13% 11% Total 6% 2% -10% -21% -9% -7% 54% 35% 4% 36% 3% 6% 9% 9% 8%
Margins
GP Margin Ppt Probiotic Supplements 71.6% 71.3% 63.8% 68.5% 65.8% 66.2% 77.7% 78.6% 71.4% 66.4% 66.0% 69.0% 72.0% 72.0% 72.0% 2.6% Infant Formula 61.7% 62.2% 58.6% 68.1% 59.1% 56.3% 65.1% 64.5% 62.0% 63.3% 57.7% 55.5% 54.5% 53.4% 52.1% -7.8% Dried Baby Food Products 46.0% 51.8% 44.6% 52.1% 46.6% 50.9% 56.9% 55.6% 49.1% 49.2% 49.2% 51.2% 51.2% 51.2% 51.2% 2.0% Baby Care Products 46.0% 48.2% 36.8% 11.6% 36.8% 15.2% 54.9% 54.2% 47.2% 22.8% 24.8% 26.8% 28.8% 30.8% 30.8% 4.0% Subtotal 61.5% 62.2% 58.2% 65.8% 106.8% 110.0% 65.9% 65.2% 61.9% 75.2% 57.4% 55.9% 55.4% 54.4% 53.2% -19.3% Vitamin and Supplements (Swisse) 60.4% 62.9% 60.5% 57.8% 55.8% 54.3% Total 65.9% 65.2% 61.9% 69.6% 59.9% 58.2% 56.6% 55.2% 53.8%
EBIT Margin IMF and baby care 29.4% 26.9% 22.9% -8.5% 13.3% 13.9% 13.8% 12.9% 11.7% Vitamin and Supplements (Swisse) 38.3% 39.5% 35.1% 32.3% 30.6% 29.2% Total 29.4% 26.9% 22.9% 9.4% 25.0% 24.2% 23.3% 22.3% 21.3%
EBITDA Margin IMF and baby care 30.1% 27.5% 24.0% -6.2% 17.8% 18.5% 18.7% 18.0% 17.1% Vitamin and Supplements (Swisse) 39.5% 40.9% 36.3% 33.5% 31.7% 30.2% Total 30.1% 27.5% 24.0% 11.3% 28.1% 27.2% 26.3% 25.3% 24.3%
Consolidated P&L 1H14 2H14 1H15 2H15 1H16E 2H16E 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-17E 2-yr CAGR Sales 2,189 2,543 1,963 2,856 3,121 3,508 3,382 4,561 4,732 4,819 6,629 7,029 7,688 8,370 9,039 21% COGS (843) (961) (820) (1,014) (1,208) (1,453) (1,153) (1,586) (1,805) (1,834) (2,661) (2,940) (3,334) (3,753) (4,175) 27% Gross Profit 1,346 1,581 1,143 1,842 1,913 2,055 2,229 2,975 2,927 2,985 3,968 4,089 4,354 4,617 4,865 17% Selling expenses (800) (787) (746) (1,230) (934) (1,037) (1,078) (1,513) (1,588) (1,976) (1,971) (2,049) (2,206) (2,381) (2,554) 2% Administrative expenses (86) (89) (80) (200) (123) (136) (117) (177) (175) (280) (259) (261) (273) (285) (299) -4% Operating Profits 459 705 317 412 855 882 1,034 1,285 1,164 729 1,738 1,780 1,875 1,951 2,012 56% Other income/expenses (39) (40) (57) (68) (43) (36) (39) (56) (79) (126) (79) (78) (81) (85) (89) -21% EBIT 420 664 259 344 812 846 996 1,229 1,085 603 1,659 1,702 1,794 1,866 1,923 68% D&A (25) (26) (30) (91) 0 0 (23) (27) (51) (121) (207) (211) (229) (251) (274) 32% EBITDA 445 690 289 434 812 846 1,018 1,256 1,135 724 1,866 1,913 2,023 2,116 2,197 63% Finance Costs (40) (46) (48) (106) (200) (273) (2) (11) (87) (154) (473) (478) (478) (406) (334) 76% Finance Income 49 64 63 56 28 28 44 88 113 119 56 85 76 87 45 -16% JV / Associate income (0)1 (0)012120 0 1 (0)2434363841 Other Income and Gains 5 2 6 (69) 1 1 12 19 7 (63) 3 20 23 25 27 One-off / Exceptional items 00000 0 0(163)0000000 Pretax income 433 685 280 224 653 615 1,051 1,162 1,118 504 1,268 1,363 1,450 1,610 1,703 64% Provisions for taxes (121) (190) (75) (135) (196) (184) (307) (341) (312) (211) (380) (409) (435) (483) (511) 39% Minority interest (I/S item) 0 0 0 (42) (57) (61) 0 0 0 (42) (118) (121) (129) (140) (150) Reported NPAT 312 495 205 46 400 369 743 821 807 251 769 833 886 987 1,042 82% Net Extraordinary Items (4) (13) 0 21 0 0 (58) (222) (17) 21 0 0 0 0 0 Recurring NPAT 316 507 205 26 400 369 801 1,043 823 231 769 833 886 987 1,042 90%
Recurring EPS (Rmb/Sh) 0.52 0.83 0.33 0.04 0.64 0.59 1.31 1.70 1.34 0.37 1.23 1.33 1.42 1.58 1.67 89%
YoY Growth % Sales 6.2% 1.7% (10.3%) 12.3% 59.0% 22.8% 54.5% 34.9% 3.7% 1.8% 37.6% 6.0% 9.4% 8.9% 8.0% GP (1.8%) (1.5%) (15.1%) 16.5% 67.4% 11.6% 53.1% 33.5% (1.6%) 2.0% 32.9% 3.1% 6.5% 6.1% 5.4% SG&A 18.8% (7.2%) (6.8%) 63.1% 28.0% (18.0%) 51.1% 41.5% 4.3% 28.0% (1.2%) 3.6% 7.3% 7.6% 7.0% OP (26.4%) 6.6% (31.1%) (41.5%) 170.2% 114.2% 55.4% 24.2% (9.4%) (37.4%) 139% 2.4% 5.4% 4.0% 3.1% EBIT (29.8%) 5.4% (38.3%) (48.3%) 213.2% 146.4% 55.1% 23.4% (11.8%) (44.4%) 175% 2.6% 5.4% 4.0% 3.1% Reported NPAT 4.9% (5.5%) (34.4%) (90.6%) 95.3% 693.7% 40.9% 10.4% (1.7%) (68.8%) 206% 8.3% 6.3% 11.4% 5.5% Recurring NPAT (35.4%) (8.4%) (35.2%) (94.9%) 95.3% 1,324.1% 50.2% 30.2% (21.0%) (72.0%) 233% 8.3% 6.3% 11.4% 5.5%
Margins Ppt GP 61.5% 62.2% 58.2% 64.5% 61.3% 58.6% 65.9% 65.2% 61.9% 61.9% 59.9% 58.2% 56.6% 55.2% 53.8% (3.8%) OP 21.0% 27.7% 16.1% 14.4% 27.4% 25.2% 30.6% 28.2% 24.6% 15.1% 26.2% 25.3% 24.4% 23.3% 22.3% 10.2% EBIT 19.2% 26.1% 13.2% 12.0% 26.0% 24.1% 29.4% 26.9% 22.9% 12.5% 25.0% 24.2% 23.3% 22.3% 21.3% 11.7% Reported NPAT 14.3% 19.5% 10.4% 1.6% 12.8% 10.5% 22.0% 18.0% 17.1% 5.2% 11.6% 11.9% 11.5% 11.8% 11.5% 6.6% Recurring NPAT 14.4% 19.9% 10.4% 0.9% 12.8% 10.5% 23.7% 22.9% 17.4% 4.8% 11.6% 11.9% 11.5% 11.8% 11.5% 7.1%
SG&A/Sales (40.5%) (34.5%) (42.1%) (50.1%) (33.9%) (33.4%) (35.3%) (37.1%) (37.3%) (46.8%) (33.6%) (32.9%) (32.2%) (31.9%) (31.6%) 14.0% Effective tax rate (%) (27.9%) (27.8%) (26.8%) (60.5%) (30.0%) (30.0%) (29.3%) (29.4%) (27.9%) (41.8%) (30.0%) (30.0%) (30.0%) (30.0%) (30.0%) 11.8%
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 54 August 13, 2016 China: Consumer Staples
Exhibit 111: Biostime Summary Financials
Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E
Total revenue 4,818.6 6,628.7 7,029.1 7,687.7 Cash & equivalents 1,198.2 2,201.2 1,935.1 2,489.1 Cost of goods sold (1,834.0) (2,660.9) (2,939.9) (3,333.9) Accounts receivable 622.8 544.8 577.7 631.9 SG&A (2,276.6) (2,229.9) (2,309.6) (2,478.8) Inventory 856.2 947.7 1,087.4 1,278.8 R&D 0.0 0.0 0.0 0.0 Other current assets 1,960.7 2,059.4 2,092.7 2,139.8 Other operating profit/(expense) (125.7) (79.3) (78.0) (81.1) Total current assets 4,638.0 5,753.2 5,692.9 6,539.5 EBITDA 703.0 1,865.8 1,912.9 2,022.5 Net PP&E 547.0 598.2 648.1 792.0 Depreciation & amortization (120.7) (207.3) (211.3) (228.7) Net intangibles 2,863.0 2,764.5 2,666.1 2,567.7 EBIT 582.3 1,658.5 1,701.6 1,793.9 Total investments 0.0 0.0 0.0 0.0 Interest income 118.7 55.9 84.6 75.6 Other long-term assets 5,783.4 5,802.3 5,833.7 5,867.3 Interest expense (154.0) (473.2) (477.6) (477.6) Total assets 13,831.3 14,918.2 14,840.8 15,766.5 Income/(loss) from uncons. subs. (0.4) 24.0 33.6 36.0 Others (63.2) 2.8 20.5 22.5 Accounts payable 618.7 801.9 886.0 1,004.7 Pretax profits 483.3 1,268.0 1,362.7 1,450.4 Short-term debt 4,740.5 0.0 0.0 0.0 Income tax (210.6) (380.4) (408.8) (435.1) Other current liabilities 1,320.2 1,320.2 1,320.2 1,320.2 Minorities (41.9) (118.3) (120.5) (129.5) Total current liabilities 6,679.4 2,122.2 2,206.2 2,325.0 Long-term debt 2,687.8 7,510.5 6,587.5 6,587.5 Net income pre-preferred dividends 230.9 769.3 833.3 885.8 Other long-term liabilities 863.9 863.9 863.9 863.9 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 3,551.7 8,374.5 7,451.4 7,451.4 Net income (pre-exceptionals) 230.9 769.3 833.3 885.8 Total liabilities 10,231.1 10,496.6 9,657.7 9,776.4 Post-tax exceptionals 20.6 0.0 0.0 0.0 Net income 251.5 769.3 833.3 885.8 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 3,600.2 4,421.6 5,183.2 5,990.1 EPS (basic, pre-except) (Rmb) 0.38 1.25 1.36 1.44 Minority interest 0.0 0.0 0.0 0.0 EPS (basic, post-except) (Rmb) 0.41 1.25 1.36 1.44 EPS (diluted, post-except) (Rmb) 0.40 1.23 1.33 1.42 Total liabilities & equity 13,831.3 14,918.2 14,840.8 15,766.6 DPS (Rmb) 0.100.310.340.36 Dividend payout ratio (%) 25.0 25.0 25.0 25.0 BVPS (Rmb) 5.867.208.449.76 Free cash flow yield (%) 2.5 11.4 10.1 9.5
Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth 1.8 37.6 6.0 9.4 ROE (%) 7.7 19.2 17.4 15.9 EBITDA growth (39.0) 165.4 2.5 5.7 ROA (%) 2.5 5.4 5.6 5.8 EBIT growth (47.1) 184.8 2.6 5.4 CROCI (%) 9.0 14.5 14.5 14.8 Net income growth (72.0) 233.2 8.3 6.3 Inventory days 164.5 123.7 126.3 129.5 EPS growth (72.3) 231.4 8.3 6.3 Receivables days 24.0 32.1 29.1 28.7 Gross margin 61.9 59.9 58.2 56.6 Payable days 90.9 97.4 104.8 103.5 EBITDA margin 14.6 28.1 27.2 26.3 Net debt/equity (%) 173.0 120.1 89.8 68.4 EBIT margin 12.1 25.0 24.2 23.3 Interest cover - EBIT (X) 16.5 4.0 4.3 4.5
Valuation 12/15 12/16E 12/17E 12/18E Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 230.9 769.3 833.3 885.8 P/E (analyst) (X) 45.7 16.2 15.0 14.1 D&A add-back 120.7 207.3 211.3 228.7 P/B (X) 2.9 2.8 2.4 2.0 Minorities interests add-back (41.9) (118.3) (120.5) (129.5) EV/EBITDA (X) 23.6 9.4 8.8 8.1 Net (inc)/dec working capital (345.8) 169.7 (88.5) (126.8) Dividend yield (%) 0.6 1.6 1.7 1.8 Other operating cash flow 401.8 531.2 567.2 577.9 Cash flow from operations 365.7 1,559.2 1,402.8 1,436.1
Capital expenditures (111.6) (160.1) (162.8) (274.1) Acquisitions (5,998.9) 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others 1,946.7 57.9 86.8 78.0 Cash flow from investments (4,163.8) (102.1) (76.1) (196.1)
Dividends paid (common & pref) (196.1) (63.2) (192.3) (208.3) Inc/(dec) in debt 4,740.5 4.4 (923.0) 0.0 Common stock issuance (repurchase) 11.8 115.3 120.5 129.5 Other financing cash flows (2,907.1) (510.5) (598.1) (607.1) Cash flow from financing 1,649.1 (454.1) (1,593.0) (685.9) Total cash flow (2,148.9) 1,003.0 (266.2) 554.1 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 55 August 13, 2016 China: Consumer Staples
Financials
Income Statement Sales: we expect Biostime to post 5% sales CAGR in 2016/17E, assuming Swisse on a full year basis. The stronger growth for Swisse is partially offset by decline in IMF.
Margin: after a jump in OPM in 2016 (due to the Swisse acquisition), we expect the company’s margin to gradually decline over 2016-18E, due to the intense competition in the IMF business .
Balance Sheet Gearing: Biostime’s net gearing ratio went up substantially post the Swisse acquisition, to 206%. We expect it will be reduced gradually to 127% in 2017E.
ROE: expect gradual fall in ROE after 2016 as company sales growth slows down and margins decline.
Cash Flow Statement Capex: In the absence of major M&A in near term, we expect the company’s capex will stabilize around Rmb150mn annually over 2016-17E.
FCF: We expect the company to generate Rmb1.3-1.4bn free cash flow each year, contributed by Swisse profit.
Valuation
We value Biostime on a Sum of the Part and assign different PE multiples to the IMF and Vitamin (Swisse) businesses. This is due to Biostime having recently bought Swisse and which is still in a high growth stage, whereas the IMF business is already in a mature stage.
We assign 19X 2017E PE to Swisse, in line with large cap China staples companies avg. PE (Yili, Mengniu, WW and Tingyi), given its high single digit growth profile.
We assign 14X 2017E PE to the IMF business, about 1SD below historical avg. level due to its slower sales and lower margin.
From this we derive our 12m target price of HK$26.9/share, implying 17.5X 2017E PE.
Key risks to our rating, TP and earnings estimates Weaker than expected Swisse sales: higher competition or channel inventory destocking could potentially slow Swisse sales and drive lower profit
Higher/lower than expected IMF margin: we expect gradual decline of Biostime IMF margin as competition is still intense.
Goldman Sachs Global Investment Research 56 August 13, 2016 China: Consumer Staples
Bright Dairy (Neutral): Stalled sales, GPM expansion offset by ANP
Investment Profile Investment view Low High We initiate coverage of Bright Dairy with a Neutral rating and a 12- Growth Growth month target price of Rmb13.2 (on 2017E EV/GCI vs. CROCI/WACC), Returns * Returns * implying a c.11 % downside. We forecast 2015-17E 2-year sales CAGR of Multiple Multiple Volatility Volatility 3.1% on the back of continued growth in star-product room temperature Percentile 20th 40th 60th 80th 100th yogurt Momchilovtski — albeit at a much slower pace than in the past Bright Dairy (600597.SS) few years. Asia Pacific Consumer Peer Group Average * Returns = Return on Capital For a complete description of the investment Specifically, we expect the growth rate of Momchilovtksi to stall as we profile measures please refer to the disclosure section of this document. expect it to continue to lose share to Yili/Mengniu’s room temperature yogurt Ambrosial/Just Yogurt, respectively, as the two have invested a Key data Current lot more in their brands and have superior distribution systems in place. Price (Rmb) 14.66 12 month price target (Rmb) 13.20 Market cap (Rmb mn / US$ mn) 17,951.1 / 2,702.3 We see Momchilovtski’s total contribution to revenue to increase Foreign ownership (%) -- minimally to 32% in 2016E-18E from 2015’s 30%. Regionally, we believe Bright Dairy, based in Shanghai and thus traditionally a stronger player 12/15 12/16E 12/17E 12/18E EPS (Rmb) 0.350.390.410.44 in Eastern China, will achieve solid growth in North/Central/South China EPS growth (%) (34.4) 8.7 6.8 6.6 EPS (diluted) (Rmb) 0.35 0.39 0.41 0.44 as management has signaled efforts to expand its reach. EPS (basic pre-ex) (Rmb) 0.34 0.37 0.40 0.42 P/E (X) 51.0 38.0 35.6 33.4 On the margin side, we expect solid GP margin improvement over 2015- P/B (X) 4.9 3.7 3.5 3.4 EV/EBITDA (X) 16.5 13.1 12.8 13.0 2017E (expanding by 120bps to 36.9% in 2017E from 2015’s 35.6%) on Dividend yield (%) 0.7 1.3 1.4 1.4 ROE (%) 9.6 10.1 10.2 10.3 the back of lower raw milk cost. However the majority of expansion will CROCI (%) 15.2 12.0 11.4 10.6 be offset by higher ANP spending. As a result we expect OPM to remain flat at 4.3% by 2017E. We expect Bright Dairy to achieve an 8% 2015-17E NPAT 2-year CAGR. Given the stock has rallied c.15% in the last 3 Price performance chart months, mainly due to historically high GPM and better performance in 24 4,200
North/Central/South China during 1Q16, we see the valuation as fair as it 22 4,000 is currently trading at 34X 12m fwd P/E, vs. an historical average of 36X. 20 3,800 18 3,600
16 3,400 Risks to the investment case 14 3,200
Higher/lower than expected growth momentum of Momchilovtski; 12 3,000 higher/lower than expected promotional activity in market 10 2,800 Aug-15 Nov-15 Feb-16 May-16
Bright Dairy (L) Shanghai - Shenzhen 300 (R) Valuation Our 12-month target price is Rmb13.2, based on our 2017E EV/GCI vs.
CROCI/WACC. It implies 2017E 31XPE. On an EV/EBITDA basis, Bright Share price performance (%) 3 month 6 month 12 month Dairy is trading on par with peers (Exhibit 104), at c. 10-12X 2017E Absolute 11.2 37.3 (27.8) Rel. to Shanghai - Shenzhen 300 6.1 25.8 (9.2) EV/EBITDA, whereas it is trading much above peers on P/E due to its Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/11/2016 close. higher financing expenses associated with the upstream dairy farm and its thin profit margin.
INVESTMENT LIST MEMBERSHIP Neutral
Coverage View: Neutral
Goldman Sachs Global Investment Research 57 August 13, 2016 China: Consumer Staples
Financials
Income Statement Sales: we expect 3% sales CAGR over 2015-18E, slower than Yili/Mengniu’s mid to high single digit. The East China region is more saturated and offers less growth potential while it will take time for Bright Dairy to expand in other region such as North and Central China given its smaller scale and intense competition. For UHT yogurt, we expect Bright Dairy to lose market share to Yili due to Yili’s extensive marketing campaign.
Margin: expect flattish OP margin over the next three years. We expect Bright Dairy will benefit further from lower raw milk price in 2016 but this will be offset by higher A&P expenses as company continued to push its UHT yogurt and expand into other regions.
Balance Sheet Gearing: expect company’s net debt to increase over the next two years and net gearing of 11% in 2018E.
CROCI: expect lower cash return over the next three years due to the still low profit margin and high capex.
Cash Flow Statement Capex: expect a slower capex of Rmb1.6bn/year, due to slower expansion of upstream dairy farming and new plant built-up. However the absolute capex level is still high compared to the company’s operating cash flow.
FCF: despite the slower capex, we expect the company’s FCF will be negative over the next two years due to the subdued margin increase.
Key risks to our rating, TP and earnings estimates Stronger/weaker than expected UHT yogurt growth: we expect a stabilized 5% sales growth for Bright Dairy’s UHT yogurt product. However a faster/slower growth would have significant impact on the company’s topline/profit.
Higher/lower than expected margin: the company makes a thin 4% OPM or only 2.3% NPM. Any increase in the gross margin or fluctuation of selling expenses will impact its profit margin.
Potential M&A of Israel Tnuva: Bright offered to buy 70% of Tnuva in 2H15 but postponed the acquisition due to financing hurdles earlier this year. If this deal takes place it would alter Bright’s capital structure and earnings composition.
Goldman Sachs Global Investment Research 58 August 13, 2016 China: Consumer Staples
Exhibit 112: We expect Bright Dairy to grow sales at Exhibit 113: We expect Bright to see flat OPM until 2018E around 3-4% for the next few years at 4.3% Bright Dairy Sales Forecast Bright Dairy GPM/OPM forecast
Bright Dairy Sales (Rmb mn) Group GPM OPM Total Revenue YoY Growth (%) 40% 24,000 10% 35% 36.8% 36.9% 37.0% 37.2% 37.3% 22,902 8% 35.6% 23,000 22,055 6% 30% 4% 4% 4% 22,000 3% 4% 3% 25% 21,252 2% 21,000 20,606 20% 0% 20,000 19,885 -2% 15% 19,373 19,000 -5% -4% 10%
-6% 4.3% 4.2% 4.3% 4.3% 4.4% 4.5% 18,000 5% -8%
17,000 -10% 0% FY15 FY16E FY17E FY18E FY19E FY20E FY15 FY16E FY17E FY18E FY19E FY20E
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Exhibit 114: We expect Bright’s star product, Exhibit 115: Bright Dairy’s plants are mainly in Eastern Momchilovts, as % of revenue growth to stall China Momchilovtski as % of Bright’s Sales Bright Dairy Plants Location
Momchilovtsi % of Total Revenue Bright Dairy China Plants Location Province/City Type 35% 32% 32% 32% 30% 29% Shanghai Sales 30% Shanghai Processing/Sales 25% Nanjing Processing/Sales 20% 20% Heilongjiang Processing/Sales Wuhan Processing/Sales 15% 11% Beijing Processing/Sales 10% 6% Guangzhou Processing/Sales 5% 2% Chengdu Processing/Sales Tianjin Processing/Sales 0% 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data
Exhibit 116: On a EV/EBITDA basis Bright is trading on Exhibit 117: Bright is currently trading at 34X Fwd 12m par with peers at 2017E EV/EBITDA of 10-11X P/E vs avg of 36X Bright EV/EBITDA vs peers Bright Dairy Fwd 12m P/E
40.0 Fwd 12m P/E 90 100%
35.0 33.4 80 50.8
30.0 50% 70 +2SD
25.0 60 +1SD Want Want China 0% China Mengniu 20.0 50 18.8 Yili 18.0 17.9 17.0 Biostime Bright Dairy 40 15.0 ‐1SD Historical Avg: 36x 33.8 ‐50% 11.7 12.1 11.3 30 10.5 9.6 10.0 ‐2SD
20 ‐100%
5.0 10
- 0 ‐150% 2017E PE 2017E EVEBITDA 14 14 13 13 13 12 12 12 11 11 11 10 10 10 09 09 09 16 16 08 08 08 15 15 15 07 07 07 14 06 06 14 13 12 11 10 09 16 08 15 07 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 59 August 13, 2016 China: Consumer Staples
Exhibit 118: We expect a 3% top line 15-17E 2 year CAGR for Bright Dairy Bright Dairy Summary Financials
Bright Dairy & Food (600597.SS) Rmb millions Divisional P/L FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 15-'17 2yr CAGR 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E
Revenues (external only) Liquid milk 10,109 11,813 15,208 14,110 14,556 15,037 15,763 16,246 16,433 3.2% 4,730 5,379 5,417 6,395 7,220 7,988 7,578 6,532 7,818 6,738 Other Dairy 3,164 3,792 3,983 3,075 2,922 2,922 2,922 2,922 2,922 -2.5% 1,476 1,688 1,684 2,107 2,097 1,887 1,772 1,303 1,684 1,238 Others 502 687 1,194 2,188 2,407 2,648 2,780 2,919 3,065 10.0% 255 247 341 345 556 638 711 1,478 748 1,659 Tnuva Total Revenue 13,775 16,291 20,385 19,373 19,885 20,606 21,464 22,086 22,420 3.1% 6,461 7,314 7,443 8,848 9,872 10,513 10,061 9,312 10,249 9,636
Gross Profit Liquid milk 4,244 4,958 6,329 6,055 6,347 6,552 6,853 7,059 7,145 2,021 2,224 2,319 3,628 3,060 3,268 3,282 2,772 3,448 2,899 Other Dairy 445 570 493 523 561 561 561 561 561 246 198 333 739 314 179 244 279 323 238 Others 149 133 233 322 408 482 535 593 657 27 121 44 -1,403 51 181 49 272 295 377 Tnuva Total Gross Profit 4,837 5,660 7,054 6,899 7,317 7,595 7,949 8,213 8,363 4.9% 2,294 2,543 2,697 2,964 3,426 3,628 3,576 3,323 4,066 3,514
Group OP 576 766 1,005 825 839 883 913 974 1,014 3.4% 179 397 285 481 374 630 354 471 536 566
YoY Growth (%) FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E
Revenues (external only) Liquid milk 15% 17% 29% -7% 3% 3% 5% 3% 1% 15% 19% 33% 25% 5% -18% 3% 3% Other Dairy 20% 5% -23% -5% 0% 0% 0% 0% 14% 25% 24% -10% -15% -31% -5% -5% Others -83% 37% 74% 83% 10% 10% 5% 5% 5% 34% 40% 63% 85% 28% 132% 5% 12% Tnuva Total Revenue 17% 18% 25% -5% 3% 4% 4% 3% 2% 16% 17% 15% 21% 33% 19% 2% -11% 2% 3%
Gross Profit Liquid milk 17% 28% -4% 5% 3% 5% 3% 1% 15% 63% 32% -10% 7% -15% 5% 5% Other Dairy 28% -13% 6% 7% 0% 0% 0% 0% 35% 273% -6% -76% -22% 56% 32% -15% Others -11% 75% 38% 27% 18% 11% 11% 11% 60% -1257% 17% -113% -4% 50% 498% 38% Tnuva Total Gross Profit 25% 17% 25% -2% 6% 4% 5% 3% 2% 23% 22% 18% 17% 27% 22% 4% -8% 14% 6%
Margins 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E
Gross Profit Liquid milk 42.0% 42.0% 41.6% 42.9% 43.6% 43.6% 43.5% 43.5% 43.5% 42.7% 41.3% 42.8% 56.7% 42.4% 40.9% 43.3% 42.4% 44.1% 43.0% Other Dairy 14.1% 15.0% 12.4% 17.0% 19.2% 19.2% 19.2% 19.2% 19.2% 16.7% 11.7% 19.8% 35.1% 15.0% 9.5% 13.8% 21.4% 19.2% 19.2% Others 29.6% 19.3% 19.5% 14.7% 17.0% 18.2% 19.2% 20.3% 21.4% 10.7% 49.1% 12.8% -406.5% 9.3% 28.4% 6.9% 18.4% 39.4% 22.7% Tnuva Group GPM 35.1% 34.7% 34.6% 35.6% 36.8% 36.9% 37.0% 37.2% 37.3% 35.5% 34.8% 36.2% 33.5% 34.7% 34.5% 35.5% 35.7% 39.7% 36.5%
Consolidated P/L (HK mn) FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 15-'17 2yr CAGR 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E
Revenue 13,775 16,291 20,385 19,373 19,885 20,606 21,464 22,086 22,420 3.1% 6,461 7,314 7,443 8,848 9,872 10,513 10,061 9,312 10,249 9,636 COGS -8,938 -10,630 -13,331 -12,474 -12,568 -13,011 -13,516 -13,873 -14,057 -4,167 -4,771 -4,747 -5,884 -6,446 -6,885 -6,485 -5,989 -6,183 -6,122 GP 4,837 5,660 7,054 6,899 7,317 7,595 7,949 8,213 8,363 2,294 2,543 2,697 2,964 3,426 3,628 3,576 3,323 4,066 3,514 SG&A (excl. other rev/exp) -4,262 -4,894 -6,050 -6,074 -6,478 -6,713 -7,035 -7,239 -7,349 -2,115 -2,146 -2,412 -2,483 -3,052 -2,998 -3,222 -2,852 -3,530 -2,948 Sales tax ------Selling Exp. -3,820 -4,410 -5,469 -5,392 -5,777 -5,987 -6,279 -6,461 -6,559 -1,915 -1,904 -2,186 -2,224 -2,785 -2,684 -2,956 -2,435 -3,217 -2,560 Admin Exp. -442 -484 -581 -683 -701 -726 -756 -778 -790 -200 -242 -226 -258 -266 -314 -266 -417 -313 -387 OP 576 766 1,005 825 839 883 913 974 1,014 3.4% 179 397 285 481 374 630 354 471 536 566 Other income/expenses (88) (19) (142) (16) (26) (26) (26) (26) (26) -51 -110 -13 -5 -38 -104 -7 -10 -24 -2 EBIT (reported) 487 747 863 809 813 857 887 948 988 2.9% 128 286 271 476 337 526 347 462 512 564 D&A (323) (325) (406) (538) (609) (640) (634) (628) (650) -156 -167 -160 -165 -181 -225 -406 -132 -227 - EBITDA 811 1,072 1,269 1,347 1,422 1,497 1,521 1,576 1,639 5.4% 285 453 431 641 518 751 753 329 739 564
Net Finance Exp. -65 -53 -78 -140 -91 -93 -92 -91 -97 -45 -19 -33 -21 -16 -62 -56 -83 -55 -37 Other Non-Op Income 69 98 16 36 36 36 36 36 36 14 55 -20 34 -22 -48 -28 64 -49 -179 Profit Before Tax 492 792 800 705 758 800 832 893 927 6.5% 97 322 219 489 298 416 263 442 409 349 Tax -84 -234 -131 -209 -212 -216 -208 -223 -232 4 -88 -63 -170 -58 -73 -36 -172 -116 -96 Minority Interest -24 -68 -15 -78 -90 -96 -103 -110 -114 -4 -20 -8 -61 -31 16 -26 -52 -70 -20 NPAT Attributable to S/holders 384 490 654 418 456 488 521 560 581 8.0% 97 215 148 258 209 359 201 217 223 233 One-off's after tax Recurring NPAT 384 490 654 418 456 488 521 560 581 8.0% 97 215 148 258 209 359 201 217 223 233
WA Shares - Basic 1,137 1,224 1,228 1,231 1,231 1,231 1,231 1,231 1,231 WA Shares - Diluted 1,225 1,224 1,231 1,231 1,231 1,231 1,231 1,231 1,231
EPS - Basic (Rmb/Sh) 0.27 0.33 0.46 0.34 0.37 0.40 0.42 0.45 0.47 0.09 0.18 0.12 0.21 0.17 0.29 0.16 0.18 0.18 0.19 EPS - Diluted (Rmb/Sh) 0.25 0.33 0.46 0.34 0.37 0.40 0.42 0.45 0.47 8.0%
Growth Sales 17% 18% 25.1% -5.0% 3% 4% 4% 3% 2% 16% 17% 15% 21% 33% 19% 2% -11% 2% 3% GP 23% 17% 25% -2% 6% 4% 5% 3% 2% 23% 22% 18% 17% 27% 22% 4% -8% 14% 6% SG&A 18% 15% 24% 0% 7% 4% 5% 3% 2% 20% 17% 14% 16% 27% 21% 6% -5% 10% 3% Operating profit (GP less SG&A) 68% 33% 31% -18% 2% 5% 3% 7% 4% 83% 62% 59% 21% 32% 31% -5% -25% 51% 20% EBIT 60% 53% 15% -6% 1% 5% 4% 7% 4% 104% 60% 111% 66% 24% 10% 3% -12% 48% 22% Recurring NPAT 27% 27% 34% -36% 9% 7% 7% 7% 4% 32% 30% 53% 20% 41% 39% -4% -39% 11% 7%
Margins GP margin 35.1% 34.7% 34.6% 35.6% 36.8% 36.9% 37.0% 37.2% 37.3% 35.5% 34.8% 36.2% 33.5% 34.7% 34.5% 35.5% 35.7% 39.7% 36.5% Operating profit (GP less SG&A) 4.2% 4.7% 4.9% 4.3% 4.2% 95.2% 4.3% 4.4% 4.5% 2.8% 5.4% 3.8% 5.4% 3.8% 6.0% 3.5% 5.1% 5.2% 5.9% EBIT margin 3.5% 4.6% 4.2% 4.2% 4.1% 4.2% 4.1% 4.3% 4.4% 2.0% 3.9% 3.6% 5.4% 3.4% 5.0% 3.4% 5.0% 5.0% 5.9% Recurring NPAT margin 2.8% 3.0% 3.2% 2.2% 2.3% 2.4% 2.4% 2.5% 2.6% 1.5% 2.9% 2.0% 2.9% 2.1% 3.4% 2.0% 2.3% 2.2% 2.4%
SG&A/Sales -30.9% -30.0% -29.7% -31.4% -32.6% -32.6% -32.8% -32.8% -32.8% -32.7% -29.3% -32.4% -28.1% -30.9% -28.5% -32.0% -30.6% -34.4% -30.6% Effective Tax Rate -17% -30% -16% -30% -28% -27% -25% -25% -25% 4% -27% -29% -35% -19% -18% -14% -39% -28% -28%
Source: Company data, Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 60 August 13, 2016 China: Consumer Staples
Exhibit 119: Bright Dairy Summary Financials
Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E
Total revenue 19,373.2 19,885.0 20,606.0 21,464.4 Cash & equivalents 3,319.5 2,722.3 2,263.4 1,818.9 Cost of goods sold (12,474.0) (12,568.2) (13,010.5) (13,515.7) Accounts receivable 1,754.2 1,855.0 1,922.2 2,002.3 SG&A (6,074.2) (6,478.0) (6,712.9) (7,035.5) Inventory 1,852.8 1,866.8 1,896.9 1,933.5 R&D 0.0 0.0 0.0 0.0 Other current assets 628.2 628.2 628.2 628.2 Other operating profit/(expense) (16.4) (25.8) (25.8) (25.8) Total current assets 7,554.7 7,072.3 6,710.7 6,382.9 EBITDA 1,346.5 1,421.8 1,497.0 1,520.9 Net PP&E 5,925.1 6,454.2 6,951.5 7,459.5 Depreciation & amortization (537.8) (608.8) (640.3) (633.5) Net intangibles 532.7 519.2 505.7 492.1 EBIT 808.7 813.0 856.7 887.4 Total investments 69.4 69.4 69.4 69.4 Interest income 53.4 49.8 40.8 34.0 Other long-term assets 1,364.9 1,834.5 2,311.3 2,796.9 Interest expense (193.1) (141.2) (133.6) (126.0) Total assets 15,446.8 15,949.6 16,548.6 17,200.8 Income/(loss) from uncons. subs. (0.3) 0.0 0.0 0.0 Others 36.2 36.2 36.2 36.2 Accounts payable 4,765.6 4,870.5 5,113.2 5,385.8 Pretax profits 704.9 757.8 800.2 831.6 Short-term debt 1,441.4 1,441.4 1,441.4 1,441.4 Income tax (208.8) (212.2) (216.0) (207.9) Other current liabilities 862.8 862.8 862.8 862.8 Minorities (77.8) (89.8) (96.1) (102.7) Total current liabilities 7,069.9 7,174.7 7,417.4 7,690.0 Long-term debt 1,088.8 1,088.8 1,088.8 1,088.8 Net income pre-preferred dividends 418.3 455.8 488.0 521.0 Other long-term liabilities 2,025.0 2,025.0 2,025.0 2,025.0 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 3,113.8 3,113.8 3,113.8 3,113.8 Net income (pre-exceptionals) 418.3 455.8 488.0 521.0 Total liabilities 10,183.7 10,288.5 10,531.2 10,803.8 Post-tax exceptionals 18.2 18.6 18.9 19.4 Net income 436.5 474.4 506.8 540.4 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 4,538.6 4,846.7 5,106.8 5,383.8 EPS (basic, pre-except) (Rmb) 0.34 0.37 0.40 0.42 Minority interest 724.6 814.4 910.5 1,013.2 EPS (basic, post-except) (Rmb) 0.35 0.39 0.41 0.44 EPS (diluted, post-except) (Rmb) 0.35 0.39 0.41 0.44 Total liabilities & equity 15,446.8 15,949.6 16,548.6 17,200.8 DPS (Rmb) 0.12 0.19 0.20 0.21 Dividend payout ratio (%) 33.8 48.0 48.1 48.2 BVPS (Rmb) 3.69 3.94 4.15 4.37 Free cash flow yield (%) (1.3) (2.3) (1.2) (1.0)
Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth (5.0) 2.6 3.6 4.2 ROE (%) 9.6 10.1 10.2 10.3 EBITDA growth 13.9 5.6 5.3 1.6 ROA (%) 3.1 3.0 3.1 3.2 EBIT growth 4.1 0.5 5.4 3.6 CROCI (%) 15.2 12.0 11.4 10.6 Net income growth (26.3) 9.0 7.1 6.8 Inventory days 56.8 54.0 52.8 51.7 EPS growth (34.4) 8.7 6.8 6.6 Receivables days 33.3 33.1 33.5 33.4 Gross margin 35.6 36.8 36.9 37.0 Payable days 130.0 139.9 140.0 141.8 EBITDA margin 7.0 7.2 7.3 7.1 Net debt/equity (%) (15.0) (3.4) 4.4 11.1 EBIT margin 4.2 4.1 4.2 4.1 Interest cover - EBIT (X) 5.8 8.9 9.2 9.6
Valuation 12/15 12/16E 12/17E 12/18E Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 418.3 455.8 488.0 521.0 P/E (analyst) (X) 51.0 39.3 36.8 34.5 D&A add-back 537.8 608.8 640.3 633.5 P/B (X) 4.9 3.8 3.7 3.5 Minorities interests add-back 77.8 89.8 96.1 102.7 EV/EBITDA (X) 16.5 13.6 13.2 13.4 Net (inc)/dec working capital 296.0 (10.0) 145.4 155.9 Dividend yield (%) 0.7 1.2 1.3 1.4 Other operating cash flow 536.4 0.0 0.0 0.0 Cash flow from operations 1,866.4 1,144.5 1,369.8 1,413.1
Capital expenditures (2,166.0) (1,594.0) (1,600.9) (1,613.5) Acquisitions 70.3 0.0 0.0 0.0 Divestitures 70.3 0.0 0.0 0.0 Others (2.4) 0.0 0.0 0.0 Cash flow from investments (2,027.8) (1,594.0) (1,600.9) (1,613.5)
Dividends paid (common & pref) (344.6) (147.7) (227.9) (244.0) Inc/(dec) in debt 1,915.4 0.0 0.0 0.0 Common stock issuance (repurchase) 2.5 0.0 0.0 0.0 Other financing cash flows (156.6) 0.0 0.0 0.0 Cash flow from financing 1,416.7 (147.7) (227.9) (244.0) Total cash flow 1,282.5 (597.2) (459.0) (444.4) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 61 August 13, 2016 China: Consumer Staples
CMD (Neutral): Weak upstream to persist, brand expansion slower
Investment Profile Investment view Low High We initiate coverage of China Modern Dairy with a Neutral rating and a Growth Growth DCF-based 12-month target price of HK$1.05. We are cautious on Returns * Returns * upstream dairy companies given we expect the weak raw milk price to Multiple Multiple Volatility Volatility persist.CMD’s downstream liquid milk expansion has slowed in 2016, Percentile 20th 40th 60th 80th 100th due to the intense premium UHT milk competition and the company’s China Modern Dairy Holdings (1117.HK) adjustments to its distribution network. The stock has fallen 40% ytd on Asia Pacific Consumer Peer Group Average * Returns = Return on Capital For a complete description of the investment concerns of lower raw milk price and margin decline. We see current profile measures please refer to the valuation as fair. disclosure section of this document.
1) Expect tight upstream cash margin on weak raw milk price: we Key data Current expect Modern Dairy’s raw milk price to remain at a low level (Rmb3.85- Price (HK$) 1.11 12 month price target (HK$) 1.05 3.95/kg) over next 3 years given industry’s weak demand and high Market cap (HK$ mn / US$ mn) 5,596.5 / 721.5 inventory. This is 20% lower than the peak level in 2014. We think this Foreign ownership (%) -- will hamper CMD’s upstream margin and free cash flow. 12/15 12/16E 12/17E 12/18E EPS (Rmb) 0.06 (0.10) 0.00 0.06 2) Brand milk to slow down due to high competition: we expect its EPS growth (%) (58.1) (255.5) 97.7 2,607.0 EPS (diluted) (Rmb) 0.06 (0.10) 0.00 0.06 brand milk sales to grow at a slower 17% CAGR for 2015-17E, vs. the EPS (basic pre-ex) (Rmb) 0.06 (0.10) 0.00 0.06 100% in the past 2 years. We expect continued intense competition in P/E (X) 32.6 NM NM 17.1 P/B (X) 1.4 0.7 0.7 0.7 the premium UHT market from the influx of import players and EV/EBITDA (X) 15.6 26.7 15.9 9.0 Dividend yield (%) 0.6 0.0 0.0 1.2 promotions from Yili/Mengniu. CMD announced it is to buy back the ROE (%) 4.5 (7.2) (0.2) 4.1 minority stake of its distributors and build up its own sales team starting CROCI (%) 12.0 8.7 8.1 7.4 2Q16. We expect it to take some time for the company to expand its distribution team. Price performance chart As a result, for FY16E we forecast a net loss of Rmb 559mn, with 3.0 13,500 expectations of a more benign upstream environment in 2H16. This also 2.5 12,500 includes Rmb400mn loss from JV valuation impairment and Rmb870mn 2.0 11,500 biological asset loss. 1.5 10,500
1.0 9,500
Risks to the investment case 0.5 8,500
Upstream: upside/downside as better/worse-than-expected raw milk 0.0 7,500 Aug-15 Nov-15 Feb-16 May-16 price inflation, herd management risks such as disease, higher/lower China Modern Dairy Holdings (L) Hang Seng China Ent. Index (R) yield. Downstream: better/worse-than-expected sales growth and operating margin.
Share price performance (%) 3 month 6 month 12 month Valuation Absolute (22.9) (20.7) (53.8) Rel. to Hang Seng China Ent. Index (30.0) (31.3) (44.2) We value Modern Dairy using DCF, with a WACC of 7.6% and a terminal Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/09/2016 close. growth rate of 3%. We believe the DCF better reflects the actual state of Modern Dairy’s operations (including cash outflows of feed cost for heifers and calves, which is capitalized under IFRS and not depreciated). Our 12-month target price of HK$1.05 implies 10x 2017E PE excluding biological assets.
INVESTMENT LIST MEMBERSHIP Neutral
Coverage View: Neutral
Goldman Sachs Global Investment Research 62 August 13, 2016 China: Consumer Staples
Financials
Income Statement Sales: we expect a 7% sales fall in 2016 followed by 10% rebound in 2017E. The fall is mainly due to lower sales volume in the upstream dairy farm segment as the company has had to pour raw milk into milk powder inventory. For its brand milk business, we see slower expansion in 2016, but still expect double digit CAGR over the next three years as the company further expands its POS after it consolidated its distributors.
Margin: we expect the raw milk ASP to fall 10% yoy in 2016 but more or less stabilize in 2017. This drives our estimates of 430bps OPM decline in 2016.
Balance Sheet Gearing: expect slight decline of gearing ratio due to slower capex but it is still high at 58% over the next three years.
ROE and CROCI: We expect returns to decrease further as profitability declines.
Cash Flow Statement Capex: expect total Rmb1.4bn/year capex over 2016-18E, slower than Rmb2bn in the past two years, due to 1) slower dairy farm expansion, 2) high culling rate of cows to generate cash flow.
FCF: despite the sharp capex reduction, we see limited positive free cash flow over the next two years, due to the lower profit margin and working capital drag from higher inventory.
Key risks to our rating, TP and earnings estimates Higher/lower than expected raw milk price: we expect a more stabilized raw milk price after 2017E, but higher or lower price will have significant impact on the company’s upstream margin.
Stronger/weaker than expected brand milk sales: the company has consolidated its distributors and started to build up its own sales team. The stronger or weaker brand milk performance will have impact on company’s free cash flow and profit margin.
Goldman Sachs Global Investment Research 63 August 13, 2016 China: Consumer Staples
Exhibit 120: Global Raw Milk still trading at a discount to Exhibit 121: China Milk Powder import experienced a China milk strong rebound since late 2014 Global and China Raw Milk Price China Milk Powder Import
China raw milk price (Rmb/Kg) 6.00 Import milk powder volume ('000 ton) Yoy growth (%) NZ WMP equivalent price (auction only) 5.50 NZ WMP equivalent price (auction plus transport, VAT) 180 200% 5.00 160 150% 4.50 140 4.00 120 100% 100 3.50 50% 80 3.00 60 0% 2.50 40 -50% 2.00 20 1.50 - -100% 1.00
Source: Ministry of Agriculture Source: Bloomberg
Exhibit 122: China Milk Powder imports have rebounded Exhibit 123: We expect Modern dairy to see -7% sales in strongly since late 2014 2016E China Liquid milk Import Modern dairy Sales Forecast
Modern Dairy Sales (Rmb mn) Import liquid milk volume ('000 ton) Import price (US$/ton) Revenue YoY Growth % 80.0 3,000 6,000 5,549.5 15% 70.0 2,500 4,920.5 5,000 4,826.3 13% 60.0 4,477.5 10% 2,000 50.0 4,000 10% 5% 40.0 1,500 3,000 30.0 1,000 0% 20.0 2,000 500 ‐5% 10.0 1,000 ‐4%
- - ‐7% 0 ‐10% 2015 2016E 2017E 2018E
Source: Wind Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 64 August 13, 2016 China: Consumer Staples
Exhibit 124: We expect CMD to have tight FCF over 2016- Exhibit 125: CMD is now trading at 10X fwd 12m P/E vs 17E from the culling of more cows avg. of 12X (excluding biological assets) Modern dairy Free cash flow CMD Fwd 12m P/E
Modern Dairy Fwd 12m P/E (exc. Biological assets) EPS Growth FCF (RMB mn) 23.0 120%
200 21.0 100% 80% 100 19.0 + 1 STDV 60% - 17.0 (100) 40% 15.0 (200) 20% 13.0 (300) 0% 9.8 11.0 Average = 11.9x (400) -20% 9.0 (500) -40% -1 STDV (600) 7.0 -60% 6.9 (700) 5.0 -80% 2014 2015 2016E 2017E Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Jan-13 Jan-14 Jan-15 Jan-16
Source: Bloomberg Source: Bloomberg, Goldman Sachs Global Investment Research
Exhibit 126: Our Modern Dairy DCF valuation yields a 12m target price of HK$1.05 Modern dairy DCF valuation
WACC: DCF Valuation Rmb mn HKD Cost of Equity 9.0% Sum of PV of FCF 3,014 Cost of Debt (Pre-tax) 5.7% Terminal Value 18,180 Cost of Debt (After tax) 5.1% Discounted TV 6,977 Target Debt weight 35.0% Enterprise Value 9,991 Target Equity weight 65.0% Less: 2017 net debt 4,444 Tax Rate 10.0% Less: 2017 MI 366 WACC 7.6% Equity Value 5,180 Terminal Growth 3.0% No. of diluted shares (mn) 5,683 Value per share, HKD 0.9 1.05
=L72*L86 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Sales 5,027 4,826 4,478 4,921 5,550 6,175 6,729 7,321 7,964 8,676 9,379 10,169 11,072 12,095 13,075 14,136 15,281 GP 1,865 1,659 1,586 1,702 2,126 2,487 2,772 3,080 3,424 3,809 4,136 4,501 4,914 5,381 5,771 6,185 6,627 Reported EBITDA 1,014 658 (4) 545 850 1,603 1,689 1,906 2,155 2,434 2,622 2,969 3,275 3,628 3,868 4,142 4,470 Less: Govt Grants (11) (16) (12) (17) (21) (28) (35) (45) (55) (65) (75) (84) (98) (112) (125) (144) (162) Less: Associate/JVC gains (0) (5) (4) (5) (5) (5) (6) (6) (7) (7) (8) (8) (9) (10) (11) (12) (13) Add: Loss/(Gain) from FV Chg 329 475 873 640 456 271 404 427 442 457 513 445 460 469 551 626 667 Change in net WC (187) (86) 216 5 (53) (34) (15) (14) (17) (21) (3) 1 4 2 25 28 31 Less: Tax (14) (18) 30 1 (19) (62) (67) (80) (96) (115) (128) (154) (179) (207) (226) (247) (273) Operating CF 1,130 1,008 1,098 1,169 1,208 1,744 1,970 2,187 2,421 2,682 2,922 3,169 3,454 3,770 4,082 4,393 4,721
Less: Capex - PPE (861) (197) (358) (362) (632) (609) (907) (933) (975) (1,019) (1,062) (1,419) (1,488) (1,559) (1,969) (2,064) (2,160) Less: Capex - Land Use Rights - (60) ------Less: Capex - Biological Assets (78) (469) 170 167 167 167 162 162 162 162 162 162 162 162 162 162 162 Less: Breeding/Feeding Cost (1,133) (1,313) (1,216) (1,211) (1,254) (1,302) (1,362) (1,437) (1,521) (1,612) (1,711) (1,834) (1,981) (2,137) (2,307) (2,486) (2,677) Less: Acqusitions (55) (66) - - (1,342) ------Add: Proceeds from disposal of cows 462 447 377 396 398 394 412 436 460 487 515 535 572 614 662 719 774 FCF for valuation (536) (650) 72 159 (1,454) 395 275 415 548 700 827 613 719 851 630 724 820 PV of FCF 159 (1,351) 341 221 309 379 450 494 340 370 407 280 299 315
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 65 August 13, 2016 China: Consumer Staples
Exhibit 127: We expect a 1% 15-17E 2 yr CAGR for sales as we see the dairy Farming business continue to be under pressure Modern Dairy summary financials
Modern Dairy (1117.HK) (RMB mn) Divisional P/L and Key Drivers 1H14 2H14 1H15 2H15 1H16E 2H16E 2014 2015 2016E 2017E 2018E 2015-17E Yr-end Jun-14 Dec-14 Jun-15 Dec-15 Jun-15 Dec-15 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 2Yr CAGR
Segment Revenues Dairy Farm 2,299.9 1,943.4 1,647.8 1,676.6 1,322.4 1,370.9 4,194.0 3,324.5 2,693.3 2,858.4 3,154.4 (7.3%) Branded Liquid Milk 284.6 548.0 789.5 712.4 880.7 903.5 832.7 1,501.9 1,784.2 2,062.1 2,395.2 17.2% Total 2,584.5 2,491.5 2,437.3 2,389.0 2,203.1 2,274.5 5,026.7 4,826.3 4,477.5 4,920.5 5,549.5 1.0% 41% 39% Segment GP (consolidated) Dairy Farm 941.8 836.2 663.7 620.9 530.7 514.6 1,728.7 1,287.1 1,045.4 1,084.8 1,391.6 Branded Liquid Milk 68.2 68.5 225.2 150.2 280.9 259.7 136.7 375.4 540.6 617.7 734.1 Total 1,010.0 904.7 888.9 771.1 811.6 774.4 1,865.4 1,662.6 1,586.0 1,702.4 2,125.7
Key Drivers Raw milk price (RMB/kg) 5.15 4.9 4.5 4.3 4.0 3.9 5.0 4.4 4.0 3.9 3.9 (6.1%)
Calves + Heifers (head) 82,511 93,929 95,240 110,791 110,591 110,359 93,929 110,791 110,359 114,323 118,395 1.6% Milkable cows (head) 107,516 107,578 102,593 114,751 115,251 115,697 107,578 114,751 115,697 119,319 124,624 2.0% Total Herd Size (head) 190,027 201,507 197,833 225,542 225,842 226,055 201,507 225,542 226,055 233,642 243,019 1.8%
Milk yield (tons per milkable cow) 9.0 8.7 9.1 9.1 9.1 9.2 8.9 9.1 9.3 9.5 9.7 2.0% Raw milk volumes produced (K tons) 469.5 461.8 450.8 473.3 425.0 454.3 931.3 924.1 879.3 965.5 1,076.0 2.2%
YoY Growth %
Segment Revenues Dairy Farm 81% 15% -28% -14% -20% -18% 41% -21% -19% 6% 10% Branded Liquid Milk 143% 168% 177% 30% 12% 27% 159% 80% 19% 16% 16% Total 86% 31% -6% -4% -10% -5% 53% -4% -7% 10% 13%
Key Drivers Raw milk price (RMB/kg) 23% -4% -13% -12% -11% -9% 10% -13% -10% -2% 0%
Calves + Heifers (head) -10% 3% 15% 18% 16% 0% 7% 18% 0% 4% 4% Milkable cows (head) 24% 24% -5% 7% 12% 1% 9% 7% 1% 3% 4% Total Herd Size (head) 7% 13% 4% 12% 14% 0% 8% 12% 0% 3% 4%
Milk yield (tons per milkable cow) 7% 2% 1% 5% 0% 1% 5% 2% 2% 2% 2% Raw milk volumes produced (K tons) 53% 24% -4% 2% -6% -4% 37% -1% -5% 10% 11%
Consolidated P&L 1H14 2H14 1H15 2H15 1H16E 2H16E 2014 2015 2016E 2017E 2018E 2015-17E 2Y Sales 2,584.5 2,442.2 2,437.3 2,389.0 2,203.1 2,274.5 5,026.7 4,826.3 4,477.5 4,920.5 5,549.5 1.0% COGS (1,579.2) (1,582.2) (1,548.4) (1,618.9) (1,272.7) (1,945.4) (3,161.3) (3,167.3) (2,891.5) (3,218.1) (3,423.8) 0.8% Gross Profit 1,005.4 860.0 888.9 770.1 930.4 329.1 1,865.4 1,659.0 1,586.0 1,702.4 2,125.7 1.3% SG&A (158.9) (172.2) (185.0) (258.3) (392.0) (343.7) (331.1) (443.3) (650.3) (735.8) (822.6) 28.8% EBIT 846.4 687.9 703.9 511.9 423.8 542.9 1,534.3 1,215.8 935.7 966.7 1,303.1 (10.8%) EBITDA 954.0 580.2 703.9 511.9 423.8 542.9 1,534.3 1,215.8 935.7 966.7 1,303.1 (10.8%) Net interest income / (expense) (123.6) (119.9) (142.2) (160.1) (126.8) (126.8) (243.5) (302.3) (253.6) (257.7) (231.4) (7.7%) Net income from associates 4.7 (4.5) 4.0 0.6 0.0 4.2 0.2 4.6 4.2 4.7 5.0 1.3% Gain from chg in fair value less costs to se (84.6) (244.5) (199.3) (275.6) (449.3) (423.9) (329.1) (474.9) (873.1) (639.8) (456.1) 16.1% Other non-operating income / (expense) (91.0) (100.5) 155.5 (243.3) (400.0) 12.7 (191.5) (87.8) (387.3) (87.3) (284.4) Profit before tax (reported) 552.0 218.4 521.9 (166.5) (552.2) 9.1 770.4 355.4 (574.0) (13.4) 336.1 Profit before tax (excl. Biological gain/lo 636.5 462.9 721.2 109.1 190.0 436.4 1,099.4 830.3 299.1 626.4 792.2 (13.1%) Income tax (6.6) (0.9) (14.6) 2.9 23.9 6.0 (7.5) (11.7) 29.8 0.7 (18.8) Minority interests (22.2) (5.4) (30.4) 7.9 (22.7) 22.7 (27.6) (22.4) (14.7) 0.0 0.0 Reported NPAT 523.2 212.2 477.0 (155.7) (466.7) (92.2) 735.3 321.3 (558.9) (12.7) 317.3 Underlying NPAT (excl. biological gain/ 604.7 447.8 663.2 102.0 (5.3) 331.7 1,052.5 765.2 337.9 627.2 773.4 (9.5%)
YoY Growth % Sales 86.2% 28.5% (5.7%) (2.2%) (9.6%) (4.8%) 52.8% (4.0%) (7.2%) 9.9% 12.8% GP 175.9% 38.5% (11.6%) (10.4%) 4.7% (57.3%) 89.3% (11.1%) (4.4%) 7.3% 24.9% EBIT 211.7% 37.1% (16.8%) (25.6%) (39.8%) 6.0% 98.4% (20.8%) (23.0%) 3.3% 34.8% Reported NPAT 240.7% (35.2%) (8.8%) (173.4%) (197.9%) (40.8%) 52.9% (56.3%) (274.0%) (97.7%) (2,607.0%) Recurring NPAT 179.3% 30.5% 9.7% (77.2%) (100.8%) 225.2% 88.1% (27.3%) (55.8%) 85.6% 23.3%
Margins Ppt GP 38.9% 35.2% 36.5% 32.2% 42.2% 14.5% 37.1% 34.4% 35.4% 34.6% 38.3% -1.7% EBIT 32.7% 28.2% 28.9% 21.4% 19.2% 23.9% 30.5% 25.2% 20.9% 19.6% 23.5% -9.6% Reported NPAT 20.2% 8.7% 19.6% (6.5%) (21.2%) (4.1%) 14.6% 6.7% (12.5%) (0.3%) 5.7% -27.1% Recurring NPAT 23.4% 18.3% 27.2% 4.3% (0.2%) 14.6% 20.9% 15.9% 7.5% 12.7% 13.9% -13.4%
Staff cost & opex /Sales (5.8%) (5.5%) (6.0%) (12.8%) (14.2%) (14.8%) (6.6%) (9.3%) (14.5%) (15.0%) (14.8%) -7.9% Effective tax rate (%) (1.2%) (0.4%) (2.8%) (1.8%) (4.3%) 65.3% (1.0%) (3.3%) (5.2%) (5.4%) (5.6%) -4.2%
Source: Company data, Goldman Sachs Global investment Research
Goldman Sachs Global Investment Research 66 August 13, 2016 China: Consumer Staples
Exhibit 128: Modern Dairy Summary Financials
Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E
Total revenue 4,826.3 4,477.5 4,920.5 5,549.5 Cash & equivalents 833.6 1,780.0 794.4 579.2 Cost of goods sold (3,167.3) (2,891.5) (3,218.1) (3,423.8) Accounts receivable 1,097.8 895.8 984.4 1,110.2 SG&A (925.7) (1,523.4) (1,375.6) (1,278.7) Inventory 834.1 877.2 945.8 998.9 R&D 0.0 0.0 0.0 0.0 Other current assets 187.4 187.3 187.3 187.2 Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 2,952.9 3,740.3 2,911.8 2,875.6 EBITDA 1,008.5 378.8 627.5 1,129.7 Net PP&E 12,967.8 12,745.4 12,755.4 13,277.7 Depreciation & amortization (275.2) (316.2) (300.6) (282.7) Net intangibles 1,441.5 1,441.5 1,441.5 1,441.5 EBIT 733.3 62.6 326.9 847.0 Total investments 25.1 157.3 162.0 167.0 Interest income 12.8 25.4 0.0 0.0 Other long-term assets 120.6 118.1 115.7 113.4 Interest expense (315.1) (279.0) (257.7) (231.4) Total assets 17,507.8 18,202.6 17,386.4 17,875.1 Income/(loss) from uncons. subs. 4.6 4.2 4.7 5.0 Others (80.2) (387.3) (87.3) (284.4) Accounts payable 2,013.0 2,070.4 2,232.3 2,357.8 Pretax profits 355.4 (574.0) (13.4) 336.1 Short-term debt 5,225.5 3,238.9 2,172.3 2,154.6 Income tax (11.7) 29.8 0.7 (18.8) Other current liabilities 0.3 16.2 19.9 27.2 Minorities (22.4) (14.7) 0.0 0.0 Total current liabilities 7,238.8 5,325.4 4,424.6 4,539.7 Long-term debt 821.7 3,110.9 3,066.5 3,039.9 Net income pre-preferred dividends 321.3 (558.9) (12.7) 317.3 Other long-term liabilities 1,497.3 1,930.4 2,072.0 2,152.4 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 2,319.0 5,041.3 5,138.6 5,192.3 Net income (pre-exceptionals) 321.3 (558.9) (12.7) 317.3 Total liabilities 9,557.8 10,366.7 9,563.1 9,732.0 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 321.3 (558.9) (12.7) 317.3 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 7,781.9 7,653.1 7,640.4 7,960.3 EPS (basic, pre-except) (Rmb) 0.06 (0.10) 0.00 0.06 Minority interest 168.1 182.9 182.9 182.9 EPS (basic, post-except) (Rmb) 0.06 (0.10) 0.00 0.06 EPS (diluted, post-except) (Rmb) 0.06 (0.10) 0.00 0.06 Total liabilities & equity 17,507.8 18,202.7 17,386.5 17,875.2 DPS (Rmb) 0.01 0.00 0.00 0.01 Dividend payout ratio (%) 19.8 0.0 0.0 19.9 BVPS (Rmb) 1.47 1.36 1.35 1.41 Free cash flow yield (%) (6.2) 1.8 (2.6) (9.7)
Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth (4.0) (7.2) 9.9 12.8 ROE (%) 4.5 (7.2) (0.2) 4.1 EBITDA growth (29.6) (62.4) 65.6 80.0 ROA (%) 2.0 (3.1) (0.1) 1.8 EBIT growth (39.1) (91.5) 422.2 159.1 CROCI (%) 12.0 8.7 8.1 7.4 Net income growth (56.3) (274.0) 97.7 2,607.0 Inventory days 85.0 108.0 103.4 103.7 EPS growth (58.1) (255.5) 97.7 2,607.0 Receivables days 72.8 81.3 69.7 68.9 Gross margin 34.4 35.4 34.6 38.3 Payable days 196.8 257.7 244.0 244.7 EBITDA margin 20.9 8.5 12.8 20.4 Net debt/equity (%) 65.6 58.3 56.8 56.7 EBIT margin 15.2 1.4 6.6 15.3 Interest cover - EBIT (X) 2.4 0.2 1.3 3.7
Valuation 12/15 12/16E 12/17E 12/18E Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 321.3 (558.9) (12.7) 317.3 P/E (analyst) (X) 32.6 NM NM 16.2 D&A add-back 273.0 313.7 298.1 280.3 P/B (X) 1.4 0.7 0.7 0.6 Minorities interests add-back 22.4 14.7 0.0 0.0 EV/EBITDA (X) 15.6 26.0 15.5 8.8 Net (inc)/dec working capital 558.6 216.4 4.7 (53.5) Dividend yield (%) 0.6 0.0 0.0 1.2 Other operating cash flow 266.5 1,512.7 978.7 664.4 Cash flow from operations 1,441.8 1,498.5 1,268.8 1,208.5
Capital expenditures (2,098.1) (1,403.4) (1,405.3) (1,718.3) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others 986.8 525.8 519.4 567.9 Cash flow from investments (1,111.3) (877.6) (885.8) (1,150.4)
Dividends paid (common & pref) (49.0) (64.3) 0.0 2.5 Inc/(dec) in debt 259.4 174.5 (1,110.9) (44.3) Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows (264.2) 215.4 (257.7) (231.4) Cash flow from financing (53.8) 325.6 (1,368.6) (273.2) Total cash flow 276.6 946.5 (985.6) (215.2) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
Note: Numbers include Biological Assets gains/losses.
Source: Goldman Sachs Global Investment Research
Goldman Sachs Global Investment Research 67 August 13, 2016 China: Consumer Staples
Appendix: China dairy overview
China dairy overview
Exhibit 129: We initiate on 1 upstream dairy farming and 5 downstream dairy processors in this report Dairy industry value chain
UHT Milk Profit Key Players Industry Supply Chain Flow (Rmb/Kg)
Feed (70% of cost)
Other D&A and Grain (60% volume) Forage (40% volume) Farming Opex Salary (9%) Other Cost (10%) (11%)
Corn Soybean Meal Alfalfa Other Forage
Upstream ‐ Dairy Dairy farmers Modern Dairy (1117.HK), Dairy farmers (2011: 2.2mn farmers) Farming free cash flow Huishan (6863.HK), are typically Shengmu (1432.HK) 20‐24mths 5‐6 lactation cycles thin due to half of its cow herd is not milkable. Calves (c.10mn heads) Milkable Cows (c.7mn heads) Culled
Import Milk Import Milk Domestic Raw Milk Output (37mn tons, estiamted supply gap 8‐9mn tons) Powder (102K tons) (572K tons)
Processor GPM 30‐35% Dairy processors (649), IMF processors (128), USD 40bn industry sales for total dairy products. Mengniu (2319.HK), Yili (600887.SS), Bright Dairy (600597.SS), Downstream ‐ Want Want (151.HK) Processors IMF: Biostime (1112.HK), Yashili (1230.HK), Beingmate (002570.SZ) UHT/Pasteurized Milk Milk Beverages Food Yoghurt (Wholesale:US$5.1bn) IMF (Wholesale:US$7.4bn) (Wholesale:US$10bn ) (Wohelsale:US$8.9bn) Ingredients
3rd party distributors direct distribution
Modern Mother/Baby Retailer/Distributo Traditional Trade (2011: 3.2mn POS) Trade (2011: E‐commerce Store (55K rGPM c.25% 148K POS) POS)
Retailers
UHT/Pasteurized Milk Milk Beverages (Retail:US$12bn) Yoghurt (Retail:US$7.2bn) IMF (Retail:US$12.1bn) (Retail:US$13.5bn)
Source: Company data, China Dairy Association, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 68 August 13, 2016 China: Consumer Staples
Exhibit 130: Stock performance closely correlated with Exhibit 131: Divergence between companies, as Yili has dairy sector earnings outperformed and Mengniu has dipped Stock perf. Vs dairy earnings index Dairy stock performance by company
Stock Perf. Index Dairy Earnings Index (RHS) Index to 100 Dairy Stock Performance 2010-13: 2014-16: 2000-2007: 2008-09: 2000-2007: 2008-09: 2010-13: 2014-16: Demand for Quality Milk: Milk Oversupply, High 800 Expansion of UHT milk Melamine Incident 800 Expansion of UHT milk: Melamine Incident Demand for Quality Milk Milk Oversupply, High Kids milk, Premium Infant Inventory and Promotion 1,600 Yili and Mengniu Growth of Kids milk, Premium Inventory and Promotion; formula 1,500 Infant formula: IMF online shift WW, Biostime, Upstream dairy 700 700 1,400 1,300 Yili, 12X 600 600 1,200 1,100 500 500 1,000 900 400 400 800 700 Mengniu, 6X 300 300 600 500 400 200 200 Biostime, 300 2.5X 200 100 100 WW, 2X 100 CMD, 0 0.5X 0 0
Source: Datastream. Source: Datastream.
Exhibit 132: Industry ROIC has declined over the past 5 Exhibit 133: We expect dairy industry capex to slow years due to higher expansion of asset base down in next 3 years Dairy downstream ROIC Total dairy industry capex
Total Dairy Industry Capex (RMB mn)
16,000 Downstream Capex PPE/Land use capex Biological Assets (Capex)
14,000
12,000 3,691
10,000
8,000 5,864 3,807 3,571 6,000 2,553 3,203
1,969 3,472 4,000 3,068 2,018 1,895 5,399 2,000 4,193 4,620 4,353 2,608 1,862 2,800 1,581 0 613 2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research 69 August 13, 2016 China: Consumer Staples
Exhibit 134: Yili and Mengniu are highly involved in advertising/promotions Dairy Key Brands Marketing Strategy
Yili/Mengniu/Bright/Want Want Main Products Marketing Strategy 15-16 Sponsoring Company Product Category Product Feature Program/Promotions/Movies
Yili Brand Entire Brand Olympic Strategic Partner
- Organic - I am Singer 4 Satine UHT Milk - High Protein Content - Biggest Brain 2 - Low Fat Content
-Transformers 4 ShuHua UHT Milk - Suitable for Lactose Intolerant Consumers - LeeHom Wang
- Low Sugar Content MeiYiTian Yoghurt Drink - Happy Camp - High level of lactive acid bacteria
- Good for Digestive System ChangYi Probiotic Drink - Challenger's League 2 - Aids Weight loss process Yili - High Protein Content - Running Man 4 Ambrosial UHT Yoghurt - Organic and Nautral - AngelaBaby - "Greek Yoghurt"
- Nutritional for Kids QQ Star Flavored Milk - Dad, where we going 3 - High amount of Vitamin D
- Targets younger customers YouSuanRu Yoghurt Drink - Jay Chou - Flavourful
- Light taste - Aids weight loss process ChangQing Low Temp Yoghurt - Gao Yuan Yuan - High probiotic content - Fermented from 100% fresh milk
Mengniu Brand Entire Brand Olympic Sponsor
- Superior Milk Source Milk Deluxe UHT Milk - High Protein content - Independence Day 2 - High end premium product
XinYangDao UHT Milk - Suitable for Lactose Intolerant Consumers - Very Perfect
- High level of probiotics YouYiC Yoghurt Drink - WoShiMoWang - Good for Digestive system
- Full Speed 2 - China is Listening Just Milk UHT Yoghurt - 0 additives, all natural - Deng Chao - The Mermaid
- Organic and nutritional Mengniu Future Star Flavored Milk - Disney - 0 additives
- TF Boys SourSour Yoghurt Yoghurt Drink - Flavorful and nutritional - 2016 Super Female Voice
- Good for digestive system GuanYiRu Low Temp Yoghurt - Sun Li - High probiotic content
- 0 Additives U+Milk UHT Milk - Natural Flavor
ChangYou Yoghurt Drink - Contains lactobacillus plantarum
- Bulgarian Probiotics - Ultimate Challenge Bright Momchilovtsi UHT Yoghurt - Exotic/Scientific - Olympics Sponsor
- Suitable for kids WangZai Milk Flavored Milk - Flavorful
Want Want
Source: Channel Checks, Company data.
Goldman Sachs Global Investment Research 70 August 13, 2016 China: Consumer Staples
Exhibit 135: Yili sources its milk from a variety of regions via different partnerships Dairy Company Global Sourcing and Partnerships
Main Global Sourcing/Partnerships New Zealand/Australia China EU US Middle East Name Oceania Dairy (NZ) Sterilgarda Alimenti SpA (Italy) Dairy Farmers of America Type Wholly Owned Equity Minority Stakes (1%-5%) JV JV Function Dairy Production Plant Milk Supply Liquid Milk Supply Milk Powder Plant N/A Amount (USD mn) $262 mn $30mn Comments Bought in 2013 Eg. Huishan (~1%) Since late 2013 Late 2014, Kansas Yili Name Wageningen University (Netherlands) Type Cooperation Function R&D Center Amount (USD mn) Comments Dairy product research Name Yashili New Zealand Dairy Co. Modern Dairy Arla (Denmark) Type Subsidiary ~25% Stake Holds 5% Mengniu Mengniu Function Production/processing Plant 10 year supply agreement (until 201Processing/Distribution N/A N/A Amount (USD mn) $409 mn Comments Founded in 2012 ~ 20% of milk supply China-Denmark Milk Tech. Center Name Type Want Wan Function Purchases WMP from Fonterra N/A N/A N/A N/A Amount (USD mn) Downstream Companies Downstream Comments Name Synlait Milk (NZ) Shanghai Dairy Farm Type Controlling ownership Equity Minority Stake (<10%) Function Farm Cooperative/Milk Processing Milk Processing/farming N/A N/A N/A Amount (USD mn) Comments Invested in 2010, IPO in 2013 Bright Name Pactum Dairy Group (AU) Type Strategic supply agreement Function Manufacturing of UHT beverage Amount (USD mn) Comments Signed in 2014
Source: Company data.
Case study of Meiji and Danone We take a look at two of the larger dairy companies in developed markets and their growth story over the last 10-20 years as a way to gauge the possible future development trajectory of Chinese dairy companies. Danone, the largest dairy company in the world, and Meiji, the largest dairy company in Japan were our focus.
Meiji, a Japanese Confectionary giant and household name has a strong market positions in Chocolate, Snacks, Dairy, and Packaged food in their home market. Specifically in the dairy market, Meiji has had a strong foothold in the fresh milk category. In the yogurt category, Meiji has two star products that were launched in the 1970s, Plain Yogurt and Bulgaria Yogurt (named after the birthplace of yogurt). These are yogurt still in their semi- solid state as opposed to “drinking yogurt” and are usually the healthier in terms of protein/sugar/caloric content (see Exhibit 24). After a series of Chocolate/Snacks/Packed food launches in the 1990s, the company shifted towards the yogurt market to find a new source of growth at the turn of the century; in particular they started developing their Functional Yogurt portfolio that paved the way to a series of successful products throughout the 2000s. Moreover, their turn to Functional Yogurt has successfully created a new market in the Dairy industry that did not exist in the past. Its success was also partially driven by the desire for healthier products in the ageing Japanese population.
In the early 2000s, Meiji launched the “Probio Yogurt LG21”, a yogurt that contains a type of LG21 lactobacillus that reduces helicobacter pylori, a microbe that causes gastritis. Subsequently in 2009, Meiji launched another probiotic yogurt named Meiji Yogurt R-1, which in a study “Reducing the Risk of infection in the elderly by dietary intake of yoghurt fermented with Lactobacillus delbrueckii”, published in the British Journal of Nutrition, showed it could potentially lead to lower incidence of influenza. More recently, the company released the “Meiji PA-3” yogurt, which a study showed it was able to break down purines (a chemical compound found in many meat products that may increase risk of gout and contain high levels of uric acid).
Goldman Sachs Global Investment Research 71 August 13, 2016 China: Consumer Staples
These successful new probiotic products now accounts for near half of its yogurt category sales and has replaced the declining sales of Meiji Bulgaria yogurt (see Exhibit 136). In the last decade, Meiji has slowly transformed itself into a company more catered to the health conscious Japanese population.
Exhibit 136: Meiji’s Functional yogurt has outgrown Exhibit 137: Danone launched its yogurt drink, Actimel, in Bulgaria yogurt (plain yogurt) in recent years the 1990s to compete against Yakult Yogurt growth Danone milestones in dairy business
Danone Historical Milestones in Dairy Bn Yen Functional Yoghurt Meiji Bulgaria Yoghurt Functional Growth (RHS) 100 60% 1910s 1919 Isaac Carrasso began producing own yoghurt in Barcelona *Source: Company website Started advertising beneficial effects of Danone yoghurt 53% 1920s 90 87.2 1950 In the US, decided to put sweet strawberry in bottom…emphasized "A delicious dessert" 50% 1950s 80 75 1959 Hit annual sales of $3mn , produced 3/4 of country's yoghurt 72.3 70 71.6 70 68 1990s 1994 Launched Actimel, (probiotic yoghurt drink) 40% 2004 Activia rolled out in Germany/Canada/Mexico/Netherlands 60 58 2000s 2006 Activia grew by 48% to reach 1.3bn Euro 50 30% 25% 40 38 35 21% 20% 30
20 9% 10% 10
0 0% 2011 2012 2013 2014 2015
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data.
Exhibit 138: Meiji turned its focus to functional/probiotic yogurt drinks in the 2000s Meiji Sales growth
Meiji Total Sales (JPY Bn) Dairy Segment Confectionery/Nutritional Growth
1,200 14% Consolidated into Meiji Holdings: Restructured Focus on Dairy/Processed food Functional/Probiotic segment 12% drinks 1,000
10% Launches Meiji Probio Yoghurt Launches Meiji "Probio Yoghurt R-1" 800 8%
6% Launches Meiji "Probio Yoghurt 600 PA-3" 4%
400 2%
0%
200
-2%
0 -4% FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Company data.
On the other hand, the French dairy giant, Danone, has a slightly different story. As a leader in the global dairy market, the company pioneered the concept of sweetening yogurt. In the 1950’s the company came up with a sweetened strawberry yogurt product, marketing it as a “dessert” rather than a health-oriented product such as that of Meiji’s Plain/Bulgaria yogurt. In 1987, the company introduced Activia, a type of semi-solid state
Goldman Sachs Global Investment Research 72 August 13, 2016 China: Consumer Staples
yogurt, which is often sweetened with other flavors. In 1994, with the invasion of Japan’s popular Yakult yogurt drink into Europe and the rest of the international market, Danone decided to launch its own version of a yogurt drink, Actimel. Like Yakult, Actimel is a Lactobacillus casei based product, a specific strand of bacteria documented to be nutritional to the digestive system. It was successful and the product remains popular to this day.
The paths of both Meiji and Danone in our view shed some light on the possible development for the Chinese dairy, more specifically, yogurt, market. First of all, unlike France and Japan, it is estimated by a third party consultant Dr. ChunYu (a reputable healthcare app/platform in China, as reported in SoHu in April 2016) that almost 25% of China’s population is lactose intolerant (i.e., has trouble digesting fresh milk) – thus the appeal of yogurt as a source of protein instead of milk. Meiji/Danone’s story tells us that yogurt can be either marketed as a flavorful dessert, functional food that helps digestion, a healthy source of protein or a combination of these. We believe the Chinese consumer will gradually shift from their relatively high consumption of flavored milk/UHT milk/UHT Yogurt towards a relatively healthier type of yogurt – that is low temperature yogurt.
Exhibit 139: Danone’s Fresh dairy segment has seen sales almost double in the last 10 years Danone Sales growth
Eur mn Danone Fresh Dairy Product Segment
14,000.3 Fresh Dairy Products Sales Growth 20%
12,000.3 11,057.0 15%
10,000.3 10%
8,000.3
6,510.0 5%
6,000.3
0% 4,000.3
-5% 2,000.3
0.3 -10% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Company data.
Goldman Sachs Global Investment Research 73 August 13, 2016 China: Consumer Staples
Disclosure Appendix Reg AC We, Lincoln Kong, CFA, Joshua Lu, Kevin Li and Xufa Liao, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Lincoln Kong, CFA: Asia Pacific Consumer and Retail. Joshua Lu: Asia Pacific Consumer and Retail, Hong Kong/China Consumer. Xufa Liao, CFA: Asia Pacific Consumer and Retail, China Food and Beverage, China Media. Asia Pacific Consumer and Retail: Ace Hardware Indonesia, Amorepacific, BGF Retail, Biostime International Holdings, Bright Dairy, China Modern Dairy Holdings, China Resources Enterprise, CJ CheilJedang, CP ALL PCL, E-Mart, Eclat Textile Co., GS Retail Co., Hyundai Department Store, KT&G, LG Household & Healthcare, Lotte Shopping, Makalot Industrial Co, Matahari Department Store, Mengniu Dairy, MOMO.COM Inc., Orion, PChome Online Inc., Pou Sheng International Holdings, President Chain Store, PT Gudang Garam Tbk, PT Hanjaya Mandala Sampoerna Tbk, PT Indofood CBP Sukses Makmur, PT Indofood Sukses Makmur Tbk, PT Kalbe Farma Tbk, PT Unilever Indonesia Tbk, Shenzhou International Group Holdings Ltd, Shinsegae, Stella International Holdings, Sun Art Retail Group, Tingyi (Cayman Islands) Holdings, Tsingtao Brewery (A), Tsingtao Brewery (H), Uni- President China Holdings, Uni-President Enterprises, Want Want China Holdings, WH Group Ltd., Yili Industrial, Yue Yuen Industrial. China Food and Beverage: Anhui Gujing Distillery Co., Jiangsu Yanghe, Kweichow Moutai, Luzhou Laojiao, Qinghai Huzhu Barley Wine Co., Shanxi Xinghuacun Fen Wine, Wuliangye Yibin. China Media: Alpha Group, Beijing Enlight Media Co., Beijing Gehua CATV, Beijing Hualubaina Film & TV Co., BlueFocus Communication, China South Publishing & Media, Focus Media Information Technology, Guangdong Advertising, Huayi Brothers Media, IMAX China Holding, Jiangsu Phoenix, Leshi Internet Information & Tech, Oriental Pearl, Ourpalm Co., Wanda Cinema Line Co., Zhejiang Huace Film & TV. Hong Kong/China Consumer: Anta Sports Products, Belle International Holdings, Global Brands Group, Li & Fung, Li Ning Co., Samsonite International SA. Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe
Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 54% 15% 66% 60% 50% As of July 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 2,963 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months. Price target and rating history chart(s) Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research
Goldman Sachs Global Investment Research 74 August 13, 2016 China: Consumer Staples
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Goldman Sachs Global Investment Research 75 August 13, 2016 China: Consumer Staples
months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. 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