证券研究报告 COMPANY RESEARCH Outperform Yili Industrial Group

(maintained) (600887.SH) F&B Completing the acquisition of New Zealand’s company to further progress platformization 5-Aug-19 Analyst Chen Jiao [email protected] Company Profile S0190513070011 Inner Mongolia Yili Industrial Group Co., Ltd. produces , , ice cream, and other dairy products. The Company also produces frozen food and noodles. (Source: Bloomberg) Group Member Event Yan Yan [email protected] On August 1st, 2019, China’s completed the purchase of all of the shares in New Zealand’s Westland Co-operative Dairy Company with a payment of NZ$3.41 per share (NZ$ 244 mn in total).

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Westland has a long history as a dairy company in New Zealand, with high-quality and sufficient raw milk.

Westland’s official website presents that Westland was formed in the hinterland along New Zealand’s west coast in 1937; it runs 429 farms that can supply quality milk in 2018 and has a total of 178,000 dairy cows (with the average number of 415 cows for each farm) with a yoy growth of 1.8%; Westland is the second largest dairy cooperative in New Zealand: its annual milk collection reaches 689,000 tons and its raw milk supply accounts for 4% of the country’s total. Westland’s abundant raw milk resources will complement Yili’s upstream business layout.

As of July 31st, 2019, Westland’s total assets were NZ$ 588 mn (about CNY 2.71 bn) and net assets were NZ$ 230 mn (about CNY 1.06 bn), implying an asset-liability ratio of 61%; its operating revenue settled at NZ$ 693 mn (about CNY 3.195 bn), with a yoy growth of 10.7% recording a new high in the past three years; its gross margin was 21.3%, down by 0.5 pct yoy. Westland turned losses into gains from FY2017: net profit for FY 2018 was NZ$ 560,000 (about CNY 2.58 mn), down by 62.8% yoy, implying a net profit margin of 0.08%.

Westland’s business layout covers the entire industry chain, supporting coordination with Yili in an all- round way.

Besides raw milk supply, Westland expanded its business into dairy products from 2001, engaged in milk powder, butter, protein powder, high-temperature sterilization products and infant formula base powder.

For FY2018, Westland’s UHT products/infant formula milk powder/butter products posted an obvious yoy growth of 461.8%/69.9%/51.3%, with their output increasing by 312.2%/78.2%/8.4% yoy at 0.63 kiloliters/17,000 tons/31,000 tons.

New products are in line with Yili’s development direction, expected to inject new vitality into Yili and support Yili’s product cultivation. Westland has a close trade relationship with China: it received NZ$ 118 mn revenue (about CNY 544 mn) from the Chinese market in FY2018, up by 40% yoy, which accounted for 17% of the total. Westland is expected to fully coordinate with Yili in market and product category expansion.

In the long term, Yili’s major development strategy lies in product category expansion, expected to become “China’s Nestle”.

In H214, Yili proposed a long-range plan of becoming a healthy food group in a CNY 100 bn level by 2020. The company may expand dairy products and other categories through internal growth and

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证券研究报告 COMPANY RESEARCH M&A to gain new steam to grow. After announcing the acquisition of CHOMTHANA (a Thai ice cream company) in 2018, Yili has completed another purchase in New Zealand in August 2019, showing a clear trend of expanding areas and product categories. Product category expansion can share channel resources, making marginal costs reduced. Yili keeps cautious about M&A and selects the company that can coordinate with itself, in order to stabilize its earnings.

Earnings forecast and investment recommendations

As a leading company in China’s dairy industry, Yili is expected to enjoy bright prospects with market share increasing and platformization improving. We estimate Yili’s revenue to be CNY 90.04 bn (+13.2%)/CNY 101.71 bn (+13.0%) and net profit to be CNY 7.2 bn (+11.8%)/CNY 8.13 bn (+13.0%) for 2019/2020, implying a P/E ratio of 26/23x (based on the closing price of August 1st, 2019). We maintain “Outperform” rating for Yili.

Potential risks: failure in the acquisition; intensifying market competition; food safety

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证券研究报告 COMPANY RESEARCH Appendix

Balance Sheet Mn/CNY Income Statement Mn/CNY

FY 2018A 2019E 2020E 2021E FY 2018A 2019E 2020E 2021E

Current Assets 24455 39719 45190 52576 Operating Income 79553 90038 101712 112900

Cash and Cash Equivalent 11051 25296 29769 36011 Operating Expense 49106 54680 60895 67277

Trading Financial Assets 0 0 0 0 Business Tax and Surcharges 531 630 712 790

Account Receivables 1101 1246 1408 1563 Selling Expense 19773 23068 25911 28180

Other Receivables 155 170 192 213 Administration Expense 2980 3286 4703 5419

Inventory 5507 6116 6795 7519 Financial Expense -60 12 69 131

Non-current Asset 23151 21136 19797 18206 Asset Impairment 76 72 52 59

Available-for-sale Financial Assets 831 770 716 742 Change in Fair Value 0 0 0 0

Long-term Equity Investment 1909 2100 2310 2541 Investment Income 261 287 316 347

Investment Real Estate 0 0 0 0 Operating Profit 7691 8576 9685 11391

Fixed Assets 14688 14335 13200 11674 Non-business Income 35 38 42 46

Construction in Progress 2687 1343 672 336 Non-business Expense 148 138 152 167

Oil and Gas Assets 0 0 0 0 Total Profit 7578 8477 9576 11271

Intangible Assets 639 748 868 1002 Income Tax 1126 1267 1429 1683

Total Assets 47606 60855 64987 70782 Net Profit 6452 7209 8147 9588

Current Liabilities 19171 25370 25564 26659 Minority Interest Income 12 13 14 14

Short-term Loans 1523 7615 7767 7923 Net Profit Attributable to Parent Company 6440 7197 8134 9574

Notes Payable 0 0 0 0 EPS(CNY) 1.06 1.18 1.34 1.58

Account Payable 0 0 0 0

Others 17648 17755 17796 18736 Key Financial Ratios

Non-current Liabilities 398 141 249 242 FY 2018A 2019E 2020E 2021E

Long-term Loans 0 0 0 0 Growth

Others 398 140 249 241 Increase Rate of Business Revenue 16.9% 13.2% 13.0% 11.0%

Total Liabilities 19569 25511 25813 26900 Increase Rate of Business Profit 8.1% 11.5% 12.9% 17.6%

Share Capital 6078 6078 6078 6078 Net Profit Growth Rate 7.3% 11.8% 13.0% 17.7%

Capital Reserve 2841 2841 2841 2841

Undistributed Profit 15673 22566 25608 29393 Profitability

Minority Interest 122 134 148 162 Gross Margin Rate 38.3% 39.3% 40.1% 40.4%

Total Shareholders’ Equity 28037 35344 39174 43881 Net Profit Margin 8.1% 8.0% 8.0% 8.5%

Total Liabilities and Equity 47606 60855 64987 70782 ROE 23.1% 20.4% 20.8% 21.9%

Cash Flow Statement Mn/CNY Solvency

FY 2018A 2019E 2020E 2021E Asset-liability Ratio 41.1% 41.9% 39.7% 38.0%

Net Profit 6440 7197 8134 9574 Current Ratio 1.28 1.57 1.77 1.97

Depreciation and Amortization 1609 1731 1845 1902 Quick Ratio 0.99 1.32 1.50 1.69

Property Depreciation Preparation 76 22 20 19

Amortization of Intangible Assets 34 36 38 40 Operation Capacity

Loss from Fair Value Change -0 0 0 0 Asset Turnover Ratio 164.2% 166.0% 161.7% 166.3%

Financial Expense 134 12 69 131 AR Turnover Ratio 77.40 70.57 70.51 69.93

Investment Loss -261 -287 -316 -347

Minority Interest Income 12 13 14 14 Stock Info(CNY)

Change in Working Capitals 518 -880 -954 -204 EPS 1.06 1.18 1.34 1.58

Cash Flows from Operating Activities 8625 8078 8700 11172 OCFPS 1.42 1.33 1.43 1.84

Cash Flows from Investment Activities -5374 9 -3 -88 NAVPS 4.59 5.79 6.42 7.19

Cash Flows from Financing Activities -10749 6159 -4223 -4843

Net Change in Cash -7191 14245 4473 6241 Valuation Ratio

Beginning Balance of Cash 20756 11051 25296 29769 PE 30 26 23 20

Ending Balance of Cash 2860 25296 29769 36011 PB 6.830 5.426 4.923 4.420

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