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China Mengniu Dairy DCF-Based Target Price by 8% to HKD38 from HKD41.3, Factoring in 3.9% RFR, HANG SENG INDEX (Rebased)

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China Mengniu Dairy DCF-Based Target Price by 8% to HKD38 from HKD41.3, Factoring in 3.9% RFR, HANG SENG INDEX (Rebased) Deutsche Bank Markets Research Rating Company Date 28 August 2015 Buy China Mengniu Forecast Change Asia Dairy China Reuters Bloomberg Exchange Ticker Price at 27 Aug 2015 (HKD) 28.90 Consumer 2319.HK 2319 HK HKG 2319 Price target - 12mth (HKD) 38.00 Food & Beverage ADR Ticker ISIN 52-week range (HKD) 45.20 - 27.60 CIADY US1694951088 HANG SENG INDEX 21,080 It is not that bad Winnie Mak Research Analyst (+852) 2203 6178 What are the concerns? [email protected] We used the same title “It is not that bad” for our Mengniu 1H14 results review. This time, we believe market concerns include 1) UHT milk sales/market share decline; 2) high milk powder inventory level; and 3) Key changes insignificant underlying earnings growth. We believe 1) the 15% increase of Price target 41.30 to 38.00 ↓ -8.0% non-UHT sales is encouraging, although ideally, we want to see steady UHT Sales (FYE) 53,572 to 50,284 ↓ -6.1% milk growth together with rapid non-UHT growth and growing market share; 2) Op prof 6.2 to 5.8 ↓ -7.0% there is margin improvement despite high cost inventory; and 3) it has been margin (FYE) well expected. Maintain Buy. Net profit 2,728.2 to ↑ 0.7% (FYE) 2,746.9 1H15 sales -1% <our/consensus; NPAT +28% >our/consensus Source: Deutsche Bank Mengniu 1H15 revenue/NPAT was -1%/+28% to RMB25.56bn/RMB1,339m, compared to our estimate of RMB26.6bn/RMB1,255m (+3%/+20%), and Price/price relative consensus of RMB27bn/RMB1,269m (+5%/+21%). During the year, Mengniu recorded 1) RMB28m reversal of provision for receivables (1H14: RMB88m 48 provision); 2) inventory provision of RMB24m (1H14: RMB262m); and 3) 44 40 RMB50m disposal gain (1H14: RMB118m). Excluding provisions and disposal, 36 Mengniu NPAT would have increased by 0.3%. 32 28 Lowering our target price 8% for RMB devaluation 24 We keep our 2015-17 NPAT forecast largely unchanged. However, to factor in 8/13 2/14 8/14 2/15 RMB devaluation (our estimate: 6.5 by 2015 and 6.9 by 2016), we have cut our China Mengniu Dairy DCF-based target price by 8% to HKD38 from HKD41.3, factoring in 3.9% RFR, HANG SENG INDEX (Rebased) 5.6% ERP, 1.0 beta, debt-free structure, 2% TG. It is equivalent to 19.3x 2016E Performance (%) 1m 3m 12m PE. Separately, apart from translation, Mengniu had RMB8.4bn (HKD5/share) Absolute -19.7 -35.5 -23.9 of non-RMB borrowings, and, for another 5% devaluation from our base case, our DCF-based target price could see 5.6% downside. HANG SENG INDEX -13.4 -24.9 -15.4 Source: Deutsche Bank Maintaining Buy We maintain Buy; Mengniu is learning to sell dairy like beverage; ultimately, it plans to make itself into a nutritional brand, i.e. seeking to transform from almost a commodity to a nutritional brand. As discussed above, our target price is based on DCF (9.5% WACC). Risk: product quality issues. Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 43,356.9 50,049.2 50,283.6 55,070.8 59,751.3 EBITDA (CNYm) 3,069.2 3,874.3 4,418.0 5,394.5 6,269.2 Reported NPAT (CNYm) 1,630.9 2,350.8 2,746.9 3,347.7 3,890.0 Reported EPS FD(CNY) 0.88 1.17 1.40 1.70 1.97 DB EPS FD (CNY) 0.88 1.17 1.40 1.70 1.97 OLD DB EPS FD (CNY) 0.88 1.20 1.39 1.67 1.94 % Change 0.0% -2.1% 0.7% 1.6% 1.6% DB EPS growth (%) 19.4 33.3 19.1 21.5 16.0 PER (x) 25.8 24.5 17.1 14.1 12.2 EV/EBITDA (x) 14.9 15.0 10.9 8.6 7.1 DPS (net) (CNY) 0.20 0.28 0.31 0.38 0.44 Yield (net) (%) 0.9 1.0 1.3 1.6 1.8 Source: Deutsche Bank estimates, company data ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. 28 August 2015 Food & Beverage China Mengniu Dairy Model updated:27 August 2015 Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E Running the numbers Financial Summary Asia DB EPS (CNY) 0.74 0.88 1.17 1.40 1.70 1.97 Reported EPS (CNY) 0.74 0.88 1.17 1.40 1.70 1.97 China DPS (CNY) 0.16 0.20 0.28 0.31 0.38 0.44 BVPS (CNY) 7.1 8.4 11.0 12.1 13.4 15.0 Food & Beverage Weighted average shares (m) 1,768 1,805 1,956 1,956 1,956 1,956 China Mengniu Dairy Average market cap (CNYm) 31,763 40,958 56,126 46,878 46,878 46,878 Enterprise value (CNYm) 27,299 45,646 58,265 48,053 46,457 44,642 Reuters: 2319.HK Bloomberg: 2319 HK Valuation Metrics P/E (DB) (x) 24.4 25.8 24.5 17.1 14.1 12.2 Buy P/E (Reported) (x) 24.4 25.8 24.5 17.1 14.1 12.2 Price (27 Aug 15) HKD 28.90 P/BV (x) 2.53 3.48 2.31 1.98 1.78 1.60 Target Price HKD 38.00 FCF Yield (%) nm 1.5 0.2 2.5 4.8 5.6 Dividend Yield (%) 0.9 0.9 1.0 1.3 1.6 1.8 52 Week range HKD 27.60 - 45.20 EV/Sales (x) 0.8 1.1 1.2 1.0 0.8 0.7 Market Cap (m) HKDm 56,633 EV/EBITDA (x) 10.7 14.9 15.0 10.9 8.6 7.1 EV/EBIT (x) 17.6 24.7 23.0 16.6 12.5 10.0 USDm 7,307 Income Statement (CNYm) Company Profile Sales revenue 36,000 43,357 50,049 50,284 55,071 59,751 China Mengniu Group (CMD) is one of the leading dairy Gross profit 8,950 11,697 15,434 15,913 17,616 19,812 product manufacturers in China. There are 3 principal EBITDA 2,548 3,069 3,874 4,418 5,394 6,269 product categories (1) liquid milk (comprising UHT milk, Depreciation 995 1,218 1,342 1,517 1,678 1,825 milk beverage and yoghurt), (2)ice cream and (3)other Amortisation 0 0 0 0 0 0 dairy products such as milk power, milk tea powder and EBIT 1,553 1,852 2,533 2,901 3,716 4,444 milk tablets. Net interest income(expense) 179 199 208 290 354 340 Associates/affiliates -53 154 278 254 264 298 Exceptionals/extraordinaries 55 24 132 50 0 0 Other pre-tax income/(expense) 0 0 0 0 0 0 Profit before tax 1,734 2,229 3,150 3,495 4,335 5,082 Price Performance Income tax expense 245 367 459 540 726 897 Minorities 186 231 340 209 261 295 48 Other post-tax income/(expense) 0 0 0 0 0 0 44 Net profit 1,303 1,631 2,351 2,747 3,348 3,890 40 DB adjustments (including dilution) 0 0 0 47 46 45 36 DB Net profit 1,303 1,631 2,351 2,794 3,393 3,935 32 28 Cash Flow (CNYm) 24 Aug 13Nov 13Feb 14May 14Aug 14Nov 14Feb 15May 15 Cash flow from operations 2,118 3,469 3,023 3,870 4,778 5,361 Net Capex -2,299 -2,867 -2,931 -2,700 -2,514 -2,754 China Mengniu Dairy Free cash flow -181 602 92 1,170 2,264 2,608 HANG SENG INDEX (Rebased) Equity raised/(bought back) 12 5 4,074 0 0 0 Margin Trends Dividends paid -421 -385 -491 -302 -670 -796 Net inc/(dec) in borrowings -38 10,501 -1,842 0 0 0 12 Other investing/financing cash flows 12 -10,123 -5,894 0 0 0 11 Net cash flow -616 601 -4,061 868 1,593 1,812 9 Change in working capital -309 496 -470 -271 -338 -436 8 6 Balance Sheet (CNYm) 5 Cash and other liquid assets 5,752 7,102 4,650 5,567 7,161 8,972 3 Tangible fixed assets 9,361 18,878 20,206 21,389 22,225 23,153 12 13 14 15E 16E 17E Goodwill/intangible assets 0 0 0 0 0 0 EBITDA Margin EBIT Margin Associates/investments 1,635 4,984 6,162 6,417 6,681 6,979 Other assets 4,167 9,375 16,063 16,379 17,632 18,964 Growth & Profitability Total assets 20,916 40,339 47,081 49,752 53,699 58,068 Interest bearing debt 1,288 11,790 9,947 9,947 9,947 9,947 25 15 Other liabilities 6,507 10,539 12,640 12,960 14,035 15,075 20 Total liabilities 7,795 22,328 22,588 22,908 23,982 25,022 15 10 Shareholders' equity 12,489 15,361 21,489 23,632 26,243 29,277 10 Minorities 632 2,650 3,003 3,212 3,474 3,768 5 5 Total shareholders' equity 13,121 18,011 24,493 26,844 29,717 33,046 0 Net debt -4,464 4,688 5,298 4,380 2,787 975 -5 0 12 13 14 15E 16E 17E Key Company Metrics Sales growth (%) -3.7 20.4 15.4 0.5 9.5 8.5 Sales growth (LHS) ROE (RHS) DB EPS growth (%) -18.6 19.4 33.3 19.1 21.5 16.0 Solvency EBITDA Margin (%) 7.1 7.1 7.7 8.8 9.8 10.5 EBIT Margin (%) 4.3 4.3 5.1 5.8 6.7 7.4 30 Payout ratio (%) 21.7 22.1 23.3 22.0 22.0 22.0 20 ROE (%) 10.9 11.7 12.8 12.4 13.6 14.2 10 Capex/sales (%) 6.4 6.6 5.9 5.4 4.6 4.6 0 Capex/depreciation (x) 2.3 2.4 2.2 1.8 1.5 1.5 -10 -20 Net debt/equity (%) -34.0 26.0 21.6 16.3 9.4 3.0 -30 Net interest cover (x) nm nm nm nm nm nm -40 Source: Company data, Deutsche Bank estimates 12 13 14 15E 16E 17E Net debt/equity (LHS) Net interest cover (RHS) Winnie Mak +852 2203 6178 [email protected] Page 2 Deutsche Bank AG/Hong Kong 28 August 2015 Food & Beverage China Mengniu Dairy It is not that bad What are the concerns? While not a complete list, but below are a few common concerns.
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