China / Hong Kong Industry Focus
China Dairy Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 July 2015
Awakening of the rising giants HSI: 25,399
Dairy demand should continue to outperform the F&B • ANALYST sector on favourable consumption trends in the Alice HUI CFA, +852 2971 1960 medium term [email protected] Prefer downstream dairy giants over upstream players; • Alison Fok +852 2971 1938 cautious on infant milk formula plays on pricing [email protected] pressure concerns Stock picks: China Mengniu and Bright Dairy • Recommendation & valuation Expect dairy to outperform overall F&B sector. Despite near term challenges, dairy demand should continue to Price Target Upside Rec FY16 Mkt outstrip most other F&B segments, on consumption upgrades Local$ Price % PE (x) Cap Local$ US$bn and continuing shift towards products with healthy Bright Dairy 'A' proposition. But the change in competitive landscape (as more CNY 18.08 19.70 9 Buy 25.2 3.6 global players get in), as well as shift in distribution channels (600597 CH) China Mengniu Dairy (in particularly e-commerce) and supply dynamics (local HKD 38.35 47.10 23 Buy 19.6 9.7 production vs imported raw milk sources) would have different (2319 HK) China Modern Dairy implications on different players along the dairy supply chain. HKD 2.53 3.35 32 Buy 9.1 1.7 (1117 HK) Prefer downstream; pricing pressure for infant formula Yashili International^ We are more positive on downstream dairy HKD 2.27 n.a. n.a. NR 18.8 1.4 and upstream. (1230 HK) players, in particularly market leaders such as Mengniu and Yili. Inner Mongolia Yili A segment where market concentration is the highest along CNY 18.63 n.a. n.a. NR 17.7 18.4 'A'^ (600887 CH) the chain, we expect leaders will continue to gain market Biostime International^ share given their dominant presence, strong product HKD 21.60 n.a. n.a. NR 11.3 1.7 (1112 HK) innovation ability and ASP flexibility. We are cautious however, China Huishan Dairy #^ on the infant milk formula market which remains very HKD 2.17 n.a. n.a. NR 16.1 4.0 (6863 HK) fragmented in China with downward pricing pressure going forward. As for upstream dairy farms, their near-term ^ Consensus profitability would undoubtedly be affected by the sharp # FY16: FY17 decline in raw milk prices since last year, but in the longer run, Source: Thomson Reuters, DBS Vickers major players in the field should still have room for market share gains as industry consolidation continues.
Top picks – China Mengniu and Bright Dairy. We maintain our BUY rating on China Mengniu as we expect the company to record consistent earnings growth with its JV with Danone providing a new earnings driver in the medium to longer term. We initiate coverage on Bright Dairy with BUY given its strong foothold in East China with room for further earnings upside as scale ramps up and impact from its acquisitions kick in. In the longer run, the increasing popularity of pasteurised milk would make Bright Dairy a key beneficiary. While we are cautious on the near term earnings outlook for upstream farms, we maintain our BUY rating on China Modern Dairy as current valuation should have already priced in the weaker outlook, with the company remaining as a key beneficiary of market consolidation.
www.dbsvickers.com ed- JS / sa- CW
Industry Focus
China Dairy Sector
Table of Contents
Dairy growth to outperform overall F&B sector 3 Liquid milk and milk beverages – product upgrades are keys 5 Upstream dairy farms – Margin pressure from raw milk price decline 10 Infant formula – plagued by price wars and channel evolution 14 Stock recommendation 18 Stock Profiles 22 Bright Dairy & Food (600597 CH) 22 China Mengniu Dairy (2319 HK) 42 China Modern Dairy (1117 HK) 48 Yashili International (1230 HK) 54 Inner Mongolia Yili (600887 CH) 58 Biostime International (1112 HK) 62 China Huishan Dairy (6863 HK) 66 Appendix 70 PE & PB band charts 78
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Industry Focus China Dairy Sector
Dairy growth to outperform overall F&B sector attractive in the F&B universe, helped by the following key drivers: While the dairy sector has not been immune to the overall slowdown seen in the China consumption market facing most (i) Still room to grow on consumption per capita F&B players in general, the sector’s growth has nonetheless Despite the strong growth in the past with China already displayed stronger momentum than most. The becoming the third largest market for dairy products, China’s outperformance has also been apparent for listed dairy per capita consumption remains well below the global average. companies, which saw higher growth in general against players Even compared with other Asian countries with more similar in other sectors. dietary preferences (such as Taiwan, where per capita consumption of milk is c.40% higher than in China), China’s Dairy sector growth vs. other F&B beverages – 2014 current level still represents abundant room for growth.
Juice Milk - Per capita consumption (2014)
Carbonates kg per capita
120 110 RTD tea 109 100 90 Bottled water 80 Drinking milk 60 Sports drinks 40 31 Yogurt 15 20 11 -10% 0% 10% 20% 30% 0 Source: Euromonitor, DBS Vickers Australia New United Japan Taiwan China Zealand States
2014 sales growth – key F&B players Source: ilat.il, DBS Vickers
(ii) Continual urbanisation Tingyi UPC One driver to boost demand growth ahead would be China’s urbanisation. Although there has been significant growth in Want Want consumption of dairy products in rural areas in the past few China Foods years, the gap between rural and urban consumption remains Tsingtao Brewery large. As China’s urbanisation continues, this would further increase demand for dairy products. Yili
Mengniu
Bright
CMD
(20) 0 20 40 60
Source: Company data, DBS Vickers
We are positive on the dairy sector in the medium to long run, with overall sector growth expected to remain one of the most
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Industry Focus
China Dairy Sector
consumers are becoming more sophisticated and demanding Dairy consumption – urban vs. rural more varieties of dairy products with higher focus on quality. As a response, the dairy companies have come up with higher RMB value-added and premium products, which have been well 350 received by consumers. 292.6 300 272.9 253.6 250 234 Consumption of dairy products by type – trend 196.1 198.5 200 179.4 RMB bn 160.2 144.3 250 150 120.5 91.3 91.7 200 100 125 115 50 150 106 97 88 0 100 81 2009 2010 2011 2012 2013 2014 76 47 38 43 30 34 Urban Rural 50 24 27 52 57 64 32 36 41 46 Source: Frost & Sullivan, DBS Vickers 0
(iii) China consumer’s changing appetite 2012 2013 2014 2015E 2016E 2017E 2018E Yogurt Fresh milk UHT milk While not a traditional diet for Chinese, dairy consumption has been rising on government support and shifting of food Source: Frost & Sullivan, DBS Vickers consumption patterns as incomes rise. As consumers are now more health conscious, the strong nutritional value of dairy While the overall outlook for the dairy sector remains positive products perceived by most is also one reason for rising in the medium to longer run, there are also many challenges popularity of dairy products. facing the industry, including the sharp volatility of raw milk prices in the past 1-2 years, the significant change in Chinese consumption patterns trends distribution channels and the intensifying competition from both domestic and global plays. Meanwhile, heightened food 100% 3% 3% 4% safety concerns means the Chinese government would also be 11% 10% 90% 11% more incentivised to encourage market consolidation. 80% 10% 14% 3% 17% 70% 4% Against this backdrop, not all players will be able to benefit 10% 6% 60% 14% from the growth trend. In our view, liquid milk and milk 15% 50% beverage players should see the best potential on margin 40% expansion, while upstream and infant formula players may see 63% more pricing pressure down the road. 30% 54% 47% 20% 10% 0% 1991 2001 2011 Grain Produce Dairy & Eggs Meats Sugar & Fat Others
Source: National Geographics, DBS Vickers
(iv) Consumption upgrading
Another trend which is becoming more prominent is trading up by consumers. Instead of consuming just plain UHT milk,
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Industry Focus China Dairy Sector
but there is still abundant room for market share gains Liquid milk and milk beverages – product upgrades are … keys With already a strong lead over its smaller players, leading players like Mengniu and Yili should continue to gain market Relatively high market concentration with leaders shares given their strong scale, established supply chain and dominating… extensive market penetration. In fact, their combined market share has been growing in the past few years, with the trend Among the three dairy segments that we covered in this report, likely to continue. downstream liquid milk and beverage segment has the highest market concentration. The top three players, Mengniu, Yili and Bright Dairy account for over 42% share in the liquid milk Market share trend market in China. Despite this, compared with other F&B segments, the concentration is not particularly high, indicating % there is room for leaders to grow market shares further. 50 45 7.1 40 5.1 5.5 5.7 6.3 Dairy - Market shares of top players 35 5.2 4.1 30 Nestlé SA Hebei 16.2 18.1 17.9 17.8 18.3 Wahaha 25 14.4 5% 4% Yangyuan 14.2 Zhihui Want Want 20 4% 4% 15 Bright 7% 10 18.8 19.7 18 18.2 18.7 18.9 Coca-Cola 15.8 5 Co, The Yili 0 18% 2% Beijing San 2006 2008 2010 2012 2013 2014 2015 Yuan 2% Mengniu Yili Bright Dairy
Mengniu Source: Euromonitor, DBS Vickers Dairy Others 19% 35%
Source: Euromonitor, DBS Vickers
Market share: Top 3 players vs. other sectors
% 100 90 2.3 80 29 70 60 10.8 50 13.2 14 13.6 40 7.1 18.4 30 63.3 16.8 18.3 20 39.4 10 23.2 23.3 18.9 0
1 2 3
Source: Euromonitor, DBS Vickers
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Industry Focus
China Dairy Sector
Intense competition at the mass-end, yet a necessity Growth to be driven by new products…
While we expect top players to maintain their leading positions To tackle this, domestic leaders have been increasingly focusing in the UHT plain milk category, the real growth drivers should on newer and valued-added products. Following the success come from new and value-added products or new categories. of Mengniu’s Milk Deluxe, which created a whole new The mass market UHT plain milk category, although still a big premium milk market in China (market size now estimated at component of dairy sales, is already a commoditised market c.Rmb35bn), the good market reception of UHT yogurt, first where even key players are not having much pricing power. launched by Bright Dairy in 2010, is another such example. This is also a market where we see increasing, and viable, competition coming from imported UHT milk through the e- Bright Dairy – market share in yogurt had double since commerce channel. launch of UHT yogurt Momchilovtsi
% China UHT milk imports 25 23 Launch of 22 MT % Momchilovtsi 40,000 250 20 18 35,000 15 200 30,000 15 13 12 150 11 11 25,000 10 20,000 100 10 15,000 50 10,000 5 0 5,000 0 (50) 0 -14 r-14 r-15 2007 2008 2009 2010 2011 2012 2013 2014 2015 g
p p Jun-14 Oct-13 Feb-14 Oct-14 Feb-15 A A Dec-13 Dec-14 Au Source: Euromonitor, DBS Vickers Fresh milk % yoy
Source: WIND, DBS Vickers … an area where domestic players have clear advantages
For the downstream liquid milk and dairy beverages market, UHT milk pricing comparison: local brands vs imported we expect new products would be the key to drive growth, as brands well as margins. Domestic brands, given their better understanding of consumer tastes and preferences, are in Name Origin Size (xno) Price Price/ml stronger positions compared to their international peers. This, International MLRMBRMB coupled with their extensive distribution network, should Dev ondale New Zealand 200 x 24 79.0 0.016 Anchor Australia 250 x 24 94.0 0.016 continue to give domestic leaders some competitive Weidendor Germany 200 x 30 79.0 0.013 advantages in launching new products and categories. Oldenburger Germany 200 x 24 69.9 0.015 Meadow F resh New Zealand 250 x 24 69.9 0.012 Room for margin expansion 0.014 We expect launch of new premium products to remain the key Premium local UHT milk Mengniu - Milk Deluxe 250 x 12 52.5 0.018 focus for most domestic players. The resultant improvement Bright Dairy - U+ 250 x 12 39.8 0.013 in product mix, coupled with lower raw milk costs, bodes well Yili - Satine 240 x 12 50.6 0.018 for margins going forward. Currently, operating margins for the three major domestic players range between 2-6%, below China Modern Dairy - Modern Farming 250 x 12 42.8 0.014 international peer (Danone at 10% in FY14), partly on New Hope - Hobuxun 250 x 12 39.0 0.013 0.015 differences in product mix.
Source: YHD.com, DBS Vickers
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Industry Focus China Dairy Sector
China raw milk cost Breakdown of current dairy retail sales %
RMB/kg Powder 4.50 Milk Yoghurt Milk - UHT 5% and Sour 28% Other 4.00 Milk Drinks Dairy 26% 1% 3.50 Cheese 1% 3.00
2.50 Flavoured 2.00 Milk - Milk Drinks Fresh 31% 8% Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Source: CEIC, DBS Vickers Source: Euromonitor, DBS Vickers
Operating margins – Mengniu, Yili, Bright Dairy Given that production of fresh dairy products such as pasteurized milk would require support of consistent local % source of quality raw milk, this would provide domestic dairy 9 leaders some competitive advantages over their global peers 8 given their established raw milk supply locally. Bright Dairy, 7 with a long operating history in pasteurized milk 6 manufacturing, is the leader in this market. Its pending 5 acquisition of Tnuva Food, which is well-known for its cottage 4 cheese products in Israel, could also provide some advantages 3 to Bright in expanding its product line to niche category such 2 as cheese. 1 0 2010 2011 2012 2013 2014
Mengniu Bright Yili
Source: CEIC, DBS Vickers
Is fresh the next big trend?
Pasteurised milk definitely has strong potential and despite good growth in the past few years; it still represents a relatively small portion of overall dairy consumption. As consumers continue to trade up, together with continual development of the cold chain infrastructure in China, pasteurized milk, as well as other “fresh” products (such as cheese and butter), should see further penetration into China. In fact, Mengniu has been increasingly active in pursuing the refrigerated product category through its JV with Danone.
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Industry Focus
China Dairy Sector
Key financials
2010 2011 2012 2013 2014 Sales Mengniu 30,265 37,388 36,080 43,357 50,049 Bright 9,572 11,789 13,775 16,290 20,385 Yili 29,665 37,451 41,991 47,779 54,436 Sales growth (%) Mengniu 17.7 23.5 -3.5 20.2 15.4 Bright 20.5 23.2 16.8 18.3 25.1 Yili 22.0 26.2 12.1 13.8 13.9 Average 19.9 24.6 6.0 17.0 16.2 Gross margin (%) Mengniu 25.7 25.7 25.1 27.0 30.8 Bright 34.0 32.9 34.6 34.2 34.2 Yili 30.0 28.7 29.1 28.2 32.8 Average 28.7 27.9 28.4 28.6 32.2 Operating margin (%) Mengniu 4.8 5.1 4.1 4.3 5.3 Bright 2.2 1.7 2.6 3.8 3.9 Yili 1.9 4.4 4.1 5.5 8.3 Average 3.0 3.7 3.6 4.5 5.9 Net profit (RMB m) Mengniu 1,237 1,589 1,257 1,631 2,351 Bright 194 238 311 406 568 Yili 777 1,809 1,717 3,187 4,144 Net margin (%) Mengniu 4.1 4.3 3.5 3.8 4.7 Bright 2.0 2.0 2.3 2.5 2.8 Yili 2.6 4.8 4.1 6.7 7.6 Average 3.2 4.2 3.6 4.9 5.7 Net cash (debt) (RMB m) Mengniu 5,707 6,099 6,264 5,416 (4,034) Bright 1,319 584 929 (578) 4,087 Yili 734 314 (366) 838 1,314 CAPEX (RMB m) Mengniu (1,084) (2,293) (1,960) (2,867) (2,931) Yili (1,987) (3,789) (3,102) (3,241) (3,946) Bright (343) (977) (1,091) (1,195) (1,796) Operating cash flow (RMB m) Mengniu 2,485 2,520 2,007 3,284 3,080 Yili 1,475 3,670 2,409 5,475 2,436 Bright 534 89 1,242 1,305 336
Source: Company data, DBS Vickers
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Industry Focus China Dairy Sector
Mengniu – FY14 sales breakdown (%) Yili – sales FY14 breakdown (%)
Other dairy Ice cream Mixed feeds products 6% 1% 1% Milk powder & UHT milk dairy 51% related Ice-cream 11% Yogurt 8% 16%
Liquid milk Milk 78% beverages 26%
Source: Company data, DBS Vickers Source: Company data, DBS Vickers
Bright Dairy – FY14 sales breakdown (%)
Others 6%
Milk powder Momchilovtsi and others 29% 19%
Ubest 6% Other liquid milk 39% Changyou 1%
Source: Company data, DBS Vickers
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Industry Focus
China Dairy Sector
Upstream dairy farms – Margin pressure from raw milk China’s milk powder imports price decline
MT % What happened to raw milk prices? 180,000 200 160,000 150 One of the key concerns facing upstream dairy farms in the 140,000 past one year or so is the sharp decrease in raw milk prices. 120,000 100 Following the strong surge in 2013, raw milk prices in China 100,000 50 have fallen by c.20% from its peak in early 2014, alongside 80,000 with the volatility seen in the international price. Fonterra’s 60,000 0 40,000 WMP prices, a key benchmark of dairy prices, plunged c.60% (50) during the same period, on increased supply from EU as well as 20,000 weaker demand from China due to overstocking of milk 0 (100)
powder. -13 -14 -15 -13 -14 y y y p p Jul-13 Jul-14 Jan-14 Jan-15 Jan-13 Se Se Nov-13 Nov-14 Mar-14 Mar-15 Mar-13 Ma Ma Ma Imported milk powder prices versus China raw milk Milk powder % yoy price* RMB/kg Source: CEIC, DBS Vickers 5.0 4.5 4.0 As such, we expect raw milk prices to remain at a low level for 3.5 most of 2015, with full year average estimated to record a 3.0 20% decline y-o-y. In 2016, we believe dairy prices may start 2.5 to normalise as excess inventory of milk powder in China 2.0 should have been largely exhausted. 1.5 1.0 0.5 Was there an over-supply of raw milk in China? 0.0 Despite strong growth in production capacity from major dairy /10 /15 /13 /11 y y p g farms during the past few years, China’s milk demand remains Jul/14 Jul/09 Jan/12 Jun/12 Feb/14 Oct/10 Apr/13 Se Dec/14 Dec/09 Nov/12 Au Mar/11 Ma Ma well above domestic supply. But the supply gap has been Fonterra raw milk (RMB/kg) easily filled by imported milk powder, especially considering the China raw milk (RMB/kg) abundant supply overseas as well as pricing differences Source: CEIC, DBS Vickers (Fonterra’s WMP prices are at a 47% discount to China prices).
*imported milk powder inclusive of VAT, import tax & transportation cost est. & milk powder to raw milk conversion ratio of 1:9
While China raw milk prices appear to have stabilised in recent months, international prices remain weak with the latest Fonterra auction in July seeing another c.10% decline in WMP. The price weakness, coupled with the sharp decline in milk powder imports, indicate that there is still excess milk powder inventory held by industry players. Based on USDA’s earlier projection of 300,000 tonnes of stocks that were carried over from 2014, the excess inventory may not be fully digested until towards the end of 2015. This would likely cap any potential upside in raw milk prices in the near term.
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Industry Focus China Dairy Sector
Estimated supply gap in China Dairy farms distribution in China (based on herd size) 100% 10% m tonnes 90% 15% 19% 10% 80 80% 10% 69 11% 70 13% 63.7 70% 17% 58.6 60 54.8 60% 52.3 24% 49 50 50% 40.8 37.3 37.7 38.5 39.6 40% 40 35.3 67% 28.2 30% 59% 30 24.1 47% 20.1 20% 17.1 20 13.7 15 10% 10 0% 2009 2014 2018E 0 2013 2014 2015E 2016E 2017E 2018E <100 heads 100-499 heads Supply Demand Gap 500-999 heads >1000 heads
Source: Euromonitor, DBS Vickers Source: MoA, Frost & Sullivan, DBS Vickers
We expect dairy demand in China will continue to be satisfied by a mix of both domestic and imported products. As such, Major dairy farms in China & respective market share local raw milk prices, to a certain extent, would still be highly affected by prices of imported milk powder. Despite this, Companies No. cow s % domestic prices are likely to remain at a premium over China Modern Dairy 201,507 1.4% international prices (given cost differences). And we do not Huishan Dairy 180,331 1.2% expect imports to replace domestic raw milk production, as (i) Shengmu 103,252 0.7% there are products, such as those labeled as pure milk and J apfa 57,000 0.4% pasteurised milk, which can only be produced from raw milk, Bright Dairy-related 50,000 0.3% and not milk powder; (ii) it is in the downstream producers’ Fontera 49,000 0.3% interest to have a steady source of local raw milk to ensure a YST Dairy 44,623 0.3% consistent supply; (iii) following the melamine incident in 2008, Zhongdi Dairy 21,433 0.1% the government is encouraging the development of an Top ten 707,146 4.9% integrated dairy supply chain, which is a necessity in order to As of 2014 (China) 14.5m ensure food safety. Source: Company data, CEIC, DBS Vickers Large-scale farms to gain market share Near term margin pressure remains Despite the fast development of big scale farms in the past few years, which already represented 14.6% of total herd size in While we see further growth potential for big scale farms in China in 2014 (vs 10% in 2009), there should still be further China, earnings outlook in the near term would nonetheless be market consolidation as the market remains highly fragmented affected by the low raw milk prices. YTD, raw milk prices of and smaller and less efficient players will continue be phased major farms such as CMD have declined by 8%, and are likely out. to remain at a relatively low level in 2H15. This would take a toll on margins, despite favourable feed costs and potential yield improvement.
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Industry Focus
China Dairy Sector
Is funding a necessity?
We believe the upstream segment requires the most funding compared to the other dairy segments. In terms of cash flow, committed expansion in dairy farms as well as cultivation of milkable cows have consistently hampered companies’ free cash flow generation. Hence, developing downstream operations will be necessary to support cash flow and any potential dividend payouts. CMD should see the most improvement in its net gearing, having recently done a new share placement as well as having less capex commitment with a more mature herd size to grow organically.
Net gearing (%)
80% 60% 40% 20% 0% -20% -40% -60% -80% -100% 2012/13 2013/14 2014/15
Huishan YST CMD
Source: CEIC, DBS Vickers
In summary, we believe the raw milk price decline remains the biggest concern for dairy farmers in the near term, with earnings expected to take a hit in FY15. However, with the possibility of dairy prices bottoming out in 2016 and continual gain in market shares as smaller players phase out, we expect large scale farmers like China Modern Dairy to see some recovery in earnings in FY16.
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Industry Focus China Dairy Sector
Upstream sector - Peer comparison
2011 2012 2013 2014 Consolidated sales (RMB m) China Modern Dairy 1,392 2,040 3,289 5,027 Huishan Dairy 1,333 2,552 3,530 3,923 YST Dairy 149 689 881 1,163 Upstream sales (RMB m) China Modern Dairy 1,384 1,978 2,968 4,194 Huishan Dairy 1,143 1,825 1,240 1,491 YST Dairy 149 689 881 1,163 Upstream as % of total China Modern Dairy 99979083 Huishan Dairy 86 72 35 38 YST Dairy 100 100 100 100 Downstream sales (RMB m) China Modern Dairy 7 62 321 833 Huishan Dairy 190 727 2,290 2,432 YST Dairy 0000 Gross margin (%) - consolidated China Modern Dairy 20.0 22.0 25.0 16.4 Huishan Dairy 38.4 54.0 65.5 61.9 YST Dairy 34.5 37.8 42.6 45.7 Gross margin (%) - upstream China Modern Dairy 31% 32% 40% 41% Huishan Dairy 49% 59% 62% 60% YST Dairy 35% 38% 43% 46% Herd size China Modern Dairy 128,759 176,264 186,838 201,507 Huishan Dairy 90,254 112,851 144,191 180,331 YST Dairy 32,219 37,000 40,396 44,623 Milkable cows % of total China Modern Dairy 42445353 Huishan Dairy 35 44 43 41 YST Dairy 46565358 Sales v olume (tonne/annum) China Modern Dairy 366,656 496,979 679,722 931,334 Huishan Dairy 213,920 352,411 482,428 577,071 YST Dairy 35,722 168,070 183,702 230,121 Raw milk ASP (conso) China Modern Dairy 3.8 3.9 4.8 5.0 Huishan Dairy 4.5 4.5 5.0 4.9 YST Dairy 4.2 4.1 4.8 5.1 Milk yield (tonne/annum) China Modern Dairy 7.8 7.9 8.5 8.9 Huishan Dairy 8.6 9.1 9.0 9.1 YST Dairy 9.2 8.9 9.0 9.4
Source: Company data, DBS Vickers
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Industry Focus
China Dairy Sector
Infant formula – plagued by price wars and channel Top 3 players market share – China vs. overseas evolution
120% A battlefield for all 100% 4% Among the various segments in the dairy supply chain, infant 20% formula commands the highest margins, but also attracts the 80% 6% strongest competition from both domestic and global players. 43% 3% We expect price competition will continue to intensify in this 60% segment, due to the following: 64% 40% 74% (i) Low market concentration. The infant formula market 8% 20% 48% in China is relatively fragmented. The top three players 9% 12% 14% command only 33% of the market whereas in 0% developed markets, the top three typically account for New Zealand Philippines India China 75%+ of the market. This suggests that there is lots of Nestle Mead Johnson Abbott room for market consolidation. In fact, it is also the Danone Heinz Beingmate government’s intention to consolidate the market by encouraging M&A activities. Source: Coriolis, DBS Vickers
China infant formula – market share (ii) High ASP risk imminent. Infant formula products in China are in general commanding on average a 30% - American 90% premium over the same product overseas. It is Dairy also one of few IMF markets where a premium segment, Abbott 3% 4% in which products are selling at more than double the Mengniu mass market products, exists. Price promotions have 5% Others 33% been more aggressive in recent months, partly a result Biostime of certain brands preparing for product upgrades. We 5% expect aggressive promotions and price cuts to Friesland continue across all segments, helped by highly 6% favourable raw material costs. Yili
6% Nestle 14% Going forward, we expect the infant formula category Mead to transform into a two tier structure – the first as Johnson Beingmate locally manufactured & locally manufactured with 7% 9% Danone imported sources targeting mass market, and the 8% second as imported packaging focusing on a more Source: Euromonitor, DBS Vickers premium segment. The price difference between the two tiers is likely to narrow in due course.
IMF product – price comparison
RMB price Premium Based Brand V ol (g) Ov erseas China (%)
France Aptamil 900 115.4 149.0 29% UK Cow & Gate 900 101.0 179.0 77% UK Friso 900 173.2 255.0 47% USA Wyeth 900 150.2 186.0 24% USA Abbott/ Similac 900 92.1 175.0 90%
Source: Tesco UK, JD.com, DBS Vickers
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Industry Focus China Dairy Sector
(iii) Rapid changes in distribution dynamics. It is well known that the infant formula segment is experiencing EBIT margins (%) a more significant shift in distribution channel from the traditional ones to baby stores and e-commerce than 40.0 any other F&B products. The online platform, in 35.0 particular, offers improved price transparency and also 30.0 increases competition as it provides a formalised low- cost platform for any brand to enter into China. 25.0 International competitors along with domestic players 20.0 are facing the same issues at the moment. For example, 15.0 Mead Johnson traditionally enjoyed a dominant market 10.0 share in Hong Kong, a significant infant formula distribution channel particularly in South China, and 5.0 now also faces a significant number of online 0.0 competitors. The pilot roll-out of free trade zones and 2012 2013 2014 O2O shopping centres recently is likely further fuel Mead Johnson Biostime Yashili Beingmate potential online competition. Source: Company data, DBS Vickers
IMF – distribution channels Unlikely to stop players from competing. Despite falling ASPs, domestic players are unlikely to give up on this segment as IMF 100% 1.88 3.42 7.17 9.9 11.7 sector margins remain well above other dairy segments. Infant 90% 24.62 25.08 formula capacity expansion is ongoing with Yili partnering with 80% 25.63 26 26.2 one of the largest global processors, Dairy Farmers of America, 70% and Yashili’s expanding capacity with recent commencement 60% of New Zealand plant. 50% 40% 73.5 71.5 Demand – both good and bad 30% 67.2 64.1 62.1 20% The good – One catalyst for the infant formula demand in 10% China would be the potential relaxation of the one-child 0% policy. With China’s fertility rate fallen to a low 1.5x, versus 2010 2011 2012 2013 2014 Japan’s 1.4x and India’s 2.5, and the replacement rate of 2.1x, Modern channels Traditional channels there is obviously strong urgency for policy relaxation. In fact, Internet retailing some local media has reported recently that China may do so by the end of the year, allowing couples to have a second Source: CEIC, DBS Vickers child.
Last time when there was a change in the one-child policy was As such, we expect a continual pressure on product pricing, and back in late 2013, when the government relaxed the rules and hence further margin pressure going forward. In fact, EBIT allows couples to have a second child if one of them is an only margins have declined across the board for both domestic and child. global players in 2014. To drive growth, infant formula players would have to rely more on volume and product mix. While a policy relaxation is positive, we believe it is unlikely to cause a sharp surge in birth rates and the impact would likely to be gradual. For example, following the relaxation in 2013, new births in 2014 rose only mildly by 3%. There were only on average 80-90k couples applying for second birth applications every month since the relaxation, with total application representing less than 10% of total eligible. As economy expands, there are also more cost concerns on raising a second child in China.
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Industry Focus
China Dairy Sector
The bad – Apart from a slower economy, China’s State Council Birth rates aims to raise the breast feeding rate, targeting 50% by 2020 from less than one-third at the moment. This could potentially (%) dampen demand growth stemming from new births and 12.50 income growth. There is also recent news that China is 12.40 considering a ban on advertisements for infant formula, a 12.30 move which illustrates the government’s intention to promote 12.20 breastfeeding. 12.10 Cautious outlook, but M&A possibilities exist 12.00 11.90 Based on the above, we are cautious on the IMF market, as we 11.80 believe in terms of price competition, it is likely to be the most 11.70 intense along the dairy supply chain. At the same time, 11.60 however, there are lots of M&A and partnership opportunities. International players have been actively seeking local
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 partnerships to strengthen their market position. For example, Danone entered as a strategic shareholder of Yashili in early Source: CEIC, DBS Vickers 2015 with a 25% stake, while Fonterra now holds an 18.8% stake in Beingmate.
Overseas partnerships
Stake Int'l Existing brands Date* Domestic Paid Description (%) play er owned by int'l player
Intends to use Yashili as an infant formula product segment arm; Mengniu may inject Yashili HK$3.70/share its existing infant formula business into Feb-15 25% Danone Dumex, Nutrilon, Aptamil (1230 HK) or HK$4.4bn Yashili in future. In addition, Yashili and Mengniu will study the possibility of inv esting in Dumex China. With intention to raise to 20% equity Beingsmate RMB18/share stake; establish JV to purchase Darnum Mar-15 18.80% Fonterra Annum (0002570:CH) or RMB3.5bn plant in Australia, and exclusive distribution agreement for Fonterras Annum in China Includes a purchased plant in Xiushui plant near Shenyang. The Companies will be RMB692m for Huishan Dairy Friesland running their existing infant-related Dutch Lady, Foremost, Apr-15 n.a a 50% JV (6863 HK) Campina businesses separately - meaning Huishan will Frisian Flag, Peak, Friso stake market its own brands, while Friesland's Friso will be independent as well.
* date of completion
Source: CEIC, DBS Vickers
Page 16
Industry Focus China Dairy Sector
Infant formula - Peer comparison
2010 2011 2012 2013 2014 Sales (RMB m) Yashili 2,954 2,958 3,655 3,890 2,816 Biostime 1,234 2,189 3,382 4,561 4,732 Beingmate 4,028 4,727 5,354 6,117 5,049 Sales turnov er (y -o-y %) Yashili 14.2 0.1 23.6 6.4 (27.6) Biostime 120.7 77.5 54.5 34.9 3.7 Beingmate 24.1 17.3 13.3 14.2 (17.5) Gross margin (%) Yashili 56.9 52.0 53.7 53.5 51.3 Biostime 71.1 66.5 65.9 65.2 61.9 Beingmate 61.4 62.9 63.3 60.2 52.7 SG&A of sales (%) Yashili 38.6 42.2 39.0 41.5 46.2 Biostime 43.5 36.1 35.3 37.1 37.3 Beingmate 46.7 51.3 49.8 45.5 51.0 Operating margin (%) Yashili 20.0 10.6 15.3 12.4 9.1 Biostime 27.1 32.6 31.1 25.7 25.5 Beingmate 14.4 11.5 13.5 14.5 1.4 Pretax margin (%) Yashili 20.0 12.7 17.7 14.8 11.0 Biostime 27.1 32.6 31.1 25.5 23.7 Beingmate 13.6 12.5 13.5 15.7 2.1 Net margin (%) Yashili 17.0 10.4 12.8 11.2 8.8 Biostime 21.5 24.1 22.0 18.0 17.1 Beingmate 10.5 9.2 9.5 11.8 1.4 Net cash (debt) (RMB m) Yashili 2,643 2,623 2,654 410 37 Biostime 1,728 1,974 2,341 1,767 2,083 Beingmate (177) 1,777 2,197 1,514 558 Operating cash flow (RMB m) Yashili 313 458 772 141 264 Biostime 381 516 947 660 972 Beingmate 250 420 1,009 210 (188)
Source: Company data, DBS Vickers
Page 17
Industry Focus
China Dairy Sector
earnings expected to grow at 14.2% CAGR for FY14-16F. Its Stock recommendation JV with Danone, despite limited scale but growing fast, could be a more significant driver in the medium term considering To conclude, our preferences in the dairy industry chain are the the strong know-how of Danone and Mengniu’s strength in downstream dairy giants. Amid competition, we expect their branding and distribution. The stock is currently trading at 19x strong market dominance, extensive distribution and product FY16F PE, below its historical (24x) as well as sector average innovation efficiency will enable them to gain further market valuation (25.5x). Our TP is now rolled over to HK$47.1 (Prev. share and drive out smaller regional players. There is also room HK$45.8/sh), based on 24x FY16F PE. BUY. for margin improvement as product mix improves, while raw material costs remain generally favourable in the near term. Yili (600887: CH, NR). An even fiercer competitor than We maintain our BUY rating on Mengniu, and initiate coverage Mengniu, Yili has consistently outperformed its peers through on Bright Dairy with a BUY. Meanwhile, we believe Yili (Not improving product mix and strong operating efficiency. We Rated) would also be a strong performer under this trend. believe Yili will likely beat its own guidance of 12% and 15% growth on FY15 sales and profit respectively, via stronger We are cautious on the infant milk formula sector, as we contribution from high-margin products such as Satine, QQ expect price competition to intensify, which coupled with the Star, Ambrosial and Chang Qing. Based on consensus shift in distribution channel will put pressure on margins. We estimates, Yili trades at 17.7x FY16F PE, undemanding against expect the high-end market will continue to be dominated by its peers. global brands but there could be potential for domestic players at the mass market end. China Modern Dairy (1117: HK, Buy). Weaker earnings in FY15, a 17% decline under our estimates, should have been As for the upstream dairy farms, the key concern would be on largely priced in at the current valuation, with possible raw milk prices which dictate profitability. But in the longer resumption of earnings growth in FY16. In the medium term, run, we continue to see market consolidation potential for we believe leading upstream players should continue to benefit major farms, with growth expected to be more driven by top from rising demand from downstream, in particular pasteurised line. Despite weakness in near-term earnings, we maintain operations, as well as market consolidation. Our new TP is BUY on China Modern Dairy on possible bottoming out of milk HK$3.35 (Prev. HK$3.45ps), based on DCF valuation. BUY. prices towards the year end and on valuation ground. Yashili (1230: HK, NR). A leading domestic infant milk formula Bright Dairy (600597: CH, Buy). We like Bright Dairy for its manufacturer, Yashili holds a 5.4% market share in China as of solid positioning as the market leader in Shanghai. As of end- FY14. With the introduction of Mengniu and Danone as its FY14, it also has a dominant market share in pasteurised milk controlling and second largest shareholders respectively in the (53%) and low-temperature yogurt (31%) nationwide, which past couple of years, Yashili is undergoing restructuring and suggests some immunity from rising competition in the UHT changes in strategy. While Yashili is unlikely to see a dairy segment. Although Bright Dairy’s profitability and turnaround in FY15, we expect Mengniu and Yashili’s potential operating efficiency lags behind peers Mengniu and Yili, we investment in Danone’s Dumex China, as well as opportunities believe its’ product mix, coupled with expanding distribution to leverage on Danone’s existing online platform, could be network will help margins to catch up over the medium run. In potential re-rating catalysts. Valuation is at 18.8x FY16F PE addition, the pending acquisition of Israel’s Tnuva Foods via a (based on consensus estimates), a premium to Biostime, owing new share placement should help transform Bright Dairy as an to distortion in earnings from the restructuring in addition to integrated dairy player with a solid overseas footprint. However, heavy competition. However, with the backing of two giants, it will take time for benefits from restructuring and integration Yashili will be a strong contender in the domestic market in the to materialize. Bright Dairy offers the highest earnings CAGR of long run. 25% among its peers. Initiating coverage with BUY, TP at Rmb19.7/sh, pegged to 27.5x FY16F PE, equivalent to 1.1x Biostime (1112: HK, NR). Biostime is a major domestic infant PEG. milk formula player in China with a 7.6% market share in FY14. Since late 2014, Biostime has been clearing its old core-infant China Mengniu (2319: HK, Buy). Product mix upgrades formula inventory, paving the way for a re-launch of upgraded (yogurt and milk beverages) and margin expansion will be key products (new packaging) in Jul-15. There should also be drivers to decent earnings growth in the next 1-2 years. We some margin benefits from lower raw material costs, partly expect China Mengniu to continue gaining market share with offset by higher marketing expenses associated with the
Page 18
Industry Focus China Dairy Sector
upgraded product launches. With rising competition and rapid upstream margins in China. However, Huishan’s FYMar15 distribution channel changes within the infant formula sector, profitability was still affected by the decline in raw milk prices Biostime’s product ASP faces the largest downside. Despite and weaker than expected downstream sales. It is yet to be relatively cheap valuation at 11x FY16F PE based on consensus determined whether Huishan is able to successfully venture out estimates, there is no re-rating catalyst in sight in the near term. of NE China into East China, a strong foothold of Bright Dairy. On a positive note, Huishan’s Chairman purchased c.427m Huishan (6863: HK, NR). A vertically integrated dairy player, shares in the open market, in addition to Huishan’s own share Huishan’s key cost advantage is its ability to command lower buyback of 338m since August-14, providing some support to feed costs against peers, hence enjoying the strongest share price.
Peers valuation – Dairy Sector
Mkt PE PE Yield Yield P/Bk P/Bk ROE ROE Currency Price Cap 15F 16F 15F 16F 15F 16F 15F 16F Company Name Code Local$ US$m x x % % x x % % Liquid Milk China Mengniu Dairy* 2319 HK HKD 38.35 9,705 22.3 19.6 1.0 1.1 2.5 2.3 11.9 12.3 Inner Mongolia Yili 'A' 600887 CH CNY 18.63 18,383 22.6 17.7 2.1 2.6 4.7 4.4 26.4 27.7 Sanyuan Foods 'A' 600429 CH CNY 10.44 2,517 261.0 261.0 n.a. n.a. 2.8 2.7 1.6 1.1 Huangshi Dairy 'A' 002329 CH CNY 69.48 2,980 143.3 66.2 0.3 0.5 11.6 10.2 13.0 15.0 Bright Dairy 'A'* 600597 CH CNY 18.08 3,581 31.4 25.2 1.9 2.4 4.6 4.3 15.2 17.8 Average 96.1 77.9 1.3 1.6 5.2 4.8 13.6 14.8
Infant F ormula Yashili International 1230 HK HKD 2.27 1,390 23.6 18.8 1.3 1.9 1.2 1.2 6.8 7.0 Ausnutria Dairy 1717 HK HKD 3.03 386 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Biostime International 1112 HK HKD 21.6 1,698 12.0 11.3 3.8 4.0 3.1 2.7 28.1 25.2 Beingmate Baby & Child Food 'A' 002570 CH CNY 18 2,963 36.9 37.5 0.5 0.7 4.5 4.9 4.9 7.6 Synutra International# SYUT US USD 6.52 374 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Average 24.2 22.5 1.9 2.2 2.9 2.9 13.3 13.3
Multinational Brands Nestle 'R' NESN V X CHF 72.6 241,525 21.6 20.3 3.1 3.2 3.3 3.1 15.0 15.6 Mead Johnson Nutrition MJ N US USD 91.17 18,467 24.7 22.4 1.8 2.0 20.7 14.9 104.0 85.5 Meiji Holdings# 2269 JP J PY 17250 10,630 28.8 31.2 0.7 0.9 3.1 2.9 11.4 10.0 Danone BN FP EUR 62.16 44,528 21.3 19.4 2.5 2.7 3.0 2.7 14.4 14.7 Average 24.1 23.3 2.0 2.2 7.5 5.9 36.2 31.4
Dairy Farm China Modern Dairy* 1117 HK HKD 2.53 1,730 11.0 9.1 0.0 0.5 0.7 0.6 8.2 6.9 China Huishan Dairy# 6863 HK HKD 2.17 4,009 17.4 16.1 1.2 1.4 1.7 1.5 9.8 10.7 Yuanshengtai Dairy Farm 1431 HK HKD 0.71 358 4.7 4.0 0.0 0.0 0.5 0.4 8.5 8.3 Average 11.09.70.40.60.90.98.98.6
# FY15: FY16; FY16: FY17
Source: Thomson Reuters, *DBS Vickers
Page 19
Industry Focus
China Dairy Sector
Peers valuation – F&B
Mkt PE PE Yield Yield P/Bk P/Bk ROE ROE Price Recom Cap Fiscal 15F 16F 15F 16F 15F 16F 15F 16F Company Name Code HK $ HK$mYr x x % % x x % % HK listed Brewery Sector Tsingtao Brewery 'H'* 168 HK 44.35 Hold 59,916 Dec 25.1 23.8 1.2 1.3 2.9 2.7 11.9 11.6 China Res.Enterprise 291 HK 24.1 NR 58,638 Dec 103.4 59.2 0.9 0.9 1.2 1.1 2.0 7.1 Average 64.3 41.5 1.0 1.1 2.0 1.9 6.9 9.3
Dairy Sector China Mengniu Dairy* 2319 HK 38.35 Buy 75,216 Dec 22.3 19.5 1.0 1.1 2.5 2.3 11.9 12.3 China Modern Dairy* 1117 HK 2.53 Buy 13,421 Dec 11.1 9.1 0.0 0.5 0.7 0.6 8.2 6.9 Biostime Intl.Holdings 1112 HK 21.60 NR 13,162 Dec 12.0 11.3 3.8 4.0 3.1 2.7 28.1 25.2 China Huishan Dairy# 6863 HK 2.17 NR 31,075 Mar 17.4 16.1 1.2 1.4 1.7 1.5 9.8 10.7 Yashili Intl.Holdings 1230 HK 2.27 NR 10,772 Dec 23.6 18.8 1.3 1.9 1.2 1.2 6.8 7.0 Yuanshengtai Dairy 1431 HK 0.71 NR 2,775 Dec 4.7 4.0 0.0 0.0 0.5 0.4 8.5 8.3 Average 15.2 13.1 1.2 1.5 1.6 1.4 12.2 11.7
Instant Noodle & Beverage and Others Tingyi* 322 HK 15.60 Hold 87,421 Dec 24.7 22.6 2.0 2.2 3.4 3.2 14.4 14.6 Want Want China* 151 HK 8.37 Buy 109,913 Dec 20.4 18.5 2.7 3.0 5.8 5.1 31.0 29.2 Uni-President China Hdg.* 220 HK 7.00 Hold 30,229 Dec 38.0 31.7 0.8 0.9 2.1 2.0 5.7 6.5 V itasoy Intl.Hdg.*# 345 HK 12.20 Hold 12,685 Mar 29.7 25.4 2.3 2.7 6.0 5.4 21.2 21.2 China Foods* 506 HK 4.07 Hold 11,385 Dec 55.4 35.6 0.0 0.0 1.9 1.8 3.4 5.1 Average 33.6 26.8 1.6 1.8 3.9 3.5 15.2 15.3
Slaughter Sector China Yurun* 1068 HK 2.5 Hold 4,557 Dec n.a. 37.0 0.0 0.0 0.3 0.3 (0.1) 0.8 WH Group 288 HK 5.46 NR 77,878 Dec 11.5 10.4 2.7 3.0 1.8 1.6 16.0 16.0 Average 11.5 23.7 1.3 1.5 1.0 0.9 8.0 8.4 HK-listed av erage (ex Yurun,CRE) 22.8 19.0 1.4 1.6 2.4 2.2 12.4 12.4
# FY15: FY16; FY16: FY17
Source: Thomson Reuters, *DBS Vickers
Page 20
Industry Focus China Dairy Sector
Peers valuation – F&B (continued)
Mkt PE PE Yield Yield P/Bk P/Bk ROE ROE Currency Price Cap Fiscal 15F 16F 15F 16F 15F 16F 15F 16F Company Name Code Local$ US$m Yr x x % % x x % % A-share listed Wine Sector Yantai Changyu Pion.Wine 'B' 200869 CH HKD 27.59 3,266 Dec 13.5 12.1 2.0 2.0 2.0 1.8 15.6 15.3 Average 13.5 12.1 2.0 2.0 2.0 1.8 15.6 15.3
Brewery Sector Beijing Yanjing Brew.'A' 000729 CH CNY 9.04 4,102 Dec 31.4 28.4 1.0 1.0 2.0 1.9 6.3 6.6 Tsingtao Brewery 'A'* 600600 CH CNY 41.38 9,000 Dec 29.3 27.7 1.0 1.1 3.3 3.1 11.9 11.6 Average 30.3 28.1 1.0 1.1 2.7 2.5 9.1 9.1 Dairy Sector Inner Mongolia Yili Indl.Gp.'A' 600887 CH CNY 18.63 18,383 Dec 22.6 17.7 2.1 2.6 4.7 4.4 26.4 27.7 Beijing Sanyuan Foods 'A' 600429 CH CNY 10.44 2,517 Dec 261.0 261.0 n.a. n.a. 2.8 2.7 1.6 1.1 Bright Dairy & Food 'A'* 600597 CH CNY 18.08 3,584 Dec 31.4 25.2 1.9 2.4 4.6 4.3 15.2 17.8 Beingmate Baby & Child Food 'A' 002570 CH CNY 18 2,963 Dec 36.9 37.5 0.5 0.7 4.5 4.9 4.9 7.6 Av erage (ex. Sany uan) 30.3 26.8 1.5 1.9 4.6 4.5 15.5 17.7
Beverage and Others Hebei Chengde Lolo 'A' 000848 CH CNY 18.01 2,183 Dec 27.8 23.9 1.5 1.6 7.6 6.2 30.6 27.6 Sanquan Food 'A' 002216 CH CNY 15.6 2,020 Dec 101.3 68.1 0.3 0.3 6.4 6.1 5.6 8.0 Average 64.5 46.0 0.9 0.9 7.0 6.1 18.1 17.8 Slaughter Sector Henan Shuanghui Inv.& Dev.'A' 000895 CH CNY 21.86 11,617 Dec 15.4 13.9 4.2 4.9 3.9 3.5 26.2 26.4 Average 15.4 13.9 4.2 4.9 3.9 3.5 26.2 26.4 Chinese Liqueor Sector Wuliangye Yibin 'A' 000858 CH CNY 27.9 17,051 Dec 17.5 15.2 2.1 2.5 2.4 2.2 14.4 15.2 Kweichow Moutai 'A' 600519 CH CNY 219.54 44,401 Dec 16.5 15.0 2.0 2.5 4.2 3.6 27.8 25.8 Luzhou Lao Jiao 'A' 000568 CH CNY 25.61 5,782 Dec 21.9 18.3 2.0 2.6 3.3 3.0 15.6 16.7 Xinghuacun Fen Wine 'A' 600809 CH CNY 20.15 2,809 Dec 33.4 32.2 0.7 0.8 4.1 3.8 10.4 11.3 J iangsu Yanghe Brew.J st. 'A' 002304 CH CNY 67.5 16,377 Dec 20.6 17.9 2.1 2.5 4.3 3.8 23.1 22.9 Average 33.3 24.8 1.8 2.2 3.8 3.4 16.2 16.6 A-share listed av erage (ex Beijing Sany uan, Roy al Group, Sanquan F ood) 29.2 24.0 1.8 2.1 4.0 3.6 16.7 17.1
Multinational Companies Nestle 'R' NESN V X CHF 72.6 241,525 Dec 21.6 20.3 3.1 3.2 3.3 3.1 15.0 15.6 Unilever (Uk) ULVR LN GBP 29.05 128,581 Dec 0.2 0.2 293.8 312.3 0.1 0.1 37.7 37.4 Coca Cola KO US USD 40.84 178,009 Dec 20.3 19.2 3.2 3.5 6.2 6.1 27.6 29.1 Pepsico PEP US USD 96.87 142,301 Dec 21.4 19.7 2.8 3.0 8.8 8.6 40.0 44.0 Danone BN FP EUR 62.16 44,528 Dec 21.3 19.4 2.5 2.7 3.0 2.7 14.4 14.7 Mondelez International Cl.A MDLZ US USD 42.12 68,513 Dec 24.5 21.0 1.5 1.6 2.6 2.4 9.9 11.5 Hormel Foods HRL US USD 57.66 15,238 Oct 22.7 20.8 1.7 1.9 3.9 3.6 18.0 17.7 Tyson Foods 'A' TSN US USD 43.13 13,112 Sep 12.5 11.5 0.9 0.9 1.8 1.6 14.7 13.8 Average 20.6 18.8 2.3 2.4 4.2 4.0 19.9 20.9
# FY15: FY16; FY16: FY17
Source: Thomson Reuters, *DBS Vickers
Page 21
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Bloomberg: 600597 CH Equity | Reuters: 600597.SS Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 July 2015
TRANSFORMATION IN PROGRESS BUY (Initiating Coverage) Last Traded Price: RMB18.08 (CSI300 Index : 4,251) Market leader in Shanghai, Bright Dairy is evolving into an integrated dairy player with an overseas footprint. Bright Dairy is a leading dairy Price Target: RMB 19.70 (9% upside) player based in Shanghai. It has cultivated a household name under Potential Catalyst: Star products to drive profitability; expansion in ‘Bright’ with product offerings including both pasteurised and UHT dairy distribution network coverage products, milk beverages and infant formula. It recently proposed a new Where we differ: We are more conservative in our sales estimate for share placement with gross proceeds of c.Rmb9bn in exchange for Tel Momchilotvsi Aviv-based Tnuva Foods, the largest food company in Israel, and parent
Analyst Shanghai Dairy’s upstream assets. While the restructuring and integration Alice HUI CFA, +852 2971 1960 will take time, it will transform Bright Dairy into an integrated dairy player [email protected] with a solid overseas footprint.
Alison Fok +852 2971 1938 Despite intense competition, Bright's strong product capability would [email protected] continue to support product mix enhancement and drive higher-than-
peers earnings growth of 25% in FY14-17. We estimate sales to grow at Price Relative FY14-17F CAGR of 13%. We expect Bright Dairy’s organic sales growth RM B Relative Index to be driven by cultivation of its core, high margin brands (Momchilovtsi, 338 UBEST, Changyou) through expansion of its distribution network further 27.3 288 into South and Central China, where its penetration still lags behind 22.3 238 peers. Coupled with a larger scale and a favourable input cost 17.3 188 environment, there should be abundant room for margin improvement.
12.3 138 Premium valuation justified given strong earnings potential. Initiate 7.3 88 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 coverage with BUY, TP set at RMB19.7share. We believe Bright Dairy has
Bright Dairy & Food Co Ltd (LHS) Relative SHSZ300 Index (RHS) significant potential for growth from new products, distribution network expansion, as well as being a key beneficiary of the SOE reform initiatives Forecasts and Valuation underway right now. We expect Bright Dairy will achieve earnings CAGR FY Dec (RMB m) 2014A 2015F 2016F 2017F of 25% in FY14-17F, against Mengniu’s 12%, and Yili’s 23% (based on Turnover 20,385 23,013 26,036 29,151 EBITDA 893 1,132 1,410 1,734 consensus estimates). Initiate with Buy; TP at RMB19.7/sh, pegged to Pre-tax Profit 714 907 1,132 1,412 27.5x FY16F PE, equivalent to 1.1x PEG, but still below its historical 8- Net Profit 568 708 883 1,102 year average of 35.5x EPS (RMB) 0.46 0.58 0.72 0.89 EPS Gth (%) 39.1 24.6 24.8 24.7 Valuation DPS (RMB) 0.29 0.35 0.43 0.54 BV Per Share (RMB) 3.67 3.90 4.18 4.54 The stock is currently trading at 25.2x FY16F PE, representing a premium PE (X) 39.2 31.4 25.2 20.2 over Mengniu and Yili. This is likely due to Bright Dairy’s higher than P/Cash Flow (X) 66.3 27.9 20.8 16.9 P/Free CF (X) nm nm nm nm industry growth rate, and potential earnings re-rating from its recent EV/EBITDA (X) 26.4 22.0 18.2 15.2 acquisitions. Net Div Yield (%) 1.6 1.9 2.4 3.0 P/Book Value (X) 4.9 4.6 4.3 4.0 Key Risks to Our View: Net Debt/Equity (X) 0.1 0.4 0.5 0.5 ROAE (%) 12.9 15.2 17.8 20.5 Food safety, rising penetration. Food safety issues, growing yogurt
competition and raw milk prices could affect Bright Dairy’s profitability. Earnings Rev (%): New New New Consensus EPS (RMB) 0.66 0.87 1.06 At A Glance Other Broker Recs: B: 13 S: 0 H: 4 Issued Capital (m shrs) 1,231 ICB Industry: Consumer Goods Mkt. Cap (RMBm/US$m) 22,250 / 3,581 ICB Sector: Food Producers Major Shareholders Principal Business: Leading dairy player with the largest market Bright Food (%) 54.4 presence in Shanghai. Free Float (%) 45.6 Source of all data: Company, DBSV, Thomson Reuters, HKEX Avg. Daily Vol.(‘000) 35,687
www.dbsvickers.com ed- JS / sa- AL
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
INVESTMENT THESIS
Profile Rationale Listed on the Shanghai Stock Exchange in 2002, Bright Dairy We estimate Bright Dairy’s sales to grow at FY14-17F CAGR is one of the largest downstream dairy players in China. As of 13%, with organic growth driven by cultivation of its of 2014, Bright Dairy held a 22% market share in dairy core, high margin brands, through expansion of its products in East China, where it has a dominant foothold in distribution network into South and Central China, where its Shanghai with a market share of 46%. penetration lags behind peers.
We expect Bright Dairy will achieve earnings CAGR of 25% in FY14-17F, against Mengniu’s 12% and Yili’s 23% (based on consensus estimates).
Valuation Risks Our TP is at RMB19.7/sh, pegged to 27.5x FY16F PE, Food safety issue is a key concern to the dairy sector, and equivalent to 1.1x PEG, but still below its historical 8-year Bright Dairy is subject to policy and regulatory changes. With average of 35.5x the inclusion of Israeli-based Tnuva Food, currency risks will become a potential risk. Lastly, fluctuation in raw material costs such as raw milk prices and milk powder costs may have an impact on the company’s margins.
Source: DBS Vickers
Page 2 3
China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
SWOT Analysis
Strengths Weakness
State-owned background with strong presence in the Lack of scale against dairy giants such as Mengniu and Shanghai region, where the company is the top player with Yili >40% market share in liquid milk products The smaller scale also translates into weaker OP Established market position and brand reputation in the margins against its bigger peers pasteurised milk segment Weaker market penetration compared with major peers Strong product innovation, as demonstrated by its success in with strong nationwide coverage UHT yogurt Momchilovtsi Relatively low ROE Comprehensive product mix including liquid milk, yogurt, milk powder as well as dairy-based products such as butter
Improving product mix with rising skew towards higher- margin products. Its five key products are estimated to account for 60% of its liquid milk sales in FY14, vs 40% previously
Opportunities Threats
As the first mover in the UHT yogurt category, Bright’s star Rising competition from domestic and international product Momchilovtsi should have more room to grow as it players expands into other regions and into lower tiered cities Profitability could fluctuate on raw milk and milk powder price volatility Extending product offerings by rolling out other high-margin products into Momchilovtsi’s existing distribution channel Food safety scares Weaker consumer demand due to slower macro Huge potential for pasteurised milk segment which Bright environment already has an strong market position and expertise
Source: DBS Vickers
Page 24
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Company background
Dominant market player in East China. Listed on the Shanghai Part of SOE reform initiatives. The acquisition of Tnuva Food Stock Exchange in 2002, Bright Dairy is one of the largest has been well anticipated by the market as Parent Company downstream dairy players in China. As of 2014, Bright Dairy Bright Food had already announced its intention for the held a 22% market share in dairy products in East China, where injection after acquiring Tnuva in Jun-14. This is also part of the it has a dominant foothold in Shanghai with a market share of SOE reform initiatives that aims to (1) bring in strategic 46%. shareholders and introduce a mixed ownership scheme; (2) consolidate assets to form a clearer and well defined corporate Strong SOE backing. Bright Dairy has a strong state-owned structure, i.e. use Bright Dairy as the sole platform for dairy- background with Shanghai Municipal Government as its related business. principal shareholder. Bright Dairy is one of the four publicly listed platforms for Bright Food. Other affiliated companies In addition to acquiring Tnuva Foods, Bright Dairy has been include Shanghai Jinfeng Wine (600616.SH, alcohol related), consolidating the Group’s upstream assets. In 2014, Bright Dairy Shanghai Maling Aquarius (600073.SH, canned products & purchased the remaining 20% stake in its upstream subsidiary, other products), and Shanghai HaiBo (600708.SH, Shanghai Bright Holstan from Parent Company Bright Food. In transportation & logistics). Feb-14, Bright Dairy formed a 55%/45% JV with PE fund RRJ Capital to develop its upstream capabilities. As of end-14, Bright In Jun-15, Bright Dairy announced its intention to place out no Dairy owns 14 farms with approximately 15,000 cows, and is more than 559m shares for Rmb16.1/share to six strategic looking to expand to 20 farms in the next 3-5 years. With the shareholders. The gross proceeds of Rmb9bn will be used to potential acquisition from Shanghai Dairy in the pipeline as well, acquire a 77% stake in Israeli-based Tnuva Food from Parent this should consolidate Bright Dairy’s control on upstream raw Company, as well as Shanghai Dairy’s upstream assets. As one milk sourcing. Shanghai Dairy holds c.35,000 cows under 24 of the strategic shareholders in the placement, Bright Food’s dairy farms. effective controlling stake will be lowered to 40.8% (from 54.4%). The new shareholders will be subject to a 3-year holding period.
Pending shareholder structure (Before & after new share placement)
Before After Shares (m) % Shares (m) % Bright Food 669 54.4% 669 37.4% Yimin Group ( )* 0 0.0% 62.1 3.5% 益民集團 Bright Food 669 54.4% 731 40.8% Xin Cheng Investments ( ) 0 0.0% 217.4 12.1% 信晟投資 Cheng Chuang Investments ( ) 0 0.0% 186.3 10.4% 晟創投資 Shangqi Investments ( ) 0 0.0% 31.1 1.7% 上汽投資 Guosheng Investments ( ) 0 0.0% 31.1 1.7% 國盛投資 Puke Yuanfuday i ( ) 0 0.0% 31.1 1.7% 浦科源富達壹 Other investors 562 45.7% 562 31.4%
Source: Company data, DBS Vickers
*Owned by Bright Food
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
Growth drivers UBEST, Changyou, AB100, Zhiwuhuoli) to account for 60% of FY14 liquid milk sales, and this should continue to improve. Growth to outperform peers. Bright Dairy derives its revenue from a range of dairy products which includes UHT dairy Momchilotvsi sales products (plain milk, premium milk, and yogurt), pasteurised products, milk beverages, infant formula etc. We forecast the RMB m % yoy company to post FY14-17F earnings CAGR of 25% driven by an 14,000 300 enhanced product mix (skewing towards high-margin products 12,000 such as UHT yogurt), favourable raw material cost environment, 250 10,000 and synergies with overseas acquisitions. In the longer term, we 200 expect the possible spin-off of its upstream assets to be a 8,000 potential re-rating catalyst. 150 6,000 100 4,000 Star product offerings 2,000 50 Premium category Brand Est. launch 0 0 Pastuerised milk Sept-06 2010 2011 2012 2013 2014 2015F2016F2017F U+ (优倍) Fresh yogurt; kid's AB100 ( ) July-10 Momchilovtsi % yoy yogurt 健能
UHT Yogurt Momchilovtsi (莫斯利 Dec'10 Source: Company data Fresh yogurt 安) Apr-12 Changyou (畅优) Plant-based bacteria (ii) Market leader in pasteurised milk Zhiwuhuoli ( )Mar-13 drink 植物活力 As of FY14, Bright is the market leader in pasteurised milk with a 53.6% market share, of which it holds a dominant market share of 84% in East China. Within fresh yogurt, Bright Dairy holds a nationwide market share of 31.2%, with a 53% market share in East China. We expect Bright Dairy in a better position vs. its competitors as further competitions enters into the UHT segment.
Nationwide & East China market share Source: Company data 90% 84.0% (i) Star products to lead profit growth 80% 70% Bright Dairy is a pioneer in the UHT yogurt market in China, 60% 53.6% 53.1% with its first UHT yogurt product, Momchilotvsi, launched in 50% 2010. Since inception, Momchilotvsi has achieved tremendous 40% 31.2% growth, and is now the single largest contributor to topline at 30% 35% of total. Targeting the premium market, we estimate this 20% product commands a gross margin that exceeds 40%, above 5.7% the average for its other UHT dairy products. 10% 1.6% 0% In FY14, sales of Momchilovtsi grew 85% y-o-y to c.Rmb6bn. Pastuerised milk Low-temp yogurt UHT milk We expect sales to rise further to Rmb8bn in FY15, translating National East China into y-o-y growth of 35%. This will boost its contribution to 38% of overall sales (FY14: 35%). We also expect its other Source: Company data higher margin brands including UBest, Changyou and AB100 to sustain strong double-digit growth in FY15 as penetration improves. We estimate its top-5 star products (Momchilotvsi,
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
(iii) Deepening penetration. (iii) A beneficiary of the SOE reform
The success of Momchilovtsi, which is a UHT product with Parent Company, Bright Food, has been in the process of further reach compared to low-temperature or pasteurised dismantling and streamlining existing assets for a number of products, had enabled Bright Dairy to extend its distribution years through management incentives, inviting strategic network beyond its traditional stronghold in Eastern China. shareholders and lately acquiring overseas assets. As a key With POS reaching 650K in FY14, the company plans to expand subsidiary of Bright Food, Bright Dairy should remain under the it further to 1m POS in FY15. This also opens up opportunities spotlight, given dairy sector’s stronger-than-industry growth for the company to roll out other products using Momchilovtsi’s and significant overseas acquisitions recently. existing channel, and provides an established distribution platform for future product launches. The latest share placement of 559m shares will generate gross proceeds of Rmb9bn, which will be allocated in exchange for (1) We expect South and Central China regions to exhibit stronger c.77% controlling stake in Israeli-Tnuva Food, estimated to be growth, with increasing capacity expansion directed at both worth c. Rmb6.87bn (implying c. 13.3x FY14 PE or 1.89x regions. As scale picks up, we see room for improvement in P/NAV), and (2) Shanghai Dairy’s upstream dairy operations (no operating leverage. In fact, Bright Dairy’s SG&A expense to financial details have been released yet). sales ratio has been on a declining trend in the past two years, but remains higher than bigger peers, an indication of its With the expected injection of Tnuva Foods, Bright is well smaller scale but also implies lots of room for improvement. positioned to become a diversified dairy player over the long term. In addition, we expect Bright Dairy to spin-off its upstream assets in due time after the consolidation of Shanghai SG&A expense % to overall sales versus peers Dairy’s upstream assets. If we include Tnuva’s earnings assuming flat earnings growth y-o-y, we expect the potential 32% impact on EPS will be milder at 8%/3%/0% in FY15-17F inclusive of the enlarged share base. 30%
28%
26%
24%
22%
20% 2013 2014 2015F 2016F 2017F
Yili Bright Mengniu
Source: Company data
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
Initial thoughts on Tnuva acquisition. Given Tnuva’s strong roots Bright Dairy’s earnings – before & acquisition inclusion in the Israeli community as the largest food manufacturer, we of Tnuva* expect profitability may be limited by government policies 1Q15 2015 (dominant market share in Israel, which could run into anti- (RMB m) Before After Before After monopoly trust issues). However, we expect Tnuva’s product Sales 4,991 6,672 23,013 29,810 technology expertise, as well as vast product offerings to be Net profit 98 162 708 1,135 distributed to China. Profit margin (%) 2.0 2.4 3.1 3.8 We also highlight that Tnuva owns the franchising rights to Sales % diff 33.7 29.5 Yoplait yogurt in Israel, a brand which Bright Food had Net profit % diff 65.8 60.4 attempted to acquire back in 2011 (but lost out to General Mills). The acquisition of Tnuva should also be positive to ROE Source: Company data, DBS Vickers with Bright’s FY14 ROE at 12.6% versus Tnuva’s at 14.2% *illustration of impact on earnings assuming Tnuva is consolidated on Jan1st
Tnuva owns 7 of the 10 best known food brands in Israel formed by farming communities eighty years ago. Tnuva Foods is the largest food manufacturer in Israel with product offerings spanning dairy related products (>70% market share in Israel), pork, frozen vegetables and bakery goods. Besides its domestic market, Tnuva Food’s products are also sold in the Middle East, Europe and the US. Tnuva Food was granted the franchising rights for General Mill’s Yoplait in Dec-01.
Tnuva Food’s product offerings
Brand Product description
Adom Adom Fresh beef 38% whipping cream, 32% mildly sweet whipping cream, 15% cooking cream, 10% reduced-fat cooking cream, Chef L av an excellent Canaan cheese for baking and grated cheese. Cottage and soft cheeses Cottage cheese and white cheese Eggs 30% market share in egg market Hard Cheese and F resh salted Under Piraeu - salted cheese cheese Hard Cheese , processed Tnuv a’s range of special cheeses includes Brie, Camembert, Mozzarella, Roquefort and other selected cheeses. cheese and butter Harduf Organic cow, goat milk and yogurt Maadanot Frozen pastries including pizzas, burekas (filled pastry), Yemenite products and other dough products Chilled, fresh ready to eat poultry products, the brand also serv es the institutional market with customers such as Mama Of McDonalds, Burger Ranch, and leading café chain Oliv ia Sauces, spread Soy products Soy products and desserts Sunfrost Leading frozen v egetables company in Israel Specialises in the dev elopment, production and marketing of meat delicacies: pastrami, cold cuts, sausages and Tirat Zvi others Tnuv a Chocolate Milk Directed at children Tnuva Milk Milk Cartoon, UHT Milk, Milk bags, Milk packs Yogurts Yogurts and puddings, and franchising rights to Yoplait
Source: Company data, DBS Vickers
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Financial analysis Cost of sales breakdown % (FY14) Revenue breakdown. The bulk of Bright Dairy’s revenue is derived from Momchilovtsi. The company is now ramping up its product offerings towards higher margin brands including UHT Production yogurt Momchilovtsi, pasteurised products UBEST, and low- Labour 3% costs temperature yogurt Changyou. Higher margin products account 14% for approximately 45% of overall sales.
Revenue breakdown % (FY14) Direct Others materials 6% 83%
Milk powder Momchilovtsi and others 29% 19%
Source: Company data
Ubest Cost structure. Bright Dairy’s cost of sales mainly comprises of 6% Other liquid raw material costs such as raw milk and milk powder (83%), milk while labour cost and manufacturing overheads accounted for 39% Changyou 1% 3% and 14% respectively in 2014.
Source: Company data Financial health. In 2014, capex was 65% higher y-o-y owing to completion of processing plant capacity expansion, as well as Gross margin expansion. Continued improvement in product building of new dairy farms. Capex in 2015 would continue to mix and a favourable raw material cost environment are the key remain high as Bright Dairy continues to expand its production drivers to profitability. We expect overall gross margins to edge base and distribution network. After its recent new share up modestly by 1.1ppt from 2014 to 2017F. Compared to 2010, placement which raised gross proceeds of Rmb9bn in exchange just before Momchilovtsi was launched, liquid milk gross margin for Tnuva Foods (for no more than Rmb6.87bn) and upstream had expanded 7ppts up to FY14 on the back of higher margin assets from Parent Company, Bright Dairy should have sufficient product contribution. capital in the near term. If we exclude recent new share placement and pending acquisitions, we estimate Bright’s net
gearing to be 35%. Overall gross margin 38.0% Earnings risk. Food safety issue is a key concern to the dairy sector, and Bright Dairy is subject to policy and regulatory 37.0% changes. With the inclusion of Israeli-based Tnuva Food, 36.0% currency risk will become a potential risk. Lastly, fluctuation in raw material costs such as raw milk prices and milk powder 35.0% costs may have an impact on the company’s margins. 34.0%
33.0%
32.0%
31.0%
30.0% 2013 2014 2015F 2016F 2017F
Source: Company data
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
Financial forecast Valuation
1Q15 analysis. In 1Q15, revenue grew 8.1% while net profit The stock is currently trading at 25.2x FY16F PE, representing a expanded 39.2% y-o-y to Rmb98m. This was on the back of premium over other downstream dairy players such as Mengniu improvement in product mix as well as a favourable raw and Yili. This is likely due to Bright Dairy’s higher than industry material environment. Gross margins expanded 0.85ppt to growth rate, and potential earnings re-rating from its recent 34.7%, a decent performance but much slower than Yili’s 1Q15 acquisitions. GP margin expansion of 3.4ppts. This is likely a reflection of Bright’s higher-cost milk powder inventory which had yet to be We peg our TP at 27.5x FY16F PE, which is equivalent to 1.1x fully digested. In terms of seasonality, 1Q is typically a low PEG, but still below its historical 8-year average of 35.5x. This season for dairy product sales, while 2H normally reports much translates into a fair value of Rmb19.7 per share. stronger sales.
We forecast UHT plain white milk to grow in the single-digits over the next few years, given low barriers of entry and weaker brand loyalty in the low-end price range. As for the higher- margin products, we expect double-digit growth in topline, bringing about stronger profitability expansion, thanks to improving operating leverage. We forecast topline growth of 13%/13%/12% in FY15-17F, and earnings to grow at 25% CAGR in 2014-17F.
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Appendix: Overseas assets and partnerships
Synlait Dairy. Synlait Dairy is a New Zealand based raw milk processor and manufactures milk powders, cream products and infant formula and nutritional products. Synlait Dairy acts a third party milk powder provider for customers mainly based in Asia, the Middle East, Europe and Africa. In 2010, Bright Dairy invested NZ$82m (Rmb382m) for a 51% stake. Through its IPO in Jul-13, Bright Dairy subsequently sold down its stake to 39.12%. As of the last traded price, Bright Dairy’s stake is worth NZ145.4m. (Rmb: 610m)
Synlait Dairy’s customers. Synlait Dairy’s infant formula customer base includes Bright Dairy, which uses Synlait Dairy to manufacture its imported infant formula brand “Pure Canterbury”. In addition to Bright Dairy, Synlait Dairy has been working with A2 Corporation to develop branded infant formula.
Strategic cooperation with Pactum Dairy Group. In mid-2014, Bight Dairy signed a strategic cooperation with Australia-based Pactum Dairy Group to manufacture “U+ imported “a UHT milk brand. Bright Dairy initially agreed to take up 25m litres of UHT milk in the first year, which is less than <1% of FY14 sales. Pactum Dairy Group is part of Freedom Foods Group (FNP: ASX).
Bright’s imported brands – Pure Canterbury, U+ import
Source: Company, DBS Vickers
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
State-owned; beneficiary of reforms Possible spin-offs with recent overseas privatisations. Bright Food has highlighted its intention to (1) spin-off its Weetabix Overseas ambitions. Bright Foods’ Vice-President, Ge Junji, acquisition while retaining a controlling stake, similar to Synlait announced Bright’s intention to increase the proportion of its Dairy, (2) combination of asset spin-off with existing domestic overseas assets to 25% (2014:12%) over the next few years. private assets, and lastly (3) the injection of assets into existing Bright Foods has been one of the most aggressive Chinese listed entities. For example, Bright Foods plans to inject DIVA, a players embarking on an M&A spree. There were a few bordereau specialised French distributor, into Jinfeng Wine, to unsuccessful deals (United Biscuits, GNC). Bright Foods is mainly broaden its existing wine operations. focused on consumer brand names, with similar businesses relating to its existing assets. In total, we estimate Bright Foods has spent over Rmb3bn on purchasing overseas assets.
Bright Foods: overseas acquisitions
Date Company Country Category Now under: Description
Produces infant formula products under Pure Canterbury brand. Bright Dairy J ul-10 Sy nlait New Zealand Dairy -related The Company was publicly listed in Jul-2013 on NZSE, of which (39%) Bright Dairy parred down its stake to 39%.
Dry groceries, confectionery, biscuits, cakes, perishable, and Aug-11 Manassen Foods Australia Dry grocery Bright Foods frozen foods and private label
May-12 Weetabix UK Cereal Bright Foods Whole-wheat grain breakfast cereal under Weetabix
Jun-12 Diva France Alcohol Bright Foods Export oriented wine broker, mainly known for Bordeaux
Premier dairy company with products such as yogurt, cheese, Jan-14 Mundella Foods Australia Dairy-related Bright Foods probiotic yogurt
Bright Foods; Largest food company in Israel specialising in milk and dairy May-14 Tnuva Israel Dairy -related pending injection products, Tnuva accounts for 70% of the dairy market in the into BrightDairy sale of meat, egg and packaged food.
Olive oil maker which produces Flippo Berio (leading brand in US Oct-14 Salov Italy Cooking oil Bright Foods and UK).
Source: Company data, DBS Vickers
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Key Management Team
Key Title Other directorships
Mr. Zhuang Guowei Chairman Bright F oods Group Co. Ltd: party member and v ice president; F ormer Shanghai F arming ( ) (Group) Co. Ltd: V ice President & F ormer Shanghai Haibo Co. 庄國蔚 Mr. Shen Weiping Director Shanghai Milk (Group)'s Director, General Manager; Shanghai Agri-business Inv estment ( ) Company: General Manager 沈偉平 Mr. Dong Zongbo CFO Serving since 2006, Mr. Dong used to serve as a finance manager for its fresh product ( ) business. 董宗泊 Mr. Hu Kaiming Supervisor of F ormer Shanghai Yimin F ood, Party Secretary and Deputy Minister ( ) Company 胡凱明 Mr. Zhang Daming Chairman of Chairman of Supervisory Board, Bright Food, V ice-Chairman of the Supervisory Board'; ( ) Supervisory Board Shanghai Haibo Co. Chairman 張大鳴 Mr. Pan Fei ( ) INED V ice President & Professor of Shanghai Univ ersity of F inance and Accounting 潘飛 Mr. Zhang Guangsheng INED Jilin provinicial government economic advisor; honorary director of Shanghai Institute of ( ) Economic Research; former Shanghai Pudong Dev elopment Bank Co. Chairman 張廣生 Mr. Gu Xiaorong INED Shanghai A cademy of Social Sciences research at the Institute of Law ( ) 顧肖榮 Source: Company data, DBS Vickers
Parent Company’s listed entities
Company Ticker Category Stake Description
Dairy-related products with primary brands as Bright ( ), and Bright Dairy 600597 Dairy-related 51.25% 光明 Momchilov tsi ( ) 莫斯利安
Shanghai Maling Canned products including processed meat, seasoning, seafood, vegetable Processed Aquarius 600073 37.79% as well as national brands under " "," "," "," ", " products 冠生園 大白兔 蘇食 梅林 ( ) "," "," ","SF"," ","96858" 上海梅林正廣和 佛手 華佗 正廣和 愛森 Alcohol related products; well-known for its yellow-wine, of which Shanghai J infeng brands include yellow wine - Shikumen ( ), Hejiu ( ), red-wine 600616 Alcohol 34.90% 石庫門 和酒 Wine Meishengshijia( ), and rice-wheat alcohol Jinsenianhua( 美聖世家 金色年 ) as w ell as cocktails 華 Three major revenue segments - Haibo Taxi, Haibo Logistics, and Haibo Investments. Haibo Taxi is one of the four enterprises of Shanghai taxi Logistics and industry. As for Haibo Logistics includes facilities such as transportation, Shanghai Haibo 600708 35.81% others storage and integrated logistics. Shanghai Solid Stainless Steel Products is a stainless steel producers of steel vaccum flask products under "Solid" which is exported to over 40 countries.
Source: Company data, DBS Vickers
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
Bright Dairy products
Bright Dairy
U+, Bright Dairy, Comfort Night Pure white milk Milk; High Calcium; Milk UHT Excellent; Ubest; Bright Dairy; High- (76% of Pastuerised FY15F Calcium; Children; sales Bright (Peanut; Red-bean; Red Date; Fermented milk including Chocolate); Morning Series yogurt) Children DUDU
Plant-based; Red date; Chang-You; Yogurt Abioo; Bright Dairy; Rui-Shi Low-temp Yogurt Red date, HI-You, Bright Dairy yogurt Children Children Abioo; 1911 flavoured &
Milk Infant formula Pure Canterbury; You; Bright Dairy powder (c.18% of FY15 Adult Bright l) Others (c. 6% of Butter; cheese; Bright Juice; Little Bright FY15 juice sales)
Source: Company data, DBS Vickers
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Tnuva Food’s brand offerings
Yoplait Sunfrost Cottage and Soft Tirat Zvi Hard Cheese, Processed Cheeses Cheese and Butter
Maadanot Hard Cheese and Fresh Mama Of Tnuva Milk Chocolate Milk Salted Cheese
Chef Lavan Harduf Soy Products Eggs Adom Adom
OIivia
Source: Company data, DBS Vickers
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
Segmental Breakdown (RMB m)
FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Dairy products 9,888 11,620 15,090 17,501 20,182 22,931 Other dairy related products (milk powder & ice 3,164 3,792 3,983 4,182 4,392 4,611 cream) Others 579 767 1,156 1,330 1,463 1,609 Total 13,630 16,179 20,230 23,013 26,036 29,151 Gross Profit (RMB m) Dairy products 4,280 4,983 6,425 7,403 8,577 9,791 Other dairy related products (milk powder & ice 444 570 493 481 483 507 cream) Others 40 24 50 53 59 64 Total 4,765 5,576 6,968 7,937 9,119 10,363 Gross Profit Margins (%) Dairy products 43.3 42.9 42.6 42.3 42.5 42.7 Other dairy related products (milk powder & ice 14.0 15.0 12.4 11.5 11.0 11.0 cream) Others 6.9 3.1 4.3 4.0 4.0 4.0 Total 35.0 34.5 34.4 34.5 35.0 35.5 Source: Company, DBS Vickers
Income Statement (RMB m) Margins Trend FY Dec 2012A 2013A 2014A 2015F 2016F 2017F 6.0% Revenue 13,775 16,290 20,385 23,013 26,036 29,151 5.5% Cost of Goods Sold (9,010) (10,714 (13,417 (15,174 (17,027 (18,911 5.0% Gross Profit 4,765 5,576 6,968 7,840 9,009 10,240 4.5% Other Opng (Exp)/Inc (4,409) (4,950) (6,167) (6,934) (7,798) (8,735) 4.0% Operating Profit 420 679 776 1,003 1,262 1,563 3.5% Other Non Opg (Exp)/Inc 64 82 16 20 22 24 3.0% Associates & JV Inc 0 0 0 0 0 0 2.5% Net Interest (Exp)/Inc (65) (53) (78) (116) (152) (175) 2.0% Dividend Income 0 0 0 0 0 0 2013A 2014A 2015F 2016F 2017F
Exceptional Gain/(Loss) 0 0 0 0 0 0 Operating Margin % Net Income Margin % Pre-tax Profit 419 708 714 907 1,132 1,412 Tax (84) (234) (131) (181) (226) (282) Minority Interest (24) (68) (15) (18) (23) (28) Preference Dividend 0 0 0 0 0 0 Net Profit 311 406 568 708 883 1,102 EBITDA 568 735 893 1,132 1,410 1,734 Growth Revenue Gth (%) 16.8 18.3 25.1 12.9 13.1 12.0 EBITDA Gth (%) 74.2 29.5 21.5 26.7 24.6 22.9 Opg Profit Gth (%) 69.8 61.8 14.3 29.3 25.8 23.8 Net Profit Gth (%) 30.9 30.4 39.9 24.6 24.8 24.7 Margins & Ratio Gross Margins (%) 34.6 34.2 34.2 34.1 34.6 35.1 Opg Profit Margin (%) 3.0 4.2 3.8 4.4 4.8 5.4 Net Profit Margin (%) 2.3 2.5 2.8 3.1 3.4 3.8 ROAE (%) 9.6 9.8 12.9 15.2 17.8 20.5 ROA (%) 3.7 3.9 4.6 5.1 5.6 6.3 ROCE (%) 6.3 7.1 8.6 8.9 9.7 10.8 Div Payout Ratio (%) 80.0 73.9 63.2 60.0 60.0 60.0 Net Interest Cover (x) 6.5 12.8 9.9 8.7 8.3 8.9 Source: Company, DBS Vickers
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Interim Income Statement (RMB m) Margins Trend FY Dec 1H2012 2H2012 1H2013 2H2013 1H2014 2H2014 6%
5% Revenue 6,461 7,314 7,443 8,847 9,872 10,513 Cost of Goods Sold (4,805) (4,784) (5,930) (6,481) (6,481) (6,936) 4% Gross Profit 2,256 2,508 2,659 2,917 3,391 3,577 3% Other Oper. (Exp)/Inc (3,780) (4,750) (3,938) (4,838) (6,480) (6,680) 2% Operating Profit 132 288 235 445 302 474 Other Non Opg (Exp)/Inc (35) 99 (16) 98 (4) 20 1% Associates & JV Inc 0 0 0 0 0 0 0% 2 2 3 3 4 4 1 1 1 1 1 1 Net Interest (Exp)/Inc (45) (19) (33) (21) (16) (62) H H H H H H Operating1 Margin2 % 1 Net Income2 Margin1 % 2 Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 52 367 187 522 282 432 Tax 4 (88) (63) (170) (58) (73) Minority Interest (4) (20) (8) (61) (31) 16 Net Profit 97 215 148 258 209 359
Growth Revenue Gth (%) 16.5 17.2 15.2 21.0 32.6 18.8 Opg Profit Gth (%) 100.9 58.6 78.1 54.3 28.7 6.7 Net Profit Gth (%) 31.9 30.4 53.0 20.2 41.5 38.9
Margins Gross Margins (%) 25.6 34.6 20.3 26.7 34.3 34.0 Opg Profit Margins (%) 2.0 3.9 3.2 5.0 3.1 4.5 Net Profit Margins (%) 1.5 2.9 2.0 2.9 2.1 3.4
Source: Company, DBS Vickers
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
Quarterly Income Statement (RMB m) Margins Trend FY Dec 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 7%
6% Revenue 4,618 5,254 5,443 5,070 4,991 5% Cost of Goods Sold (3,055) (3,426) (3,637) (3,299) (3,259) 4% Gross Profit 1,563 1,828 1,806 1,771 1,732 3% Other Oper. (Exp)/Inc (1,422) (1,666) (1,643) (1,459) (1,533) 2% Operating Profit 141 162 163 312 198 1% Other Non Opg (Exp)/Inc 11 26 19 (17) (20) 0% 3 3 4 4 4 4 5 1 1 1 1 1 1 1 Associates & JV Inc 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 Q Q Q Q Q Q Q Net Interest (Exp)/Inc (4) (13) (30) (32) (29) 3 4 1 2 3 4 1 Exceptional Gain/(Loss) 0 0 0 0 0 Operating Margin % Net Income Margin % Pre-tax Profit 139 159 151 265 173 Tax (39) (19) (26) (47) (50) Minority Interest (30) (1) 72 (57) (24) Net Profit 70 139 197 162 98 EBITDA 133 133 132 283 192
Growth Revenue Gth (%) 35.1 30.6 28.1 10.3 8.1 Net Profit Gth (%) 42.8 40.8 23.3 64.5 39.2 Margins Gross Margins (%) 33.8 34.8 33.2 34.9 34.7 Opg Profit Margins (%) 3.0 3.1 3.0 6.1 4.0 Net Profit Margins (%) 1.5 2.6 3.6 3.2 2.0
Source: Company, DBS Vickers
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Balance Sheet (RMB m) Asset Breakdown FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Net Fixed
Assets - Debtors - 51.4% Net Fixed Assets 3,391 4,044 5,166 6,612 7,686 8,720 14.9% Invts in Associates & JVs 0 0 0 0 0 0 Other LT Assets 986 1,113 1,299 1,334 1,375 1,422 Cash & ST Invts 2,351 2,619 2,002 2,040 2,063 2,109 Inventory 1,016 1,501 2,031 2,297 2,577 2,862 Assocs'/JVs - Debtors 1,310 1,386 1,695 1,914 2,165 2,424 0.0% Inventory - Other Current Assets 386 905 691 691 691 691 17.9% Bank, Cash Total Assets 9,440 11,568 12,883 14,889 16,558 18,228 and Liquid Assets - 15.9% ST Debt 793 950 1,814 1,814 1,814 1,814 Creditors 2,416 3,507 3,634 4,038 4,531 5,032 Other Current Liab 851 1,491 1,034 1,034 1,034 1,034 LT Debt 708 336 854 2,154 2,954 3,654 Other LT Liabilities 246 260 348 348 348 348 Shareholder’s Equity 4,014 4,278 4,512 4,795 5,148 5,589 Minority Interests 411 746 688 706 729 757 Total Cap. & Liab. 9,440 11,568 12,883 14,889 16,558 18,228
Non-Cash Wkg. Capital (555) (1,206) (252) (171) (133) (90) Net Cash/(Debt) 849 1,333 (666) (1,927) (2,704) (3,359) Debtors Turn (avg days) 32.8 30.2 27.6 28.6 28.6 28.7 Creditors Turn (avg days) 88.5 101.4 98.0 93.1 92.7 93.1 Inventory Turn (avg days) 43.6 43.1 48.5 52.5 52.7 53.0 Asset Turnover (x) 1.6 1.6 1.7 1.7 1.7 1.7 Current Ratio (x) 1.2 1.1 1.0 1.0 1.0 1.0 Quick Ratio (x) 0.9 0.7 0.6 0.6 0.6 0.6 Net Debt/Equity (X) CASH CASH 0.1 0.4 0.5 0.5 Net Debt/Equity ex MI (X) (0.2) (0.3) 0.1 0.4 0.5 0.6 Capex to Debt (%) 72.7 92.9 67.3 44.1 30.8 27.2 Z-Score (X) NA NA NA NA NA NA
Source: Company, DBS Vickers
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China / Hong Kong Company Focus Bright Dairy & Food Co Ltd
Cash Flow Statement (RMB m) Capital Expenditure FY Dec 2012A 2013A 2014A 2015F 2016F 2017F RM 2,000.0 Pre-Tax Profit 419 708 714 907 1,132 1,412 1,800.0 Dep. & Amort. 412 352 524 305 395 457 1,600.0 1,400.0 Tax Paid (888) (1,075) (994) (181) (226) (282) 1,200.0 Assoc. & JV Inc/(loss) 0 0 0 0 0 0 1,000.0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 800.0 600.0 Chg in Wkg.Cap. (424) (431) 909 (80) (39) (43) 400.0 Other Operating CF 1,723 1,751 (817) (152) (194) (223) 200.0 0.0 Net Operating CF 1,242 1,305 336 799 1,068 1,321 2013A 2014A 2015F 2016F 2017F Capital Exp.(net) (1,091) (1,195) (1,796) (1,751) (1,467) (1,489) Capital Expenditure (-) Other Invts.(net) 0 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF 182 154 79 116 152 175 Net Investing CF (910) (1,040) (1,717) (1,635) (1,315) (1,314) Div Paid (249) (300) (359) (425) (530) (661) Chg in Gross Debt (250) (36) 1,167 1,300 800 700 Capital Issues 1,392 336 81 0 0 0 Other Financing CF 0 (3) (106) 0 0 (1) Net Financing CF 893 (3) 783 875 270 38 Currency Adjustments 0 0 0 0 0 1 Chg in Cash 1,226 262 (598) 39 23 45 Opg CFPS (RMB) 1.36 1.42 (0.47) 0.71 0.90 1.11 Free CFPS (RMB) 0.12 0.09 (1.19) (0.77) (0.32) (0.14)
Source: Company, DBS Vickers
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China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
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China / Hong Kong Company Guide
China Mengniu
Edition 1 Version 1 |Bloomberg: 2319 HK EQUITY | Reuters: 2319.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 July 2015
BUY GETTING BIGGER AND BETTER Last Traded Price: HK$38.35 (HSI : 25,399) Maintain BUY on solid performance. We maintain our Buy Price Target : HK$ 47.1 (23% upside) (Prev. HK$45.8) rating on China Mengniu as we expect product mix upgrades
and margin expansion would continue drive decent earnings Potential Catalyst: Stronger than expected margin enhancement growth in the next 1-2 years. We expect the company to Where we differ: More conservative on earnings vs consensus continue gaining market share, with earnings expected to grow at 14.2% CAGR for FY14-16. Its JV with Danone, despite Analyst Alice HUI CFA, +852 2971 1960 limited scale but growing fast, could be a more significant driver [email protected] in the medium term considering the strong know-how of
Alison Fok +852 2971 1938 Danone and Mengniu’s strength in branding and distribution. [email protected] Improving product mix to drive sales and margins. We expect yogurt, representing 15% of FY14 sales, to remain a key Price Relative growth contributor with sales rising by 25% in FY15 (FY14:
HK$ Relative Index 37%), helped by star products including Champion, Yoyi C and full-year contribution from Danone’s Bio+ (FY14: Rmb200m). 46.3 203 Coupled with solid momentum in other high-margin products 41.3 183 163 such as premium milk, we expect Mengniu’s double-digit 36.3 143 growth in top line to be sustainable, with room for margin 31.3 123 expansion given the enhancement in product mix and 26.3 103 favourable raw material costs. 21.3 83 16.3 63 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Competition in UHT milk remains tough. We expect the mass UHT milk market to face tougher competition. But with its China Mengniu (LHS) Relative HSI INDEX (RHS) strategy to place more promotional efforts on this category,
Forecasts and Valuation there could still be some growth with the cheaper raw material FY Dec (RMB m) 2014A 2015F 2016F 2017F Turnover 50,049 55,784 61,750 67,723 costs (avg. raw milk prices and Fonterra milk powder prices have EBITDA 4,241 4,372 4,944 5,694 fallen 15% and 40% yoy respectively) providing a cushion on Pre-tax Profit 3,150 3,469 4,004 4,658 margins. Net Profit 2,351 2,694 3,066 3,526 EPS (RMB) 1.22 1.38 1.57 1.80 Valuation: EPS (HK$) 1.52 1.72 1.96 2.25 The stock is currently trading at 19.6x FY16F PE, below its EPS Gth (%) 35.1 12.9 13.8 15.0 Diluted EPS (HK$) 1.52 1.72 1.96 2.25 historical (24x) as well as sector average valuation (25.5x). Our DPS (HK$) 0.36 0.39 0.44 0.51 TP is now rolled over to HK$47.1(previously HK$45.8), based on BV Per Share (HK$) 13.93 15.10 16.67 18.48 24x FY16F PE (prev. c.26x FY15 PE), pegged to its historical PE (X) 25.2 22.3 19.6 17.0 average. P/Cash Flow (X) 19.2 13.2 14.2 13.2
P/Free CF (X) 398.5 29.4 35.3 29.4 Key Risks to Our View: EV/EBITDA (X) 15.9 15.3 13.1 10.8 Demand, cost, competition and food safety the key risks. Net Div Yield (%) 0.9 1.0 1.1 1.3 P/Book Value (X) 2.8 2.5 2.3 2.1 Slower than expected demand, raw material cost fluctuation, Net Debt/Equity (X) 0.2 0.1 0.0 CASH rising SG&A on increased A&P efforts, surging competition ROAE (%) 12.8 11.9 12.3 12.8 (both domestic and global players) and food safety concerns
Earnings Rev (%): Nil Nil New would be key risks. Consensus EPS (RMB) 1.43 1.69 2.03 Other Broker Recs: B: 22 S: 1 H: 8 At A Glance Issued Capital (m shrs) 1,961 Source of all data: Company, DBSV, Thomson Reuters, HKEX Mkt. Cap (HK$m/US$m) 75,216 / 9,705 Major Shareholders COFCO, Arla, Danone (%) 31.5 Commonwealth Bank of Australia 8.0 Free Float (%) 60.4 3m Avg. Daily Val. (US$m) 28.9 ICB Industry : Consumer Goods / Food Producers
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Company Guide
China Mengniu
FY14 revenue breakdown% Ice cream Other dairy 5% products CRITICAL DATA POINTS TO WATCH 1% Yogurt Earnings Drivers: 15% Yogurt – leader in driving stronger product mix. Yogurt accounted for 15% of FY14 sales. We expect sales growth to reach 25% in UHT milk Milk 47% FY15 (FY14: 37%), led by higher margin star products such as beverages Champion, Yoyi C, and full-year contribution from Danone’s Bio+ 24% (FY14. RMB200m). Mengniu has launched smaller packaging formats for Yoyi C with more varieties of flavours, while it continues to extend the products’ shelf-life to improve profitability. Yogurt sales & % yoy RMB m Recovery in infant formula sales. Despite the tough operating 10,000 70% 9,000 60% environment in the infant formula market, we see potential 8,000 catalysts coming from (i) a likely recovery in Yashili’s topline 7,000 50% 6,000 40% growth; (ii) injection of the remainder of existing infant formula 5,000 operations from Mengniu to Yashili; and (iii) potential investment 4,000 30% 3,000 20% into Danone’s Dumex China, which is one of the fastest growing 2,000 10% imported brands. Mengniu became a controlling shareholder of 1,000 0 0% Yashili last year. In FY14, Yashili accounted for c.5% of its sales 2009 2010 2011 2012 2013 2014F 2015F Sales Growth (%) and net profit. Following the acquisition, Yashili has been undergoing restructuring and is refining its distribution network. Yashili net profit contribution as % of total sales % We expect impact from these efforts to start kicking in gradually. 6.0 5.0 Given the typically higher GP margin for infant formula, a recovery 5.0 in Yashili would enhance Mengniu’s margin in the medium term. 4.0
3.0 Seeking to improve distribution channels. Mengniu will continue 2.0 to streamline its distribution channels, shifting from distributor- 1.2 1.0 based to direct selling. This will be implemented in 2015 in first 0.2 tier and key provincial cities, where the company aims to switch to 0.0 2H13 1H14 2H14 direct selling in modern channels instead of through distributors. In addition, Mengniu will also proactively seek new channels such Overall profitability as schools and catering. This should result in improved control of RMB m 44% its distribution network in the longer run, though in the near term, 3,000 50% the process would need to be carefully monitored to minimise any 2,500 28% 30% 40% 30% possible negative impact during transition. 15% 2,000 11% 20%
1,500 10% 0% 1,000 -21% -10% 500 -20% 0 -30% 2009 2010 2011 2012 2013 2014F 2015F Net profit Growth (%)
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Company Guide China Mengniu
Leverage & Asset Turnover (x) Balance Sheet: 1.5 Healthy financial position. Mengniu is in a solid financial position 0.70 1.5 with net gearing of 24% as of end-FY14, after the injection of 0.60 1.4 Danone and Arla as key shareholders. Given robust operating 0.50 1.4 cash flow (est. >Rmb3bn p.a.), this should be more than 0.40 1.3 sufficient to cover its upcoming capex (est. Rmb2.5bn), with net 0.30 1.3 gearing expected to trend down to 3% by FY16. 0.20 1.2
0.10 1.2 Share Price Drivers: 0.00 1.1 Market share gains. We expect one of the key drivers of Mengniu 2013A 2014A 2015F 2016F 2017F Gross Debt to Equity (LHS) Asset Turnover (RHS) will be its ability to further expand its distribution network, Capital Expenditure thereby improve its market share nationwide. RM 3,000.0 Stronger than expected margin expansion. Persistent soft raw 2,900.0 milk prices and milk powder prices could offer further room for 2,800.0 2,700.0 margin improvement. 2,600.0
2,500.0
Key Risks: 2,400.0 Rising domestic and import competition. Competition may 2,300.0 continue to intensify, not only from domestic players but also 2013A 2014A 2015F 2016F 2017F international brands. This may create more aggressive price Capital Expenditure (-) competition and hurt ASP and thus margins. ROE (%) 12.0%
Food safety issues. Mengniu may be affected by any dairy-related 10.0% industry news concerning food safety issues. 8.0%
Raw material price volatility. Mengniu’s profitability would be 6.0% affected by volatility in raw material costs, in particularly raw milk 4.0% and milk powder which are key materials. 2.0%
0.0% COMPANY BACKGROUND 2013A 2014A 2015F 2016F 2017F One of the key leading giants. Mengniu is one of the leading Forward PE Band (x) dairy giants in China. China Mengniu, through its subsidiaries, (x) manufactures and distributes dairy related products (UHT milk, 32.4 yogurt, and milk beverages), ice cream, and other dairy products, 30.4 28.4 such as infant formula powder. The company markets its +2sd: 28.4x 26.4 +1sd: 25.4x products under its MENGNIU core brand. 24.4 22.4 Avg: 22.5x 20.4 Key listed companies. China Mengniu has controlling stakes on ‐1sd: 19.6x 18.4 two listed companies - Yashili (51% stake) and China Modern 16.4 ‐2sd: 16.6x Dairy (25.4% stake) - which secures Mengniu’s upstream supply 14.4 Jul-11 Jul-12 Jul-13 Jul-14 chain as well as improving its infant formula capabilities. It also holds minor equity stakes in other upstream players such as PB Band (x) (x) Shengmu and YST Dairy. As for downstream operations, 4.2 Mengniu holds a 51% stake in Junlebao, a private company, 3.7 +2sd: 3.65x which is known for its affordable infant formula powder. 3.2 +1sd: 3.26x Partnerships with international players. Mengniu has formed Avg: 2.87x 2.7 partnerships with its stakeholders such as Danone and Arla; ‐1sd: 2.48x 2.2 Danone holds a 20% stake in Mengniu’s cold-chain business that ‐2sd: 2.1x includes yogurt offerings. In addition, Mengniu also has formed a 1.7 49%/51% JV with US-based Whitewave Foods, which has Jul-11 Jul-12 Jul-13 Jul-14 launched a plant-based product online this year. Source: Company, DBS Vickers
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Company Guide
China Mengniu
Segmental Breakdown (RMB m)
FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Liquid milk 37,903 43,036 48,218 53,613 59,023 Ice cream 3,023 2,716 2,743 2,771 2,798 Other dairy products 253 336 504 655 786 Infant formula 2,177 3,961 4,320 4,711 5,115 Total 43,357 50,049 55,784 61,750 67,723 Source: Company, DBS Vickers
Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 43,357 50,049 55,784 61,750 67,723 Cost of Goods Sold (31,660) (34,616) (38,195) (42,169) (46,000) Gross Profit 11,697 15,434 17,589 19,581 21,723 Other Opng (Exp)/Inc (9,846) (12,769) (14,569) (16,104) (17,649) Operating Profit 1,852 2,665 3,020 3,476 4,074 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 154 278 239 308 354 Net Interest (Exp)/Inc 199 208 210 220 230 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 2,205 3,150 3,469 4,004 4,658 Tax (367) (459) (531) (651) (800) Minority Interest (231) (340) (245) (287) (331) Preference Dividend 0 0 0 0 0 Net Profit 1,631 2,351 2,694 3,066 3,526 EBITDA 3,186 4,241 4,372 4,944 5,694 Growth Revenue Gth (%) 20.2 15.4 11.5 10.7 9.7 EBITDA Gth (%) 27.3 33.1 3.1 13.1 15.2 Opg Profit Gth (%) 23.9 43.9 13.3 15.1 17.2 Net Profit Gth (%) 29.7 44.1 14.6 13.8 15.0 Margins & Ratio Gross Margins (%) 27.0 30.8 31.5 31.7 32.1 Opg Profit Margin (%) 4.3 5.3 5.4 5.6 6.0 Net Profit Margin (%) 3.8 4.7 4.8 5.0 5.2 ROAE (%) 11.7 12.8 11.9 12.3 12.8 ROA (%) 5.3 5.4 5.5 5.8 6.1 ROCE (%) 6.8 6.7 6.6 7.0 7.4 Div Payout Ratio (%) 22.5 23.3 22.5 22.5 22.5 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers
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Company Guide China Mengniu
Interim Income Statement (RMB m) FY Dec 2H2012 1H2013 2H2013 1H2014 2H2014
Revenue 17,837 20,668 22,689 25,836 24,213 Cost of Goods Sold (13,426) (15,149) (16,511) (17,454) (17,162) Gross Profit 4,411 5,519 6,178 8,382 7,052 Other Oper. (Exp)/Inc (3,789) (4,611) (5,210) (7,161) (5,608) Operating Profit 622 908 968 1,221 1,444 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 74 30 124 183 95 Net Interest (Exp)/Inc 86 99 100 78 130 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 782 1,036 1,193 1,481 1,669 Tax (91) (186) (181) (253) (207) Minority Interest (79) (101) (130) (180) (160) Net Profit 612 749 881 1,049 1,302
Revenue Gth (%) (5.2) 13.3 27.2 25.0 6.7 Opg Profit Gth (%) (30.9) 4.1 55.5 34.5 49.1 Net Profit Gth (%) (23.4) 16.3 43.9 39.9 47.7
Margins Gross Margins (%) 24.7 26.7 27.2 32.4 29.1 Opg Profit Margins (%) 3.5 4.4 4.3 4.7 6.0 Net Profit Margins (%) 3.4 3.6 3.9 4.1 5.4 Source: Company, DBS Vickers
Balance Sheet (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F
Net Fixed Assets 9,246 9,667 9,874 11,033 12,087 Invts in Associates & JVs 2,843 3,841 3,841 3,841 3,841 Other LT Assets 11,929 13,240 15,732 15,781 15,753 Cash & ST Invts 7,663 4,650 6,209 8,958 12,179 Inventory 2,577 4,342 3,977 4,390 5,041 Debtors 3,595 9,768 9,689 9,804 9,918 Other Current Assets 2,485 1,573 1,620 1,669 1,719 Total Assets 40,339 47,081 50,942 55,476 60,537
ST Debt 8,554 4,479 1,974 1,974 1,974 Creditors 9,116 9,546 10,465 11,553 12,603 Other Current Liab 393 326 397 517 667 LT Debt 3,336 5,464 7,969 7,969 7,969 Other LT Liabilities 929 2,773 3,255 3,833 4,527 Shareholder’s Equity 15,361 21,489 23,635 26,095 28,931 Minority Interests 2,650 3,003 3,248 3,535 3,867 Total Cap. & Liab. 40,339 47,081 50,942 55,476 60,537
Non-Cash Wkg. Capital (851) 5,811 4,425 3,793 3,409 Net Cash/(Debt) (4,227) (5,293) (3,734) (985) 2,236 Debtors Turn (avg days) 18.5 48.7 63.7 57.6 53.1 Creditors Turn (avg days) 92.4 102.2 98.5 98.0 98.5 Inventory Turn (avg days) 23.9 37.9 40.9 37.2 38.5 Asset Turnover (x) 1.4 1.1 1.1 1.2 1.2 Current Ratio (x) 0.9 1.4 1.7 1.8 1.9 Quick Ratio (x) 0.6 1.0 1.2 1.3 1.4 Net Debt/Equity (X) 0.2 0.2 0.1 0.0 CASH Net Debt/Equity ex MI (X) 0.3 0.2 0.2 0.0 CASH Capex to Debt (%) 24.1 29.5 25.3 25.3 25.3 Z-Score (X) 3.0 3.4 3.4 3.4 3.4 Source: Company, DBS Vickers
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Company Guide
China Mengniu
Cash Flow Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F
Pre-Tax Profit 2,229 3,150 3,469 4,004 4,658 Dep. & Amort. 1,218 1,321 1,187 1,236 1,343 Tax Paid (281) (572) (459) (531) (651) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 517 (478) 1,315 512 234 Other Operating CF (399) (341) (951) (1,000) (1,020) Net Operating CF 3,284 3,080 4,561 4,222 4,565 Capital Exp.(net) (2,867) (2,931) (2,519) (2,519) (2,519) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (12,402) (3,484) (1,122) 1,409 1,592 Net Investing CF (15,269) (6,415) (3,641) (1,111) (927) Div Paid (290) (391) (548) (606) (690) Chg in Gross Debt 10,780 (1,460) 0 0 0 Capital Issues 835 3,752 0 0 0 Other Financing CF 1,006 3,910 1,188 244 273 Net Financing CF 12,331 3,619 640 (362) (417) Currency Adjustments 0 0 0 0 0 Chg in Cash 346 283 1,559 2,749 3,221 Opg CFPS (RMB) 1.53 1.85 1.66 1.90 2.22 Free CFPS (RMB) 0.23 0.08 1.04 0.87 1.05
Source: Company, DBS Vickers
Target Price & Ratings History
S.No. Date Closing Target Rating HK$ 6 Price Price 47.0 5 1: 28-Aug-14 HK$38.00 HK$38.30 Hold 1 45.0 2 4 2: 31-Oct-14 HK$34.25 HK$37.10 Hold 3 43.0 3: 5-Dec-14 HK$29.75 HK$32.00 Hold 41.0 4: 9-J an-15 HK$33.30 HK$32.80 Hold 39.0 5: 27-Mar-15 HK$38.70 HK$41.30 Hold 37.0 6: 4-May-15 HK$39.25 HK$45.8 Buy 35.0 33.0 31.0 29.0 27.0 Jul-15 Jul-14 Oct-14 Feb-15 Dec-14 May-15
Source: DBS Vickers
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China / Hong Kong Company Guide
China Modern Dairy Edition 1 Version 1 |Bloomberg: 1117 HK Equity | Reuters: 1117.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 July 2015 BUY STABLE PROGRESS Last Traded Price: HK$2.53 (HSI : 25,399) Price Target : 12-Month HK$ 3.35 (32% upside) (Prev HK$3.45) Maintain BUY on undemanding valuations. We maintain our BUY rating on China Modern Dairy (CMD) as we expect raw Potential Catalyst: Earlier-than-expected rebound in dairy prices milk prices to post a mild rebound in 2016. We believe the Where we differ: Lower dairy price assumptions for FY15-16 weaker earnings in FY15, a 17% decline under our estimates,
Analyst should have been largely priced in at the current valuation with Alice HUI CFA, +852 2971 1960 possible resumption of earnings growth in FY16. In the [email protected] medium term, we believe leading upstream players like CMD Alison Fok +852 2971 1938 should continue to benefit from rising demand from [email protected] downstream as well as market consolidation.
Price Relative Recent acquisition strengthens leading position. In Jul’15, HK$ Relative Index CMD announced the placement of 477m new shares (9.9% of
212 total) to KKR and CDH with a 3-year lock-up period, in 4.4 192 3.9 exchange for the remaining 82% stake in its two JV farms 172 3.4 which holds 16,268 cows. Based on the 5M15 net profit of 152 2.9 132 Rmb44.6m, we estimate the potential earnings enhancement to 2.4 112 be 3-5% in FY15/16. 1.9 92 1.4 72 Downstream sales is Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Downstream operations still sound. sound as CMD’s UHT milk sales remained relatively healthy China Modern Dairy (LHS) Relative HSI INDEX (RHS) under a highly competitive landscape. We expect CMD to meet
Forecasts and Valuation its sales target of Rmb1.5bn for its branded business in FY15. FY Dec (RMB m) 2014A 2015F 2016F 2017F Turnover 5,027 5,467 6,861 7,558 The company's low-temperature products such as yogurt have EBITDA 1,239 1,417 1,659 1,876 hit the shelves in Beijing, which could become a new driver in Pre-tax Profit 770 928 1,126 1,332 the longer run. Core Net Profit 1,064 885 1,081 1,279 EPS (RMB) 0.22 0.18 0.22 0.26 Valuation: EPS (HK$) 0.28 0.23 0.28 0.33 We lower our EPS estimates by 5-10% for FY15-16 and EPS Gth (%) 89.1 (16.8) 22.1 18.3 Diluted EPS (HK$) 0.19 0.23 0.28 0.33 introduce FY17 earnings largely on share placement adjustment. DPS (HK$) 0.01 0.00 0.01 0.01 CMD is now trading at 9.1x FY16 PE, which is lower than its BV Per Share (HK$) 1.68 3.88 4.18 4.52 1SD below its 3-year historical average of 13x. Maintain our BUY PE (X) 9.2 11.0 9.1 7.7 P/Cash Flow (X) 6.2 6.5 5.8 5.3 rating with a new TP of HK$3.35 (Prev. HK$3.45). P/Free CF (X) nm nm 143.2 40.1 EV/EBITDA (X) 11.7 10.5 9.0 8.0 Risks: Net Div Yield (%) 0.5 0.0 0.5 0.5 Raw milk price volatility. CMD’s earnings are highly affected by P/Book Value (X) 1.5 0.7 0.6 0.6 raw milk price fluctuations, both domestic and international. Net Debt/Equity (X) 0.7 0.3 0.3 0.3 ROAE (%) 17.4 8.2 6.9 7.6
Earnings Rev (%): (1) (6) NEW At A Glance Issued Capital (m shrs) 5,305 Consensus EPS (RMB) 0.20 0.25 Other Broker Recs: B: 14 S: 5 H: 3 Mkt. Cap (HK$m/US$m) 13,411 / 1,730 Major Shareholders Source of all data: Company, DBSV, Thomson Reuters, HKEX China Mengniu Dairy Company Limited (%) 25.4 KKR & CDH (%) 9.9 Free Float (%) 21.9 3m Avg. Daily Val. (US$m) 4.6 ICB Industry : Consumer Goods / Beverages
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China Modern Dairy
CRITICAL DATA POINTS TO WATCH Raw milk price (CMD) RMB/kg 5.2 Earnings Drivers: 5.0 We Production volume to drive upstream sales growth. 4.8 expect sales volume, driven by improving milk yields and organic 4.6 herd size growth, to be the key drivers to upstream earnings. Demand will be mostly absorbed by Mengniu, with a 10-year 4.4 offtake agreement until 2018. We maintain our view that large- 4.2
scale dairy farms such as CMD will be the key beneficiaries of the 4.0 2013 2014 2015F 2016F 2017F market consolidation in the upstream dairy sector, as large-scale players should have stronger cost competitiveness vs smaller Milk yield (tonne/annum) players. In the longer run, the increasing popularity of pasteurised RMB/tonne dairy products would further drive the demand for locally 9.20 9.08 8.99 produced quality milk. In terms of herd size, we expect the 9.00 8.90 company to grow at 9% organically. Inclusive of its two JVs, we expect herd size to grow 17% this year. 8.80 8.60 8.50 Milk yield to grow. With the inclusion of the two JVs, we expect 8.40 milk yield to be softer this year on average. We estimate milk yield to grow by 1% to 9 tonnes per annum this year (FY14: 8.20 +7% y-o-y). This should improve as the herd matures. 2013 2014 2015F 2016F Sales volume ('000 tonnes) '000 tonne Point of sales expansion key to downstream growth. 2,000 40% Downstream sales will be primarily driven by distribution network expansion to improve CMD’s visibility in the market. CMD’s liquid 1,500 30% milk products are currently sold in 28 provinces, with decent sales 1,000 20% coverage at modern trade channels such as large supermarkets including Carrefour, Walmart, Meetall, Shiji Hualian, C.P Lotus, 500 10% Yonghui, Auchan, etc. As of Dec’14, CMD had expanded its 0 0% distribution partners to 463 (FY13: 210), with POS increased to 2013 2014 2015F 2016F 2017F 260k, up c.148% y-o-y (versus downstream sales growth of Sales volume % yoy 159%). We expect downstream sales contribution to grow to 16% of sales (FY14: 9%) to reach 42% in CAGR for FY14-16F. Raw milk price RMB/kg
4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 /11 /12 /13 /14 p p p p Jun/12 Jun/13 Jun/14 Jun/15 Jun/11 Se Se Se Se Dec/11 Dec/12 Dec/13 Dec/14
Mar/12 Mar/13 Mar/14 Mar/15 WMP US$/ton 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Jun/11 Jun/12 Jun/13 Jun/14 Jun/15 Oct/11 Feb/12 Oct/12 Feb/13 Oct/13 Feb/14 Oct/14 Feb/15
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Company Guide China Modern Dairy
Leverage & Asset Turnover (x) Balance Sheet: 0.4 Owing to heavy capex commitment to build 0.90 Heavy capex input. 0.4 0.80 dairy farms, CMD’s net gearing was at a relatively high level of 0.4 0.70 0.3 67%. However, CMD should see improvement, having recently 0.60 0.3 done a new share placement as well as having less capex 0.50 0.3 commitment with a more mature herd size to grow organically. 0.40 0.3 0.30 0.3 0.20 0.2 Share Price Drivers: 0.10 0.2 Rebound on raw milk prices. A rebound in raw milk prices will 0.00 0.2 lift upstream sales, as well as margins. As the largest upstream 2013A 2014A 2015F 2016F 2017F Gross Debt to Equity (LHS) Asset Turnover (RHS) player in China, we expect CMD to be one of the key Capital Expenditure beneficiaries should this happen. While we still expect volume to RM grow 15% in FY15, the decline in raw milk prices (down 12% y- 2,500.0 o-y to Rmb4.4/kg in FY15 under our assumptions, vs 4% q-o-q) 2,000.0 would partly offset the volume growth. Meanwhile, we expect 1,500.0 cost of sales (of which around 2/3rd comprise of feed costs) to post a slight decline as soft commodity and alfalfa prices 1,000.0 remained largely on the stable/downward trend y-o-y. Under this 500.0 backdrop, a potential recovery in raw milk prices from the current 0.0 level (a multi-year trough for international prices) should help 2013A 2014A 2015F 2016F 2017F margins going forward. Capital Expenditure (-) ROE (%) Stronger growth at downstream operations. CMD is 16.0% expanding its product range progressively to lower its reliance on 14.0% upstream earnings. This year, CMD is entering into low- 12.0% temperature dairy products initially in Beijing. If well-received, 10.0% CMD will begin expanding to other regions which should further 8.0% enhance its product offerings.. 6.0% 4.0%
2.0%
COMPANY BACKGROUND 0.0% Largest upstream dairy player. Established in 2005 in Maanshan, 2013A 2014A 2015F 2016F 2017F Anhui, China Modern Dairy is the largest upstream dairy Forward PE Band (x) (x) company in terms of herd size as well as the largest raw milk 35.7 producer in China. As of FY14, CMD had a total of 201k dairy 30.7 cows at 25 operating farms across China, with average milk yield at 8.9 ton/annum. 25.7 +2sd: 25x
20.7 +1sd: 20.4x A pioneer in large-scale dairy farming. CMD is among the first to 15.7 Avg: 15.7x adopt a free-stall dairy farming business model in China to ensure 10.7 ‐1sd: 11x higher yields and cost efficiency compared with small-scale backyard farmers. CMD previously relied on imported heifers 5.7 ‐2sd: 6.3x Jul-11 Jul-12 Jul-13 Jul-14 from Australia to ensure higher productivity as well as faster herd PB Band (x) size growth; this has since been halted as CMD has reached a (x) sustainable herd size. 3.2
2.7 +2sd: 2.65x Expand operations downstream. CMD expanded its operations downstream under the brand Modern Farming, primarily sold in 2.2 +1sd: 2.21x Shanghai region. In FY15, CMD will expand its product offerings 1.7 Avg: 1.76x to cover low-temperature dairy products. ‐1sd: 1.32x 1.2 ‐2sd: 0.87x 0.7 Jan-12 Jan-13 Jan-14 Jan-15 Source: Company, DBS Vickers
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Company Guide
China Modern Dairy
Segmental Breakdown (RMB m)
FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Upstream dairy 2,968 4,194 4,017 5,161 5,658 UHT Milk 321 833 1,450 1,700 1,900 Total 3,289 5,027 5,467 6,861 7,558 Source: Company, DBS Vickers
Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 3,289 5,027 5,467 6,861 7,558 Cost of Goods Sold (2,032) (3,161) (3,837) (4,909) (5,345) Gross Profit 1,257 1,865 1,629 1,952 2,213 Other Opng (Exp)/Inc (410) (870) (494) (599) (660) Operating Profit 847 996 1,136 1,353 1,554 Other Non Opg (Exp)/Inc 55 18 14 19 16 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (179) (244) (222) (246) (238) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 518 770 928 1,126 1,332 Tax (11) (7) (37) (45) (53) Minority Interest 26 28 5 0 0 Preference Dividend 0 0 0 0 0 Net Profit 560 1,064 885 1,081 1,279 EBITDA 865 1,239 1,417 1,659 1,876 Growth Revenue Gth (%) 61.2 52.8 8.8 25.5 10.2 EBITDA Gth (%) 42.5 43.2 14.3 17.1 13.1 Opg Profit Gth (%) 64.7 17.5 14.1 19.2 14.8 Net Profit Gth (%) 78.9 90.0 (16.8) 22.1 18.3 Margins & Ratio Gross Margins (%) 38.2 37.1 29.8 28.5 29.3 Opg Profit Margin (%) 25.7 19.8 20.8 19.7 20.6 Net Profit Margin (%) 17.0 21.2 16.2 15.8 16.9 ROAE (%) 10.2 17.4 8.2 6.9 7.6 ROA (%) 4.9 8.0 4.6 4.3 4.8 ROCE (%) 8.4 8.3 6.2 5.7 6.2 Div Payout Ratio (%) 0.0 6.6 0.0 5.0 5.0 Net Interest Cover (x) 4.7 4.1 5.1 5.5 6.5 Source: Company, DBS Vickers
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Company Guide China Modern Dairy
Interim Income Statement (RMB m) FY Dec 2H2012 1H2013 2H2013 1H2014 2H2014
Revenue 1,093 1,388 1,901 2,585 2,442 Cost of Goods Sold (756) (900) (1,133) (1,579) (1,582) Gross Profit 336 489 769 1,005 860 Other Oper. (Exp)/Inc (93) (171) (240) (343) (527) Operating Profit 243 318 529 662 333 Other Non Opg (Exp)/Inc 49 47 8 9 10 Associates & JV Inc 3 1 (1) 5 (5) Net Interest (Exp)/Inc (55) (74) (105) (124) (120) Exceptional Gain/(Loss) 3 4 5 6 7 Pre-tax Profit 182 179 339 552 218 Tax (3) (5) (6) (7) (1) Minority Interest 8 10 16 22 5 Net Profit 143 185 375 608 456
Growth Revenue Gth (%) N/A 47.4 74.0 86.2 28.5 Opg Profit Gth (%) N/A 19.8 117.5 108.3 (37.0) Net Profit Gth (%) N/A 8.3 163.4 228.9 21.6
Margins Gross Margins (%) 30.8 35.2 40.4 38.9 35.2 Opg Profit Margins (%) 22.3 22.9 27.8 25.6 13.6 Net Profit Margins (%) 13.0 13.3 19.7 23.5 18.7 Source: Company, DBS Vickers
Balance Sheet (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F
Net Fixed Assets 4,099 4,523 4,855 5,168 5,462 Invts in Associates & JVs 59 114 7,750 7,750 7,750 Other LT Assets 6,299 6,935 7,947 8,959 9,972 Cash & ST Invts 800 1,170 1,885 1,721 1,747 Inventory 691 641 778 995 1,084 Debtors 545 827 899 1,128 1,242 Other Current Assets 2 2 2 2 2 Total Assets 12,494 14,211 24,116 25,723 27,258
ST Debt 2,989 2,958 2,958 2,958 2,958 Creditors 1,386 1,403 1,693 2,165 2,358 Other Current Liab 108 108 108 108 108 LT Debt 1,960 2,829 3,829 3,829 3,829 Other LT Liabilities 190 350 350 350 350 Shareholder’s Equity 5,743 6,510 15,032 16,167 17,509 Minority Interests 118 146 146 146 146 Total Cap. & Liab. 12,494 14,211 24,116 25,723 27,258
Non-Cash Wkg. Capital (257) 52 (122) (148) (138) Net Cash/(Debt) (4,149) (4,618) (4,903) (5,067) (5,041) Debtors Turn (avg days) 45.9 49.8 57.6 53.9 57.2 Creditors Turn (avg days) 273.1 173.4 158.3 152.3 163.8 Inventory Turn (avg days) 110.8 82.8 72.5 70.0 75.3 Asset Turnover (x) 0.3 0.4 0.3 0.3 0.3 Current Ratio (x) 0.5 0.6 0.7 0.7 0.8 Quick Ratio (x) 0.3 0.5 0.6 0.5 0.6 Net Debt/Equity (X) 0.7 0.7 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.7 0.7 0.3 0.3 0.3 Capex to Debt (%) 19.2 36.9 23.8 23.8 23.8 Z-Score (X) 1.5 1.7 1.6 1.7 1.7 Source: Company, DBS Vickers
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Company Guide
China Modern Dairy
Cash Flow Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F
Pre-Tax Profit 518 770 928 1,126 1,332 Dep. & Amort. 169 226 267 287 306 Tax Paid (1) (14) (37) (45) (53) Assoc. & JV Inc/(loss) 1 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (387) (187) 80 26 (11) Other Operating CF (83) 787 266 286 282 Net Operating CF 216 1,581 1,504 1,681 1,856 Capital Exp.(net) (952) (2,136) (1,612) (1,612) (1,612) Other Invts.(net) 181 281 98 14 74 Invts in Assoc. & JV (33) (56) (7,636) 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 16 16 44 40 44 Net Investing CF (788) (1,895) (9,106) (1,558) (1,494) Div Paid (1) 0 7,588 0 (54) Chg in Gross Debt 170 921 1,000 0 0 Capital Issues 6 0 0 0 0 Other Financing CF 388 (420) (271) (286) (283) Net Financing CF 563 502 8,317 (286) (337) Currency Adjustments 0 0 0 0 1 Chg in Cash (9) 188 715 (164) 26 Opg CFPS (RMB) 0.13 0.37 0.29 0.34 0.39 Free CFPS (RMB) (0.15) (0.12) (0.02) 0.01 0.05
Source: Company, DBS Vickers
Target Price & Ratings History
S.No. Date Closing Target Rating HK$ 1 2 Price Price 5.0 3 6 1: 13-Aug-14 HK$3.56 HK$4.26 Buy 4.5 5 4 2: 26-Aug-14 HK$3.47 HK$4.41 Buy 4.0 3: 3-Oct-14 HK$3.35 HK$4.26 Buy 4: 5-Dec-14 HK$2.25 HK$3.00 Buy 3.5 5: 25-Mar-15 HK$2.46 HK$3.00 Buy 3.0 6: 17-Apr-15 HK$2.99 HK$3.45 Buy 2.5 2.0 1.5 1.0 Jul-15 Jul-14 Oct-14 Feb-15 Dec-14 May-15
Source: DBS Vickers
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China Dairy Sector Yashili International Holdings
Bloomberg: 1230 HK EQUITY | Reuters: 1230.HK Refer to important disclosures at the end of this report
NOT RATED On the shoulders of twin giants Last Traded Price: HK$2.27 (HSI : 25,399) A leading domestic infant formula player in China Potential Catalyst: Recovery in topline growth FY15 to be a year of transition on ongoing restructuring Analyst Premium valuation justified, given potential synergies with Alice HUI CFA, +852 2971 1960 Mengniu and Danone [email protected] Headquartered in Alison Fok +852 2971 1938 A leading domestic infant formula player. [email protected] Guangdong, Yashili is one of the leading domestic infant formula manufacturers. The company manufactures and distributes products
under its own brands, Yashily and Scient, commanding a market share
Price Relative of 4.5% in FY14. Yashili also manufactures and distributes nutritional HK$ Relative Index food such as soymilk powder and cereals. 5.9 315 With Mengniu 4.9 265 Consolidating market share with Danone’s Dumex. and Danone emerging as Yashili’s controlling and second largest 3.9 215 shareholder respectively, Based on a recent MOU between Mengniu, 2.9 165 Yashili and Danone, Danone intends to sell all of its interest in Dumex 1.9 115 China into Yashili, which could propel Mengniu-Yashili’s position to the 0.9 65 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 top tier infant formula players. Yashili is also undergoing restructuring
Yashili Int’l (LHS) Relative HSI INDEX (RHS) with changes in its marketing strategy (more active face-to-face events, nursing promotions, and loyalty membership scheme), upgrading of Forecasts and Valuation FY Dec (RMB m) 2011A 2012A 2013A 2014A technology and infrastructure, and improvements in its distribution Turnover 2,958 3,655 3,890 2,816 channel, including leveraging on Danone’s existing online resources. EBITDA 383 636 565 348 Pre-tax Profit 375 646 577 310 We expect Mengniu to inject its remaining infant formula operations Net Profit 306 468 438 249 into Yashili, turning Yashili into Mengniu’s platform for infant formula. EPS (RMB) 0.09 0.13 0.12 0.07 EPS (HK$) 0.11 0.17 0.15 0.09 FY15 a year of transition. While we believe Yashili’s 1H15 EPS Gth (%) (47.6) 52.6 (7.3) (43.3) performance should likely remain soft, as the company is still in an DPS (HK$) 0.07 0.50 0.05 0.03 adjustment period amid a challenging market environment, its effort to BV Per Share (HK$) 1.35 1.45 1.09 1.11 PE (X) 20.9 13.7 14.7 26.0 expand its penetration in the baby store and online channels as well as P/Cash Flow (X) 13.9 8.3 45.8 24.5 new product launches could start to show some impact from 2H15 P/Free CF (X) 18.2 11.4 nm nm onwards. Management had earlier guided for positive top line growth EV/EBITDA (X) 9.5 7.0 9.9 14.8 in FY15. Trading at 19x FY16 PE (based on consensus), Yashili's Net Div Yield (%) 3.1 21.9 2.0 1.2 P/Book Value (X) 1.7 1.6 2.1 2.0 valuation is at a premium to Biostime, a reflection of the company’s Net Debt/Equity (X) CASH CASH CASH CASH distortion in earnings from the restructuring, as well as potential strong ROAE (%) 8.1 11.9 12.2 7.9 synergies with Mengniu and Danone. With the backing of these two
dairy giants, Yashili will be a strong contender in the domestic infant formula market in the long run. Key risks include rising domestic and foreign competition through e-commerce, as well as food safety issues. ICB Industry: Consumer Goods Food Producers At A Glance ICB Sector: Issued Capital (m shrs) 4,746 One of the top infant formula companies in Principal Business: 10,772 / 1,390 China Mkt. Cap (HK$m/US$m) Major Shareholders Source of all data: Company, DBSV, Thomson Reuters, HKEX China Mengniu (%) 51.0 Danone (%) 25.0 Free Float (%) 24.0 3m Avg. Daily Val. (US$m) 0.9
Page 4 www.dbsvickers.com ed- JS / sa- AL DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
Yashili International Holdings
Company background Growth drivers
One of the top domestic players in China. Yashili is engaged Recovery in topline growth. Since Mengniu became Yashili’s in the production and sales of paediatric milk formula controlling shareholder, the Group has invested in information products and nutrition food. It held a market share of 4.5% in platforms to improve its communication access with China’s infant formula market in 2014. Headquartered in consumers. As at FY14, the Group had 27,000 membership Guangdong province, Yashili operates plants in Guangdong, stores with 1.1m members. Yashili will place more effort on Shanxi and Heilongjiang, with a new plant in New Zealand communicating and understanding consumers’ needs through expected to commence operations in 2015. face-to-face marketing events, increasing promotional events, upgrading technology and infrastructure, as well as leveraging In Nov-13, Mengniu made a general offer to become Yashili’s on shareholders’ strength in sales and distribution. controlling shareholder at HK$3.5/share. Danone subsequently joined as the second largest shareholder in Feb- Leveraging on key shareholders’ expertise. Based on the MOU 15 through a new share placement at HK$3.7/share. Currently, which has been entered between Mengniu, Yashili and Mengniu and Danone have 51% and 25% stakes respectively. Danone t o inject Danone’s Dumex China operations into Yashili, Danone intends to sell all its interest in Dumex China Yashili has an extensive range of infant formula brands, with to Yashili, of which the proceeds will be used to subscribe for its two core brands, Yashily and Scient, targeting mid- to Mengniu’s shares through COFCO Dairy Investment (CDI). high-end consumers. Yashily Super α-Golden series, the Combining Danone’s market share of 2.8% based on Ambery Golden series and the Arla Merla series (cooperation Euromonitor, Mengniu-Yashili’s infant formula market share with Arla foods) target high-end consumers, while Yashily will propel to second position with 7%, after Nestle. While no Newwitt series and Scient’s Ordinary Pack Series focus on mid- financial details are released at this stage, this clearly end consumers. Lastly, Yashily New Formula focuses on low- strengthens Yashili’s position in the infant formula market. to mid-end consumers. The Group also sells nutrition food, Synergies include leveraging on Danone’s sales and such as adult milk powder and nutritious paediatric rice cereal. distribution network as well as product technology to further improve on its existing product offerings. FY14 sales breakdown E-commerce presence to grow. E-commerce is the fastest- growing sales channel for infant formula, in which international brands have dominant presence due to their stronger brand reputation. This trend should likely continue. Yashily Nutritions Despite this, Yashili should still be able to benefit, given 19% opportunities to leverage on Danone’s existing online platform, as well as potential for its imported brands such as Arla Merla. Yashili will also have dedicated products (Le Pei Jian” [樂培健]) Scient to target its maternity channel. Formula Yashily 16% Formula 65%
Source: Company data, DBS Vickers
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China Dairy Sector
Yashili International Holdings
Yashili’s sales in infant formula (FY14)
100% 90% 80% 53% 50% 70% 60% 50% 40% 30% 37% 44% 20% 10% 10% 0% 7% Yashily Scient 1st tier 2nd tier 3rd and lower
Source: Company data, DBS Vickers
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China Dairy Sector Yashili International Holdings
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A Turnover 2,958 3,655 3,890 2,816 Net Fixed Assets 730 744 803 613 Cost of Goods Sold (1,420) (1,693) (1,810) (1,371) Invts in Assocs & JVs 76 418 985 939 Gross Profit 1,538 1,962 2,080 1,445 Other LT Assets 234 407 342 196 Other Opng (Exp)/Inc (1,234) (1,407) (1,601) (1,191) Cash & ST Invts 2,762 2,273 1,056 2,090 Operating Profit 304 554 479 254 Inventory 578 653 886 718 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 52 27 32 43 Associates & JV Inc 0 0 0 0 Other Current Assets 212 1,048 413 330 Net Interest (Exp)/Inc 71 92 97 56 Total Assets 4,644 5,570 4,517 4,929 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 31 331 154 141 Pre-tax Profit 375 646 577 310 Creditors 720 1,029 346 234 Tax (67) (176) (137) (61) Other Current Liab 55 91 834 735 Minority Interest (2) (2) (2) 0 LT Debt 0 0 47 621 Preference Dividend 0 0 0 0 Other LT Liabilities 33 37 25 23 Net Profit 306 468 438 249 Shareholder’s Equity 3,803 4,079 3,110 3,174 Minority Interests 1 3 0 0 EBITDA 383 636 565 348 Total Cap. & Liab. 4,644 5,570 4,517 4,929 Sales Gth (%) 0.1 23.6 6.4 (27.6) EBITDA Gth (%) (42.1) 66.0 (11.2) (38.4) Non-Cash Wkg. Cap 68 608 150 122 Opg Profit Gth (%) (48.1) 82.2 (13.5) (47.0) Net Cash/(Debt) 2,730 1,942 854 1,327 Net Profit Gth (%) (39.0) 53.0 (6.6) (43.1) Effective Tax Rate (%) 17.8 27.2 23.8 19.7
Cash Flow Statement (RMB m) Rates & Ratio FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A Pre-Tax Profit 375 646 577 310 Gross Margins (%) 52.0 53.7 53.5 51.3 Dep. & Amort. 79 82 86 94 Opg Profit Margin (%) 10.3 15.2 12.3 9.0 Tax Paid (82) (127) (196) (78) Net Profit Margin (%) 10.4 12.8 11.2 8.8 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 8.1 11.9 12.2 7.9 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 6.7 9.2 8.7 5.3 Chg in Wkg.Cap. 123 242 (257) 75 ROCE (%) 6.4 9.7 9.4 5.6 Other Operating CF (37) (72) (69) (137) Div Payout Ratio (%) 65.3 298.9 30.0 30.0 Net Operating CF 458 772 141 264 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (107) (208) (255) (704) Asset Turnover (x) 0.6 0.7 0.8 0.6 Other Invts.(net) (340) (1,283) (222) (832) Debtors Turn (avg days) 15.1 3.9 2.8 4.9 Invts in Assoc. & JV 0 0 0 488 Creditors Turn (avg days) 66.8 75.3 76.4 77.3 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 124.5 132.6 155.2 213.5 Other Investing CF 217 346 309 (4) Current Ratio (x) 4.5 2.8 1.8 2.9 Net Investing CF (229) (1,145) (168) (1,052) Quick Ratio (x) 3.8 2.3 1.1 2.2 Div Paid (235) (200) (1,408) (131) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (127) 300 (15) 559 Capex to Debt (%) 339.7 62.9 126.6 92.3 Capital Issues (16) 0 31 0 Z-Score (X) N/A N/A N/A N/A Other Financing CF (26) (230) (53) (5) N.Cash/(Debt)PS (RMB) 0.97 0.69 0.30 0.47 Net Financing CF (404) (130) (1,445) 423 Opg CFPS (RMB) 0.10 0.15 0.11 0.05 Currency Adjustments (45) (78) 10 (7) Free CFPS (RMB) 0.10 0.16 (0.03) (0.12) Chg in Cash (220) (581) (1,462) (372) Interim Income Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 1H2013 2H2013 1H2014 2H2014 FY Dec 2011A 2012A 2013A 2014A Turnover 2,153 1,737 1,546 1,271 Revenues (RMB m) Cost of Goods Sold (961) (849) (726) (646) Yashily Formula 1,826 2,478 2,661 1,833 Gross Profit 1,192 888 820 625 Scient Formula 609 653 661 438 Other Oper. (Exp)/Inc (819) (779) (607) (583) Yashili Nutritions 473 489 546 534 Operating Profit 373 109 212 43 Other 50 34 23 12 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 0 0 0 Total 2,958 3,655 3,890 2,816 Net Interest (Exp)/Inc 38 57 26 28 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 410 166 239 71 Tax (115) (22) (29) (32) Minority Interest (2) 0 0 0 Net Profit 294 144 209 39
Sales Gth (%) 27.5 (11.6) (28.2) (26.8) Opg Profit Gth (%) 44.0 (63.7) (43.0) (61.0) Net Profit Gth (%) 34.1 (42.3) (28.7) (72.6) Gross Margins (%) 55.4 51.1 53.0 49.2 Opg Profit Margins (%) 17.3 6.3 13.7 3.3 Net Profit Margins (%) 13.6 8.3 13.5 3.1
Source: Company, DBS Vickers
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China Dairy Sector Inner Mongolia Yili Industrial-A
Bloomberg: 600887 CH Equity | Reuters: 600887.SS Refer to important disclosures at the end of this report
NOT RATED Rising dominance Last Traded Price: RMB18.63 (CSI300 Index : 4,251) Expect continual market share gains to further boost Yili’s Potential Catalyst: Stronger contribution from high margin products leading position Analyst Strong portfolio of higher-margin brands to take advantage of Alice HUI CFA, +852 2971 1960 [email protected] growing health awareness among consumers
Alison Fok +852 2971 1938 Valuation undemanding against peers [email protected] Leader of the herd. Established in 1993 and listed on SSE in 1996, Inner-Mongolia Yili is the leading dairy player in China, who enjoys Price Relative highest profit and margins among its peers. Yili has an extensive RMB Relative Index product offering including mainly liquid dairy products (UHT dairy
45.4 388 products, yogurt, dairy-related and plant-based beverages), milk 40.4 35.4 338 powder, and low-temperature dairy products. Its strong product 30.4 288 capability and effective marketing campaign should enable the 25.4 238 20.4 company to gain further market share despite its substantial size. 188 15.4 10.4 138 Improving product mix, effective marketing and deepening 5.4 88 In FY15, higher margin products Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 penetration to drive growth. Inner Mongolia Yili Industrial-A (LHS) such as Satine (UHT drink), QQ Star (kid’s beverage), Ambrosial Relative SHSZ300 Index (RHS) (UHT yogurt) and Chang Qing (probiotic drinks) will be key
Forecasts and Valuation profitability drivers. Impact from lower raw material costs remain FY Dec (RMB m) 2011A 2012A 2013A 2014A Turnover 37,451 41,991 47,779 54,436 favourable, as seen in 1Q15’s net margin expansion of 0.7ppt, but EBITDA 2,160 2,274 3,324 5,265 this would be partly offset by higher operating expenses on Pre-tax Profit 2,136 2,087 3,060 4,786 Net Profit 1,809 1,717 3,187 4,144 increasing marketing efforts. Yili is active in mass market EPS (RMB) 1.13 1.07 1.56 1.35 advertising including sponsorships for popular TV shows such as EPS Gth (%) 16.4 (5.1) 45.2 (13.3) “Running Man” (奔跑吧兄弟) and ”Where did my father go?” (爸 Diluted EPS (RMB) 1.13 1.07 1.56 1.35 ?) etc. DPS (RMB) 0.25 0.33 0.80 0.80 爸去哪儿 BV Per Share (RMB) 3.77 4.59 7.89 6.08 Yili has formed strategic alliances with PE (X) 16.5 17.3 11.9 13.8 Undemanding valuation. P/Cash Flow (X) 8.1 12.4 7.0 23.4 international players overseas including Sterilgarda Alimenti SpA P/Free CF (X) nm nm 17.0 nm (Italy’s largest dairy producer) and Dairy Farmers of America (DFA; EV/EBITDA (X) 13.5 13.4 10.3 9.8 US’ largest dairy farm coop) to secure its upstream sourcing Net Div Yield (%) 1.3 1.8 4.3 4.3 capabilities. It has also set up plants in Kansas and in New Zealand P/Book Value (X) 4.9 4.1 2.4 3.1 Net Debt/Equity (X) CASH 0.1 CASH CASH to leverage on local upstream supply. Based on the company’s ROAE (%) 35.3 25.7 27.2 23.8 guidance of 12% and 15% growth on FY15 sales and profit respectively, a target likely to be exceeded. The counter is trading
at 17.7x FY16F PE (based on consensus estimates), undemanding vs sector peers, considering its consistent topline and profitability Consumer Goods outperformance, as well as superior ROE generation. ICB Industry: ICB Sector: Food Producers At A Glance Issued Capital (m shrs) 6,129 Principal Business: Leading dairy player in China Mkt. Cap (RMBm/US$m) 114,178 / 18,383
Source of all data: Company, DBSV, Thomson Reuters, HKEX Major Shareholders Hohhot Investment Co Ltd 9.3 (%) China Asset Management 3.9 Gang Pan 3.9 Free Float (%) 82.9 3m Avg. Daily Val. (US$m) 530.9
Page 58 www.dbsvickers.com ed- JS / sa- AL DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector Inner Mongolia Yili Industrial-A
through TV, radio, promoters, celebrities and large exhibitions Growth drivers (Olympic, World Expo)
Star products to drive profitability. Yili derives 78% of its sales SG&A expenses comparison from liquid milk (UHT milk, yogurt & milk beverages), while milk powder and ice-cream account for 11% and 8% % respectively. In FY14, Yili’s liquid milk posted over 14% 40 growth y-o-y, helped by ASP hike in 2H14, as well as success 35 in its star products such as Satine, Ambrosial and Chang Qing, 30 leading to an improvement in product mix towards the higher-margin products. Milk powder sales also grew 9.1% 25 mainly from product mix upgrade from Pro-Kido brand and 20 imported milk powder brand, Tofer. Going forward, star 15 products, which command higher margins than its original 10 brands, will continue to be the key driver for profitability. 5 0 FY14 sales mix 2009 2010 2011 2012 2013 2014
Mengniu Bright Yili Mixed feeds 1% Milk Source: Company data, DBS Vickers powder & dairy related Moving onto a global platform. In the past 1-2 years, Yili has Ice-cream 11% been actively securing upstream milk powder sources globally 8% to ensure an integrated dairy supply chain. In FY14, Yili initiated a partnership with DFA for upstream dairy sourcing as well as building an infant formula processing plant in Kansas. It has so far committed US$30m (Rmb186m) for a Liquid milk 78% 30% stake in the plant. In Nov-14, Yili announced that it is investing in a diversified dairy base in New Zealand for Rmb2bn, its second investment there following its Rmb1bn infant formula processing plant investment in 2012. In 2012, Yili purchased Oceania Dairy to build a milk processing plant Source: Company data, DBS Vickers in New Zealand. Further M&As under discussion. In May-15, Yili sold Shihezi Strong gross margin. By product, GP margin for milk powder Company to Western Xinjiang Animal Husbandry Co. for was the highest at 45.6% in FY14, which is better than Rmb90.5m. The subsidiary is mainly used as an infant powder domestic peers. Liquid milk and ice-cream posted GP margins production base, with revenue and net profit of Rmb230m of 30.8% and 35.1% respectively. In FY14, Yili’s overall GP and Rmb0.8m. Recently, Yili started discussions with Guizhou margin was around 1.2ppt higher than closest peer Mengniu, Triple Dairy ( ), Guizhou’s largest dairy processor. In partly a reflection of its product mix which has a larger 三联乳业 FY14, Triple Dairy recorded sales of Rmb531m, and net profit proportion of sales from higher-margin categories such as of Rmb10.2m. milk powder.
Strong advertising to generate positive brand equity. Yili has been driving down its SG&A expenses, which has fallen by 3.8ppts since FY10. Yili holds strong promotional campaigns
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Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A Turnover 37,451 41,991 47,779 54,436 Net Fixed Assets 8,662 10,419 11,897 14,083 Cost of Goods Sold (26,719) (29,754) (34,317) (36,585) Invts in Assocs & JVs 0 0 0 0 Gross Profit 10,733 12,236 13,462 17,851 Other LT Assets 2,540 3,190 4,513 4,410 Other Opng (Exp)/Inc (9,036) (10,571) (10,836) (13,306) Cash & ST Invts 3,921 2,004 8,173 14,273 Operating Profit 1,697 1,665 2,626 4,545 Inventory 3,310 2,995 3,683 5,008 Other Non Opg (Exp)/Inc 390 471 401 396 Debtors 1,116 937 670 903 Associates & JV Inc 0 0 0 0 Other Current Assets 381 271 3,941 817 Net Interest (Exp)/Inc 49 (49) 33 (155) Total Assets 19,930 19,815 32,877 39,494 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 2,985 2,578 4,086 8,072 Pre-tax Profit 2,136 2,087 3,060 4,786 Creditors 7,431 6,960 8,539 7,444 Tax (304) (351) 141 (619) Other Current Liab 2,449 1,940 2,892 3,241 Minority Interest (23) (19) (14) (22) LT Debt 7 5 0 704 Preference Dividend 0 0 0 0 Other LT Liabilities 751 808 1,047 1,212 Net Profit 1,809 1,717 3,187 4,144 Shareholder’s Equity 6,024 7,335 16,125 18,634 Minority Interests 282 190 188 188 EBITDA 2,160 2,274 3,324 5,265 Total Cap. & Liab. 19,930 19,815 32,877 39,494 Sales Gth (%) 26.2 12.1 13.8 13.9 EBITDA Gth (%) 113.3 5.2 46.2 58.4 Non-Cash Wkg. Cap (5,074) (4,697) (3,137) (3,956) Opg Profit Gth (%) 190.1 (1.9) 57.7 73.1 Net Cash/(Debt) 929 (578) 4,087 5,497 Net Profit Gth (%) 132.8 (5.1) 85.6 30.0 Effective Tax Rate (%) 14.2 16.8 N/A 12.9
Cash Flow Statement (RMB m) Rates & Ratio FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A Pre-Tax Profit 2,136 2,087 3,060 4,786 Gross Margins (%) 28.7 29.1 28.2 32.8 Dep. & Amort. 731 915 1,143 1,479 Opg Profit Margin (%) 4.5 4.0 5.5 8.3 Tax Paid (100) 0 (458) 139 Net Profit Margin (%) 4.8 4.1 6.7 7.6 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 35.3 25.7 27.2 23.8 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 10.3 8.6 12.1 11.5 Chg in Wkg.Cap. 1,321 (350) 1,539 (3,714) ROCE (%) 16.3 13.2 16.2 15.7 Other Operating CF (418) (243) 190 (253) Div Payout Ratio (%) 22.1 30.5 51.3 59.2 Net Operating CF 3,670 2,409 5,475 2,436 Net Interest Cover (x) NM 33.9 NM 29.3 Capital Exp.(net) (3,789) (3,102) (3,241) (3,946) Asset Turnover (x) 2.1 2.1 1.8 1.5 Other Invts.(net) 260 25 (178) 33 Debtors Turn (avg days) 12.7 8.9 6.1 5.3 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 90.8 90.1 84.1 81.3 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 41.0 39.5 36.2 44.2 Other Investing CF 52 20 (2,841) 2,915 Current Ratio (x) 0.7 0.5 1.1 1.1 Net Investing CF (3,476) (3,057) (6,260) (999) Quick Ratio (x) 0.4 0.3 0.6 0.8 Div Paid (88) (530) (606) (1,807) Net Debt/Equity (X) CASH 0.1 CASH CASH Chg in Gross Debt 194 (411) 1,496 4,690 Capex to Debt (%) 126.6 120.1 79.3 45.0 Capital Issues 1 0 6,118 0 Z-Score (X) N/A N/A N/A N/A Other Financing CF (238) 37 242 0 N.Cash/(Debt)PS (RMB) 0.58 (0.36) 2.00 1.79 Net Financing CF (131) (905) 7,251 2,883 Opg CFPS (RMB) 1.47 1.73 1.93 2.01 Currency Adjustments (1) 0 (5) 0 Free CFPS (RMB) (0.07) (0.43) 1.09 (0.49) Chg in Cash 63 (1,553) 6,460 4,320 Interim Income Statement (RMB m) Segmental Breakdown (RMB m) FY Dec 1H2013 2H2013 1H2014 2H2014 FY Dec 2011A 2012A 2013A 2014A Turnover 24,021 23,758 27,471 26,966 Revenues (RMB m) Cost of Goods Sold (16,761) (17,556) (18,379) (18,206) Liquid milk 26,933 32,271 37,116 42,406 Gross Profit 7,260 6,202 9,092 8,759 Ice-cream 4,222 4,294 4,243 4,284 Other Oper. (Exp)/Inc (5,955) (4,882) (6,640) (6,666) Milk powder & dairy related 5,642 4,484 5,512 6,013 Operating Profit 1,306 1,320 2,451 2,093 Others 469 687 583 1,733 Other Non Opg (Exp)/Inc 182 219 181 215 Associates & JV Inc 0 0 0 0 Total 37,266 41,736 47,454 54,436 Net Interest (Exp)/Inc 7 26 52 (207) Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 1,495 1,565 2,684 2,101 Tax 251 (110) (378) (241) Minority Interest (8) (6) (13) (9) Net Profit 1,738 1,449 2,293 1,851
Sales Gth (%) 13.4 14.2 14.4 13.5 Opg Profit Gth (%) 86.0 37.1 87.8 58.5 Net Profit Gth (%) 128.2 51.6 31.9 27.7 Gross Margins (%) 30.2 26.1 33.1 32.5 Opg Profit Margins (%) 5.4 5.6 8.9 7.8 Net Profit Margins (%) 7.2 6.1 8.3 6.9
Source: Company, DBS Vickers
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Page 61
China Dairy Sector Biostime International Holdings
Bloomberg: 1112 HK Equity | Reuters: 1112.HK Refer to important disclosures at the end of this report
NOT RATED Baby hiccups ahead Last Traded Price: HK$21.60 (HSI : 25,399) A major domestic infant formula player in China focusing on Potential Catalyst: Spin-off of e-commerce platform the premium market Despite benefits from lower raw material costs and Analyst Alice HUI CFA, +852 2971 1960 favourable forex, near-term sales growth could be affected [email protected] by clearance of old stocks
Alison Fok +852 2971 1938 1H15 profit warning; in the medium term, the highly [email protected] competitive landscape would put pressure on ASP with downward margin risk
Price Relative Focused on the premium market. Established in 2003, HK$ Relative Index Biostime is a major domestic infant formula player in China with
472 a 7.6% market share in FY14. Focusing on the premium market, 69.2 422 the company markets its products under two key brands - 59.2 372 Biostime and Adimil. Apart from infant formula, Biostime is also 49.2 322 involved in other products including probiotic supplements, 272 39.2 222 dried baby food and baby care products. With baby specialty 29.2 172 stores being its key channel, the company generated the 19.2 122 majority of its sales (77% in FY14) from its members of 9.2 72 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 MaMa100, its loyalty membership program. Biostime International Holdings (LHS) Relative HSI INDEX (RHS) Clearing old inventory to pave way for launch of new packaging. Since late 2014, Biostime has been clearing its old Forecasts and Valuation infant formula inventory to pave way for the launch of FY Dec (RMB m) 2011A 2012A 2013A 2014A Turnover 2,189 3,382 4,561 4,732 upgraded products (with new packaging) in end-June. While EBITDA 710 1,032 1,116 1,154 there have been some market share gains, partly helped by Pre-tax Profit 714 1,051 1,162 1,121 aggressive promotions (buy-1-get-1-free), 4M15 infant formula Net Profit 527 743 821 810 sales posted a slight decline. With ASP expected to remain EPS (RMB) 0.86 1.22 1.60 1.31 largely unchanged, there should be some margin benefits in EPS (HK$) 1.08 1.52 2.00 1.63 EPS Gth (%) 48.7 40.7 32.0 (18.4) FY15 from lower raw material costs, partly offset by higher Diluted EPS (HK$) 1.08 1.52 2.00 1.63 marketing expenses associated with the upgraded product DPS (HK$) 0.95 1.35 1.51 0.84 launches. On the distribution front, Biostime is working to BV Per Share (HK$) 4.10 4.84 5.21 6.00 expand its MaMa100 platform to cross-sell third-party products PE (X) 20.0 14.2 10.8 13.2 and offer assistance to parties seeking to enter its offline Core PE (X) 19.8 13.9 12.7 13.0 distribution channels, with plans to list its e-commerce platform P/Cash Flow (X) 20.2 10.9 15.8 10.8 in the A-share market in the future. P/Free CF (X) 21.8 11.4 19.9 12.5 EV/EBITDA (X) 12.1 8.7 8.5 8.3 Challenging competition landscape with rising margin Net Div Yield (%) 4.4 6.2 7.0 3.9 risk. Biostime issued a profit warning expecting 1H15 sales and P/Book Value (X) 5.3 4.5 4.1 3.6 profit to decline by 11% and 36% respectively on the back of Net Debt/Equity (X) CASH CASH CASH CASH heavy promotional activities. In the medium term, pricing risk is ROAE (%) 29.0 34.6 33.9 29.8 high given rising competition and distribution channel changes, with premium brands like Biostime likely to face most pricing pressure. Hence, despite its current valuation, at 11.3x FY16 PE
based on consensus estimates, the share price is already below both its historical and peers’ average, there are no near-term re- ICB Industry: Consumer Goods rating catalysts in sight. ICB Sector: Food Producers At A Glance Principal Business: One of the top infant formula companies in Issued Capital (m shrs) 609 China with products marketed under Biostime and Adimil Mkt. Cap (HK$m/US$m) 13,161 / 1,698 brands Major Shareholders Source of all data: Company, DBSV, Thomson Reuters, HKEX Biostime Pharmaceuticals (China) Limited (%) 73.9 Free Float (%) 26.1 3m Avg. Daily Val. (US$m) 7.0
Page 62 www.dbsvickers.com ed-TH / sa- AL DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector Biostime International Holdings
Segmental Profit Breakdown FY14
Baby care Growth prospects Dried baby products food 3% Core brand re-launch in July. Biostime will be launching a 3% Probiotic product upgrade on its core brand Biostime in July, covering supplements 10% product series including Supreme, Supreme Care, Golden Care, and the Premium series. To pave way for this, Biostime has been undergoing more aggressive price promotions to clear its older stocks (with old packaging) since end-14. While we do not expect any ASP changes from the upgrade, sales volume could see some improvement thereafter. To encourage distributors to restock, Biostime will bear some of Infant the A&P costs, such as promoters in supermarkets. formula 84% By product, 84% of FY14 sales were derived from infant formula powder. Out of this, Biostime (supreme) accounted for 69%, while Adimil (premium), launched in Sept-13, made Source: Company data, DBS Vickers up the remaining 31% of infant formula sales. Deepening penetration into lower-tier cities. To cater to a Revenue Breakdown FY14 larger range of audience, Biostime plans to deepen penetration of its Adimil brand into lower-tier cities. The Dried baby Baby care Probiotic company targets to increase its number of baby-specialty products supplements food stores to 30,000 outlets, and VIP Pharmacies to 6,000 outlets 3% 4% 9% (FY14: 2,824).
Adimil Biostime currently derives 66% of sales from VIP Baby 15% Specialty Stores, 26% from supermarkets and the remainder from VIP pharmacies from its offline channels. As of FY14, Biostime had 24,615 VIP baby specialty stores and 2,824 VIP pharmacies. Biostime 69% Potential spin-off of e-commerce platform onto A-share market. MaMa100 initiated a multi-platform online strategy – B2C through third-party e-commerce platforms, C2C (online member stores such as TaoBao), and lastly O2O through MaMa100 proprietary platforms (MaMa and WeChat).
Source: Company data, DBS Vickers Catering primarily for its strong member base of 1.96m users in Mama100, Biostime plans to begin cross selling competitors brands as well. The management plans to invite strategic shareholders and key employees to enter in order to cultivate MaMa100 as a leading vertical O2O e-commerce platform for parents and babies. Without any numbers and with MaMa100 being fully owned by controlling shareholders, it is difficult to estimate MaMa100’s value and impact on Biostime at this stage.
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China Dairy Sector
Biostime International Holdings
Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A Turnover 2,189 3,382 4,561 4,732 Net Fixed Assets 59 77 322 478 Cost of Goods Sold (733) (1,153) (1,586) (1,805) Invts in Assocs & JVs 0 0 0 0 Gross Profit 1,456 2,229 2,975 2,927 Other LT Assets 228 1,165 1,432 1,817 Other Opng (Exp)/Inc (742) (1,176) (1,802) (1,720) Cash & ST Invts 1,814 1,682 1,690 3,387 Operating Profit 714 1,053 1,173 1,207 Inventory 297 523 972 797 Other Non Opg (Exp)/Inc (13) (23) (27) (51) Debtors 39 86 127 150 Associates & JV Inc 0 0 0 1 Other Current Assets 0 0 78 3 Net Interest (Exp)/Inc 17 41 72 18 Total Assets 2,438 3,533 4,620 6,631 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 271 751 0 Pre-tax Profit 714 1,051 1,162 1,121 Creditors 332 707 1,081 1,032 Tax (187) (307) (341) (312) Other Current Liab 83 156 213 236 Minority Interest 0 0 0 0 LT Debt 0 0 0 2,411 Preference Dividend 0 0 0 0 Other LT Liabilities 45 77 60 36 Net Profit 527 743 821 810 Shareholder’s Equity 1,978 2,323 2,516 2,917 Minority Interests 0 0 0 0 EBITDA 710 1,032 1,116 1,154 Total Cap. & Liab. 2,438 3,533 4,620 6,631 Sales Gth (%) 77.5 54.5 34.9 3.7 EBITDA Gth (%) 109.4 45.4 8.2 3.3 Non-Cash Wkg. Cap (79) (253) (118) (319) Opg Profit Gth (%) 113.7 47.5 11.4 3.0 Net Cash/(Debt) 1,814 1,411 939 976 Net Profit Gth (%) 98.5 40.9 10.4 (1.3) Effective Tax Rate (%) 26.1 29.3 29.4 27.8
Cash Flow Statement (RMB m) Rates & Ratio FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A Pre-Tax Profit 714 1,051 1,162 1,121 Gross Margins (%) 66.5 65.9 65.2 61.9 Dep. & Amort. 13 23 27 51 Opg Profit Margin (%) 32.6 31.1 25.7 25.5 Tax Paid (123) (245) (347) (338) Net Profit Margin (%) 24.1 22.0 18.0 17.1 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 29.0 34.6 33.9 29.8 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 24.3 24.9 20.1 14.4 Chg in Wkg.Cap. (77) 115 (167) 151 ROCE (%) 28.6 31.7 27.6 20.1 Other Operating CF (10) 4 (14) (12) Div Payout Ratio (%) 70.6 70.9 70.4 39.7 Net Operating CF 516 947 660 972 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (39) (39) (136) (135) Asset Turnover (x) NM 1.1 1.1 0.8 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 15.1 3.9 3.2 4.3 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 66.8 75.3 86.4 94.8 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 124.5 132.6 155.2 169.0 Other Investing CF (490) (1,811) 55 (326) Current Ratio (x) 5.2 2.0 1.4 3.4 Net Investing CF (529) (1,850) (81) (460) Quick Ratio (x) 4.5 1.6 0.9 2.8 Div Paid (180) (404) (622) (493) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 0 271 480 (751) Capex to Debt (%) N/A 14.5 18.1 5.6 Capital Issues 12 (57) (64) 9 Z-Score (X) N/A N/A N/A N/A Other Financing CF 56 (7) (8) 2,407 N.Cash/(Debt)PS (RMB) 3.76 2.94 1.95 2.01 Net Financing CF (113) (197) (214) 1,173 Opg CFPS (RMB) 0.99 1.39 1.37 1.35 Currency Adjustments (56) 5 (1) (1) Free CFPS (RMB) 0.79 1.52 0.87 1.38 Chg in Cash (182) (1,095) 365 1,684 Interim Income Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions FY Dec 1H2013 2H2013 1H2014 2H2014 FY Dec 2011A 2012A 2013A 2014A Turnover 2,061 2,500 2,189 2,543 Revenues (RMB m) Cost of Goods Sold (692) (894) (843) (961) Probiotic supplements 332 379 458 425 Gross Profit 1,370 1,606 1,346 1,581 Infant formulas 1,685 2,715 3,752 3,982 Other Oper. (Exp)/Inc (915) (971) (917) (922) Dried baby food 97 135 199 151 Operating Profit 498 675 474 659 Baby care products 48 106 152 173 Other Non Opg (Exp)/Inc (13) (14) (25) (26) Others 27 47 0 0 Associates & JV Inc 0 0 0 0 Total 2,189 3,382 4,561 4,732 Net Interest (Exp)/Inc 39 33 5 13 Gross profit (RMB m) Exceptional Gain/(Loss) (163) 0 0 0 Probiotic supplements 258 295 360 304 Pre-tax Profit 494 668 433 688 Infant formulas 1,104 1,769 2,422 2,467 Tax (196) (145) (121) (190) Dried baby food 56 77 111 74 Minority Interest 0 0 0 0 Baby care products 19 58 82 82 Net Profit 443 540 312 498 Total 1,456 2,229 2,975 2,927 Gross profit Margins (%) Probiotic supplements 77.8 77.7 78.6 71.4 Sales Gth (%) 51.3 23.8 6.2 1.7 Infant formulas 65.5 65.1 64.5 62.0 Opg Profit Gth (%) 33.4 (0.7) (4.8) (2.4) Dried baby food 57.3 56.9 55.6 49.1 Net Profit Gth (%) 61.8 15.2 (29.5) (7.9) Baby care products 40.2 54.9 54.2 47.2 Gross Margins (%) 66.4 64.2 61.5 62.2 Opg Profit Margins (%) 24.1 27.0 21.6 25.9 Total 66.5 65.9 65.2 61.9 Net Profit Margins (%) 21.5 21.6 14.3 19.6
Source: Company, DBS Vickers
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China Dairy Sector China Huishan Dairy Holdings
Bloomberg: 6863 HK Equity | Reuters: 6863.HK Refer to important disclosures at the end of this report
Still some way to go NOT RATED Vertically integrated dairy player in North East China Last Traded Price: HK$2.17 (HSI : 25,399) Potential Catalyst: Successful expansion into East China, faster than Focus on downstream business through expansion into expected progress in Friesland partnership new regions Analyst Share price is well supported by controlling shareholders’ Alice HUI CFA, +852 2971 1960 [email protected] open market purchases
Alison Fok +852 2971 1938 Grass to glass business model. A vertically integrated dairy [email protected] player, Huishan is one of China’s leading alfalfa producers and the second largest upstream player in terms of herd size. Price Relative Based in Liaoning, Huishan is also involved in the HK$ Relative Index manufacture and sales of dairy products under its own 219 Huishan brand. In late 2014, the company formed a 50-50 JV 199 3.1 179 with FrieslandCampina to introduce one of 2.6 159 FrieslandCampina’s existing brands (excluding Friso) into 139 2.1 119 China. There is also a commitment from FrieslandCampina to 99 1.6 79 purchase US$30m worth of shares in the open market after 59 completion of the JV deal. 1.1 39 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Focus on downstream operations. Excluding biological asset
China Huishan Dairy Holdings (LHS) Relative HSI INDEX (RHS) and other fair value gains, Huishan FYMar15 net profit Forecasts and Valuation declined 27% yoy, mainly hampered by the decline in raw FY Mar (RMB m) 2012A 2013A 2014A 2015A milk price, a delay in the ramp up of liquid milk capacity, as Turnover 1,333 2,552 3,530 3,923 EBITDA 537 1,291 1,664 1,512 well as an increase in A&P costs to expand outside of NE Pre-tax Profit 397 1,081 1,294 967 China. We expect Huishan will continue to focus on Net Profit 386 1,014 1,249 908 downstream sales with the expansion of its low-temperature EPS (RMB) 0.03 0.09 0.10 0.06 yogurt and pasteurised milk products into new regions. This EPS (HK$) 0.04 0.11 0.12 0.08 EPS Gth (%) N/A 162.7 9.7 (34.4) will be aided by its new factory located in Jiangsu. We also Diluted EPS (HK$) 0.04 0.11 0.12 0.08 expect its partnership with FrieslandCampina to be a potential DPS (HK$) 0.00 0.00 0.03 0.02 driver in the longer run. BV Per Share (HK$) 0.10 0.64 1.27 1.19 PE (X) 52.1 19.8 18.1 27.5 Supporting share price via various methods. We expect Core PE (X) 52.1 19.8 18.1 27.5 FYMar16 capex to remain high at approximately Rmb2bn, P/Cash Flow (X) 26.7 13.9 21.8 177.6 owing to commitment on construction of dairy farms, hence P/Free CF (X) nm 21.1 nm nm making it difficult to generate positive free cash flow in the EV/EBITDA (X) 39.6 16.7 13.7 19.1 Net Div Yield (%) 0.0 0.0 1.4 0.9 near term. However, Huishan continues to pay dividends with P/Book Value (X) 22.8 3.4 1.7 1.8 FYMar15 final dividend at Rmb0.0153/share (FYMar14: Net Debt/Equity (X) 1.3 0.3 0.0 0.3 Rmb0.0216), implying a dividend payout of 28.3% (FYMar14: ROAE (%) 60.8 30.0 13.1 6.8 22.4%). Since June, Huishan’s Chairman purchased c.427m shares in the open market, in addition to Huishan’s own share buyback of 365m since Aug-14 (implying c.2.6% of share capital prior to share repurchase.) ICB Industry: Consumer Goods ICB Sector: Food Producers At A Glance Principal Business: Integrated dairy player primarily in Northeast China Issued Capital (m shrs) 14,320 Mkt. Cap (HK$m/US$m) 31,075 / 4,009 Source of all data: Company, DBSV, Thomson Reuters, HKEX Major Shareholders Champ Harvest Limited (%) 64.2 Norges Bank 5.9 Free Float (%) 29.8 3m Avg. Daily Val. (US$m) 23.8
Page 66 www.dbsvickers.com ed- JS / sa- AL DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector China Huishan Dairy Holdings
thereafter moving into East China as the premium UHT Growth drivers product market is highly penetrated by dairy giants such as Mengniu and Yili. As of Mar-15, Huishan has 373 distributors, Growing its own feed. One of the key attractions of Huishan and 408 direct sales stores in malls and supermarkets. While Dairy is its feedstock plantation. Huishan currently leases topline is likely to grow strongly, we expect profitability could 480,000mu of land, of which 140,000mu is for alfalfa be partly offset by A&P costs at the initial stages of expansion. plantation. The remainder leased land will be used to develop oat and corn silage. This will continue to keep its cost of In Nov-14, Huishan and Alpha Spring (Nantong Zongyi breeding cows lower than the sector average. For example, Investment Co) agreed to invest up to Rmb650m together in a Huishan’s feed cost per tonne is c.30% below market leader JV to further replicate its dairy farm operations in East China CMD. (Shanghai, Jiangsu, Zhejiang, Shandong, Anhui). Nantong Zongyi Investment is a listed company which specialises in Improvement in sales volume and milk yields partly offset by software and solar cell production in Jiangsu province. raw milk price decline. As of end Mar-15, Huishan Dairy has a herd size of 180,331 cows, of which 74,389 are milkable Expanding into milk powder operations. As of Mar-15, cows. In total, Huishan has 69 dairy farms in Liaoning Province, Huishan has three milk powder production facilities and management expects the herd to grow organically by manufacturing infant formula products under its own brand 10%. The company will halt importing dairy cows this year. Gold Queen and Huishan Red. Its other product offerings While there was a slight improvement in milk yields to include whole milk powder, D90 whey powder, and non-dairy 9.1tonnes/annum (FYMar14: 9tonnes/annum), raw milk prices creamer. declined by 6% y-o-y to Rmb4.87/kg. We expect the impact from raw milk price decline to be partly offset by sales volume In Oct-14, Huishan formed a JV with FrieslandCampina to growth in FYMar16. produce and work together to start a new IMF brand with FrieslandCampina. Huishan received an Rmb700m investment from FrieslandCampina in a 50/50 JV inclusive of its Shenyang Downstream sales volume plant. In addition, FrieslandCampina will acquire USD30m worth of shares in the open market within six month of the Tonnes completion of the JV. Essentially, this JV will be able (1) to 160,000 141,374 build on existing partnership in the production of non-dairy 140,000 123,707 creamers, (2) secure more demand for Huishan’s raw milk, 120,000 and lastly (3) to utilise FreislandCampina’s existing sales and 100,000 91,244 distribution network. 77,097 80,000 66,654 75,257 60,000 Huishan infant formula 40,000
20,000 3,129 2,404 0 Fresh milk UHT Yogurt Milk beverage FY15 Volume tonnes FY14 Volume tonnes
Source: Company data, DBS Vickers
Top driving force: low-temperature products. Huishan is ranked first in market share in NE China in pasteurised milk (44.3%) and yogurt (28.7%), with an overall market share of 20.9% in liquid milk market, according to Frost and Sullivan. Source: Company data, DBS Vickers Going forward, Huishan aims to target low-temperature product sales (pasteurised milk and yogurt) in NE China,
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China Dairy Sector
China Huishan Dairy Holdings
Income Statement (RMB m) Balance Sheet (RMB m) FY Mar 2012A 2013A 2014A 2015A FY Mar 2012A 2013A 2014A 2015A Turnover 1,333 2,552 3,530 3,923 Net Fixed Assets 2,840 3,637 4,317 6,356 Cost of Goods Sold (783) (1,174) (1,326) (1,663) Invts in Assocs & JVs 0 0 0 0 Gross Profit 550 1,378 2,205 2,261 Other LT Assets 2,695 4,733 9,420 10,171 Other Opng (Exp)/Inc (5) (64) (335) (561) Cash & ST Invts 1,094 1,522 6,147 4,149 Operating Profit 500 1,223 1,500 1,289 Inventory 413 447 915 1,582 Other Non Opg (Exp)/Inc 5 42 9 34 Debtors 148 173 220 271 Associates & JV Inc 0 0 0 0 Other Current Assets 0 0 0 1,805 Net Interest (Exp)/Inc (103) (142) (206) (323) Total Assets 7,190 10,511 21,020 24,334 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 362 909 1,641 2,867 Pre-tax Profit 397 1,081 1,294 967 Creditors 524 910 738 1,401 Tax (11) (67) (45) (60) Other Current Liab 3,280 473 540 986 Minority Interest 0 0 0 (1) LT Debt 1,917 2,103 4,679 5,140 Preference Dividend 0 0 0 0 Other LT Liabilities 224 233 227 255 Net Profit 386 1,014 1,249 908 Shareholder’s Equity 882 5,883 13,195 13,686 Minority Interests 0 0 0 (1) EBITDA 537 1,291 1,664 1,512 Total Cap. & Liab. 7,190 10,511 21,020 24,334 Sales Gth (%) 256.3 91.5 38.3 11.1 EBITDA Gth (%) 373.8 140.6 28.8 (9.1) Non-Cash Wkg. Cap (3,244) (764) (142) 1,271 Opg Profit Gth (%) 459.2 144.5 22.7 (14.0) Net Cash/(Debt) (1,185) (1,489) (174) (3,858) Net Profit Gth (%) N/A 162.7 23.2 (27.4) Effective Tax Rate (%) 2.7 6.2 3.5 6.2
Cash Flow Statement (RMB m) Rates & Ratio FY Mar 2012A 2013A 2014A 2015A FY Mar 2012A 2013A 2014A 2015A Pre-Tax Profit 460 1,012 1,294 967 Gross Margins (%) 41.2 54.0 62.4 57.6 Dep. & Amort. 37 69 164 222 Opg Profit Margin (%) 37.5 47.9 42.5 32.9 Tax Paid (9) (54) (70) (45) Net Profit Margin (%) 29.0 39.7 35.4 23.1 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 60.8 30.0 13.1 6.8 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 6.1 11.5 7.9 4.0 Chg in Wkg.Cap. 230 228 (537) (2,415) ROCE (%) 15.9 18.3 10.0 5.8 Other Operating CF 34 187 185 1,412 Div Payout Ratio (%) 0.0 0.0 24.9 24.1 Net Operating CF 752 1,442 1,036 141 Net Interest Cover (x) 4.8 8.6 7.3 4.0 Capital Exp.(net) (841) (488) (1,671) (4,279) Asset Turnover (x) 0.2 0.3 0.2 0.2 Other Invts.(net) (84) (50) (2,600) 0 Debtors Turn (avg days) 39.2 22.9 20.3 22.9 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 242.9 236.8 258.8 270.9 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 150.5 141.9 213.9 316.4 Other Investing CF (759) (829) (1,652) 0 Current Ratio (x) 0.4 0.9 2.5 1.5 Net Investing CF (1,685) (1,367) (5,923) (4,279) Quick Ratio (x) 0.3 0.7 2.2 0.8 Div Paid 0 0 0 0 Net Debt/Equity (X) 1.3 0.3 0.0 0.3 Chg in Gross Debt 149 386 3,315 1,687 Capex to Debt (%) 36.9 16.2 26.4 53.4 Capital Issues 0 0 5,976 0 Z-Score (X) N/A N/A N/A N/A Other Financing CF 1,276 (124) (195) 0 N.Cash/(Debt)PS (RMB) (0.13) (0.16) (0.02) (0.34) Net Financing CF 1,425 262 9,096 1,687 Opg CFPS (RMB) 0.05 0.11 0.12 0.18 Currency Adjustments (13) (12) (44) 0 Free CFPS (RMB) (0.01) 0.08 (0.05) (0.29) Chg in Cash 479 325 4,166 (2,452) Interim Income Statement (RMB m) Segmental Breakdown (RMB m) FY Mar 1H2014 2H2014 1H2015 2H2015 FY Mar 2012A 2013A 2014A 2015A Turnover 1,534 1,997 1,995 1,929 Revenues (RMB m) Cost of Goods Sold (644) (682) (857) (806) Raw milk 672 681 989 1,028 Gross Profit 890 1,314 1,138 1,123 Liquid milk 564 1,707 2,288 2,422 Other Oper. (Exp)/Inc (301) (404) (467) (518) Milk powder 0 88 254 473 Operating Profit 590 911 671 618 Grain products 97 77 0 0 Other Non Opg (Exp)/Inc 4 6 21 13 Associates & JV Inc 0 0 0 0 Total 1,333 2,552 3,530 3,923 Net Interest (Exp)/Inc (107) (98) (156) (167) Gross profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 Raw milk 326 399 614 614 Pre-tax Profit 482 812 516 451 Liquid milk 217 922 1,499 1,499 Tax (16) (29) (32) (28) Milk powder 0 53 92 92 Minority Interest 0 0 0 (1) Grain products 7 3 0 0 Net Profit 467 783 484 424 Total 550 1,378 2,205 2,205 Gross profit Margins (%) Raw milk 48.5 58.7 62.0 59.7 Sales Gth (%) N/A N/A 30.0 (3.4) Liquid milk 38.4 54.0 65.5 61.9 Opg Profit Gth (%) N/A N/A 13.9 (32.1) Milk powder N/A 60.6 36.2 19.4 Net Profit Gth (%) N/A N/A 3.6 (45.8) Grain products 7.2 4.2 N/A N/A Gross Margins (%) 58.0 65.8 57.1 58.2 Opg Profit Margins (%) 38.4 45.6 33.7 32.0 Total 41.2 54.0 62.4 56.2 Net Profit Margins (%) 30.4 39.2 24.2 22.0
Source: Company, DBS Vickers
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China Dairy Sector China Huishan Dairy Holdings
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Industry Focus
China Dairy Sector
Appendix
M&A relating to F&B sector
Count ry of Date Acquirer Target Cat. Ty pe Target
Jul-15 China Modern Dairy 2 JV farms Dairy M&A China
Jun-15 Alfa Campofrio Pork M&A EU
Jun-15 Fosun KTG Agriculture M&A EU
Apr-15 CRH CRE Beer M&A China
China Culiangw ang Apr-15 Coke Beverages M&A China Beverages
Jan-15 Consortium of Taiwanese investments Ausnutria Dairy Dairy M&A China
Dairy Farm of Nov -14 Yili Dairy Strategic USA America
Nov-14 Danone Yashili Dairy New share China
Nov-14 New Hope Group Freedom Foods Dairy Strategic Australia
Oct-14 Bright Food Salov Olive oil M&A Italy
Sep-14 Royal FrieslandCampina Huishan Dairy Dairy Strategic China
Sep-14 Fonterra Beingmate Dairy M&A China
Sep-14 Chongqing General Trading Group Bega Dairy JV Australia
J ul-14 Yunfeng Capital Yili Industrial Group Dairy JV China
Jun-14 KKR COFCO-Meat Pork Investment CHina
May-14 Bright Food Tnuva Mixed M&A Israel
Apr-14 COFCO Noble-Agri Agriculture M&A Global
Feb-14 Danone Mengniu Dairy New share China
Feb-14 COFCO Nidera Agriculture M&A Global
Jan-14 Bright Food Mundella Foods Dairy M&A Australia
Jan-14 Mengniu Whitewave Foods Mixed JV USA
Source: Company data, DBS Vickers
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Industry Focus China Dairy Sector
Infant formula description
Company Yashili Mengniu Biostime Yili Bright Beingmate Nestle Mead F rieland Danone Abbott (Mengniu) J ohnson Campina Code 1230 HK 2319 HK 1112 HK 600887 CH 600597 CH 002570 CH Nestle MJ N US DANONE ABBOTT Origin China China China China China China Swissland USA Netherlands France USA Market 5.4 7.6 6.4 0.6 9.4 12.4 11 4.7 5.8 4.2 share (2014) Domestic Scient, Milex Oushi Biostime, Yili Xinhuo; Bright, Yao+ Beingmate Nestle-NAN, Enfamil F riso; F riso- Dumex Similac Yashili, Series Adimil Pro-Kido (Love +) S-26 Gold ASP Domestic Guangdong, IM Guangdong Inner Shanghai, Heilongjiang, Shuangcheng, Guangdong Shenyang Shanghai Zhejiang; production Shanxi, (Mengniu) Mongolia, Heilongjiang, Zhejiang Tianjin, (Huishan JV) Jiaxing base Heilongjiang, Xinjiang, Inner Suzhou (nutrition Heilongjiang Mongolia plant) Import Arla-Merla Baby &Me Biostime Pure Annum Nestle-NAN Enfamil, Frisolac- A pt ammil Similac, Cant erbury (Fonterra) HA, Illuma, S- Enfagrow, Gold, Hero- Elev a, 26 Gold Enfakid Baby Pediasure ASP Intl base New Zealand Holland F rance, New New Zealand Kerry Ireland Ireland, Netherlands, Holland Germany EU Denmark Zealand, US collaboration Germany Singapore , as well as Fonterra Partnerships Mengniu Danone, None Dairy Farmers Synlait Dairy Fonterra None Huishan Fonterra IMF Arla of America Dairy Milk 55% Synlait, 20% incl. Isigny Partnership Self-owned Contracted Holland, powder Fonterra, 7% OCD; (10-20%), with DFA, milk farms in farmers in New sourcing Imported from Europe for Laiterie de NZ plants, Shanghai Heilongjiang Zealand, infant formula; Montaigu own farms and & Expanding Australia and (60-70%), & Heilongjiang, dairy sources Netherlands Arla (10- Sy nlait Dairy in China 20%)
Source: Company data, DBS Vickers
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Industry Focus
China Dairy Sector
Market size - Dairy Market size – Drinking milk products
RMB m % RMB m % 700,000 20 450,000 25 18 600,000 400,000 16 350,000 20 500,000 14 300,000 12 15 400,000 250,000 10 200,000 300,000 8 10 150,000 200,000 6 4 100,000 5 100,000 2 50,000 0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2016F 2017F 2018F Dairy (LHS) YoY growth (RHS) Drinking Milk Products (LHS)
Market size – Yoghurt and sour milk products Market size – Milk formula
RMB m % RMB m % 160,000 30 250,000 25 140,000 25 200,000 20 120,000 20 100,000 150,000 15 80,000 15 60,000 100,000 10 10 40,000 5 50,000 5 20,000 0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2016F 2017F 2018F Yoghurt and Sour Milk Products (LHS) Milk Formula (LHS) YoY growth (RHS)
Dairy sector – Geographical breakdown
Southwest China 13% East China 28% South China 22%
Mid China 14% North and Northwest Northeast China China 7% 16%
Source: Euromonitor
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Industry Focus China Dairy Sector
Market share - Dairy Market share – Drinking milk products
Nestlé SA Wahaha Yili 5% Yili Bright 6% 20% Mengniu Wahaha Nestlé SA 18% 18% 7% 4% 5% Mengniu Yangyuan Yangyuan 19% Zhihui Zhihui 4% 5% Want Want Want Want 5% 4% Coca-Cola 3% Coca- Cola 2% Others Others 37% 37% Bright 2%
Market share – Yoghurt and sour milk products Market share – Infant formula
Yakult Jinan Beingmate Jiabao Wahaha 6% 7% Yili Dairy Nestlé SA Danone 14% 9% Mead 3% 14% Johnson 8% 9% Shenyang Yili Royal Dairy 6% FrieslandCa 2% mpina 6% Bright 23% Sichuan Others New Hope 17% 2% Biostime Mengniu 5% 24%
Others Mengniu 36% Abbott 5% 4%
Source: Euromonitor
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Industry Focus
China Dairy Sector
Market share - Beverages Market share - Beer
Wahaha 7% Tingyi Coca Cola 12% 14% Yangshengtang 5%
CRE 5% Others 53% UPC 4%
Market share – Instant noodles Market share -Wine
Yantai Weilong , Henan COFCO , 3.0 Changyu, 3.0 0.9 Nanjiecun , Citic Guoan , 0.9 Vats, 0.9 1.5 Others, 19.0 Castel Group, Nisson 0.7 Foods , 2.0 Tingyi, 39.4 Henan Si Mei Macrolink, 0.6 Te, 4.1 Baixiang Food, 10.0
UPC , 13.2 Others, 90.0 Jinmailang Food, 10.8
Source: Euromonitor, AC Nielson, DBS Vickers
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Industry Focus China Dairy Sector
Dairy: raw milk prices (China) Dairy: WMP Fonterra
RMB/kg US$/ton
4.4 5,500 5,000 4.2 4,500 4.0 4,000 3.8 3,500 3,000 3.6 2,500 3.4 2,000 3.2 1,500 1,000 3.0 /12 /13 /14 p p p Jun/11 Jun/12 Jun/13 Jun/14 Jun/15 Oct/11 Feb/12 Oct/12 Feb/13 Oct/13 Feb/14 Oct/14 Feb/15 Jun/12 Jun/13 Jun/14 Jun/15 Jun/11 Se Se Se Sep/11 Dec/11 Dec/12 Dec/13 Dec/14 Mar/12 Mar/13 Mar/14 Mar/15
White sugar (China) Packaging – PET China
RMB/ton RMB/ton 8,000 13,000 12,500 7,000 12,000 11,500 6,000 11,000 10,500 5,000 10,000 9,500 4,000 9,000 8,500 3,000 8,000 Jun/11 Jun/12 Jun/13 Jun/14 Jun/15 Dec/11 Dec/12 Dec/13 Dec/14 Jun/11 Jun/12 Jun/13 Jun/14 Jun/15 Dec/11 Dec/12 Dec/13 Dec/14
Source: CEIC, Euromonitor
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Industry Focus
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Feedstuff – soybean meal Grain: Corn (China)
US$/ton Rmb/ton 550 2,600
500 2,500
450 2,400
400 2,300
350 2,200
300 2,100
250 2,000 Jun/11 Jun/12 Jun/13 Jun/14 Jun/15 Jun/11 Jun/12 Jun/13 Jun/14 Jun/15 Dec/11 Dec/12 Dec/13 Dec/14 Dec/11 Dec/12 Dec/13 Dec/14
Grain: Alfalfa (US)
US$/ton 360 340 320 300 280 260 240 220 200 Jun/12 Jun/13 Jun/14 Jun/15 Dec/12 Dec/13 Dec/14
Source: CEIC, Euromonitor
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Industry Focus China Dairy Sector
China dairy industry chain
Growing forage Dairy Farming Dairy product processing Sales & Distribution Background Feed is a mix of forage (corn, silage, Dairy cows are imported from NZ, AUS and US between Processing facilities are typically built with raw milk sources nearby. Infant formula’s fast growing retail alfalfa) & concentrated feed (corn, 10-14 months. Most choose Holstein breed for its higher Since 08 infant formula scandal, downstream players have formed channel is e-commerce, thereafter soybean meal, cottonseed meals), yield. integrated vertically to ensure a safe and secure supply chain specialty channels. with the majority demand being satisfied by import
Market Largest exporters to China By herd size Latest Market sh Dairy market share breakdown by RSP % (by comp) Distribution channel breakdown (%) Mengniu Yili Bright Wahaha players Alfalfa 90% of volume ‐ USA China Modern Dairy 201,507 1.4% Overall 19 18 7 6 4.1 6.6 Corn USA Huishan Dairy 180,331 1.2% 100% 5.7 22 Yogurt 16 12 21 12 Soybean Argentina Shengmu 103,252 0.7% 90% Drinking Dairy 22 25 3 8 Japfa 57,000 0.4% 80% 34.3 Typical feed mix Infant formula market share RSP % (by comp) Bright Dairy-related 50,000 0.3% 70% Fontera 49,000 0.3% Mead Johnson 10.1 60% 42.7
Conce YST Dairy 44,623 0.3% Wyeth 10.0 50% 90.2 ntrate Zhongdi Dairy 21,433 0.1% Beingmate 8.7 40% d feed 59.1 40% Top ten 707,146 4.9% Biostime 7.2 30% 20% High As of 2014 (China) 14,500,000 Yili 5.9 35.3 Fibre 10% 60% Royal Friesland 4.3 0% Yashili 4.2
Abbott 3.9 % Yogurt Infant Dairy Modern formulaTraditional 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Internet retailing
Recent Alfalfa import volume & ASP Date Upstream expansion plans Date Overseas partnerships US$ per ton events '000 ton Feb'14 Bright Dairy joined hands with RRJ Capital to Feb?4 Danone increases its stake to 9.9% in Mengniu to build up its cold‐chain business , of which Danone's Bio+ 100 420 developits upstreamcapabilities and plans to list has since been launched. 80 400 in 3‐5 years. Oct'14 Danone joins as a 2nd largest shareholder with Yashili with plans to work together in infant formula Nov'14 Yili pans to partner with Dairy Farmers of 60 Oct?4 Friesland Campina invests in a 50/50 JV with Huishan to jointly develop a new infant formula brand and co‐ 380 America, in addition to announcing its NZ milk 40 invest in a production plant in Shenyang for RMB692m. Friesland will also purchase US$30m via open 360 powder plant expansion 20 market purchase. 2015 Both CMD & Huishan Dairy guide its overall herd Feb'15 Fonterra buys c.18% stake in Beingmate and plans to distribute its premium IMF brand Annum through 0 340 size to grow 10% organically
y Beingmate's channels Jul Jan Sep Nov Mar Ma Jun'15 Bright Dairy plans to purchase its Parent Mar'15 Want Want develops cold‐chain products with Japan‐Morinaga Milk Industry to be launched in 3Q15 2014 Import Volume (LHS) Shanghai Dairy's upstreamassets. 2015 Import Volume (LHS) Jun'15 Bright Dairy plans to purchase Israel‐Tnuva Food from Parent Company. Tnuva has >70% market share in 2014 Import Value (RHS) 2015 Import Value (RHS) Israel.
Source: Euromonitor, Company data, DBS Vickers
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Industry Focus
China Dairy Sector
PE & PB band charts
PE band chart PB band chart
Biostime (1112 HK) Biostime (1112 HK)
Share Price (HK$) Share Price (HK$) 90 120 12.6x 80 44x 100 70 10.0x 60 35x 80 50 7.4x 26x 60 40 17x 30 40 4.8x 20 7x 20 2.1x 10 0 0
Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Bright Dairy (600597 CH) Bright Dairy (600597 CH) Share Price (RMB) Share Price (RMB) 45 57x 35 7.9x 40 30 35 48x 25 6.4x 30 39x 25 20 4.8x 20 30x 15 15 3.2x 21x 10 10 1.6x 5 5 0 0 Jan-06 Jan-06 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 China Mengniu (2319 HK) China Mengniu (2319 HK)
Share Price (HK$) 31x Share Price (HK$) 3.6x 50 27x 50 3.2x 45 24x 2.7x 40 40 20x 35 2.3x 30 30 16x 1.8x 25 20 20 15 10 10
2010 2011 2011 2012 2013 2013 2014 2015 2010 2011 2011 2012 2013 2013 2014 2015 Source: Thomson Reuters, DBS Vickers
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Industry Focus China Dairy Sector
PE band chart PB band chart
China Modern Dairy (1117 HK) China Modern Dairy (1117 HK)
Share Price (HK$) Share Price (HK$) 6.0 12.0 2.6x 5.0 20x 10.0 2.1x 17x 4.0 8.0 1.6x 14x 3.0 11x 6.0 1.1x 2.0 9x 4.0 0.5x
1.0 2.0
0.0 0.0 Jul-15 Jul-14 Jul-13 Jul-15 Jan-15 Jan-14 Jun-12 Oct-14 Oct-13 Oct-13 Apr-15 Apr-14 Sep-12 Dec-12 Dec-14 Mar-12 Mar-13 Mar-13 Aug-12 May-14 China Huishan Dairy (6863 HK) China Huishan Dairy (6863 HK)
Share Price (HK$) 35x Share Price (HK$) 4 4.0 29x 2.7x
3 23x 3.0 2.3x 17x 2 1.8x
11x 2.0 1 1.4x
1.0x 0 1.0 Jul-15 Jul-15 Jun-14 Jun-14 Feb-14 Oct-14 Feb-14 Oct-14 Sep-13 Sep-13 Mar-15 Mar-15 Inner Mongolia Yili (600887 CH) Inner Mongolia Yili (600887 CH)
Share Price (RMB) Share Price (RMB) 35 35
30 30 24x 25 25 5.4x 20 19x 20 4.2x 15 14x 15 3.0x 10 10 8x 1.8x 5 5 3x 0.5x 0 0 Jan-06 Jan-06 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Source: Thomson Reuters, DBS Vickers
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Industry Focus
China Dairy Sector
PE band chart PB band chart
Yashili International (1230 HK) Yashili International (1230 HK)
Share Price (HK$) Share Price (HK$) 10 10 4.9x 9 9 8 8 3.9x 7 57x 7 6 6 2.8x 5 45x 5 4 32x 4 3 3 1.8x 2 20x 2 0.7x 1 7x 1 0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Source: Thomson Reuters, DBS Vickers
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Industry Focus China Dairy Sector
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVHK accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVHK and/or DBSVH (and/or any persons associated with the aforesaid entities), that:
a. such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and b. there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his / her spouse and/or relatives and/or associate who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).
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Industry Focus
China Dairy Sector
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the report is published. 2. DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject companies mentioned in this document as of the latest available date of the updated information.
3. Compensation for investment banking services: DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the subject companies mentioned in this document.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This document is being distributed in Australia by DBSVHK, which is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 [“CA”] in respect of financial services provided to the recipients. DBSVHK is regulated by the Securities and Futures Commission under the laws of Hong KONG, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA. Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission. Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it. United This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of Kingdom the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients. Dubai This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. United States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (“DBSVUSA”) directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
DBS Vickers (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523
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