Hong Kong Results Review FY16: results in line 28 March 2018 Consumer Non-cyclical | Packaging Neutral (Maintained) Greatview Aseptic Packaging Target Price: HKD4.00 Price: HKD4.04 A Faster Europe To Save a Slower China Market Cap: USD695m Bloomberg Ticker: 468 HK Greatview is likely to drive FY17 growth from a faster and more profitable Share Data European operation. This is as its second production line in Halle, Avg Daily Turnover (HKD/USD) 6.43m/0.83m Germany, turns online by mid-2017 while both old and new customers 52-wk Price low/high (HKD) 3.25 - 4.31 have increased order volumes. Mainland China operations, however, remain difficult, given stagnant sales and higher cost pressures that Free Float (%) 73 negate the benefits from a product mix upgrade. Maintain NEUTRAL on an Shares outstanding (m) 1,346 unchanged TP of HKD4.00 (1% downside). Estimated Return -1% Shareholders (%) Europe to continue to deliver. Greatview Aseptic Packaging (Greatview) Wellington management 13.0 remains confident in Europe’s ramp-up. Management provide guidance that sales should grow 25% YoY in FY17 (FY16: +29%) due to greater orders from Matthews International 9.9 both new and existing customers. The well-anticipated second production line in Foxing Development Ltd 9.6 Germany remains on schedule to begin operations by mid-2017. This would Share Performance (%) further improve GPMs as fixed overheads are spread over a greater volume of units produced. YTD 1m 3m 6m 12m Absolute 1.5 6.9 2.5 2.3 21.7 China outlook remains conservative. Management remains muted over the Relative (8.5) 5.8 (9.6) (0.3) 2.8 growth prospects in China. This is as low-end milk sales remains lacklustre. GPM benefits from Greatview’s new product Greatview Octagon are likely to be Source: Bloomberg offset by higher raw material costs, driven by paper and oil prices. While Tetra Greatview Aseptic Packaging (468 HK) Pak Inc was fined CNY668m in late 2016 by the National Development and Price Close Relative to Hang Seng Index (RHS) Reform Commission (NDRC) for bundling practices, amongst other reasons, management did not seem optimistic that Greatview would gain more market 4.1 118 share as a result of this. 3.6 103 3.1 89 FY16 results – announced on 27 Mar – were in line 16 14 12 FYE Dec (CNYm) 2015 2016 YoY 2H16 YoY Comments 10 Revenue 2,219 2,169 -2.2% 1,130 -6.6% Low-end milk slowdown 8 6 Gross profit 618 617 -0.1% 318 -6.3% 4 Operating profit 406 425 4.7% 214 -3.5% 2 Volm NP reported 317 334 5.4% 176 6.0% 16 16 16 16 16 17 - - - - - NP recurring 339 336 -0.9% 177 -2.2% - Jul Jan Mar Sep Nov As % of Sales May GP margin 27.8% 28.4% 0.6ppt 28.2% 0.1ppt Higher GPM from Europe EBIT margin 18.3% 19.6% 1.3ppt 19.0% 0.6ppt Source: Bloomberg NPM – reported 14.3% 15.4% 1.1ppt 15.5% 1.8ppt NPM – recurring 15.3% 15.5% 0.2ppt 15.6% 0.7ppt Source: Company data, RHB Maintain NEUTRAL and HKD4.00 TP. The softness in Greatview’s China business is mitigated by a more robust growth rate in its Europe business. As our forecasts remain largely unchanged, our maintained DCF-based HKD4.00 TP implies 13x FY17F, which is also 0.5SD below its 5-year mean P/E. This is a discount to peers’ average of 16x due to lower ROEs and 3-year CAGR. Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (CNYm) 2,219 2,169 2,361 2,538 2,700 Reported net profit (CNYm) 317 334 366 381 393 Recurring net profit (CNYm) 339 336 366 381 393 Recurring net profit growth (%) 15.4 (0.9) 9.0 4.2 3.2 Recurring EPS (CNY) 0.25 0.25 0.27 0.28 0.29 DPS (CNY) 0.18 0.20 0.20 0.20 0.20 Recurring P/E (x) 14.2 14.3 13.1 12.6 12.2 P/B (x) 2.18 2.58 2.40 2.26 2.42 P/CF (x) 12.8 7.3 15.4 12.9 11.9 Dividend Yield (%) 4.9 5.5 5.5 5.5 5.5 Analyst EV/EBITDA (x) 9.51 9.31 8.60 8.22 8.24 Robin Yuen, CFA Return on average equity (%) 14.6 16.4 19.0 18.5 19.2 Net debt to equity net cash net cash net cash net cash net cash +852 2103 9202 Our vs consensus EPS (adjusted) (%) 3.2 (1.7) 0.0 [email protected] Source: Company data, RHB See important disclosures at the end of this report 1 Powered by the EFA Platform Greatview Aseptic Packaging Hong Kong Results Review 28 March 2017 Consumer Non-cyclical | Packaging Financial Exhibits Financial model updated on: 2017-03-27. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Hong Kong Recurring EPS (CNY) 0.25 0.25 0.27 0.28 0.29 Consumer Non-cyclical EPS (CNY) 0.24 0.25 0.27 0.28 0.29 Greatview Aseptic Packaging DPS (CNY) 0.18 0.20 0.20 0.20 0.20 Bloomberg 468 HK BVPS (CNY) 1.64 1.39 1.49 1.58 1.48 Neutral Weighted avg adjusted shares (m) 1,346 1,338 1,338 1,338 1,338 Valuation basis Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F DCF. Recurring P/E (x) 14.2 14.3 13.1 12.6 12.2 P/E (x) 15.2 14.3 13.1 12.6 12.2 Key drivers P/B (x) 2.18 2.58 2.40 2.26 2.42 i. Volume sales of dairy products; FCF Yield (%) 5.2 11.4 4.4 5.6 6.3 ii. Raw material deflation; iii. Capacity utilisation. Dividend Yield (%) 4.9 5.5 5.5 5.5 5.5 EV/EBITDA (x) 9.51 9.31 8.60 8.22 8.24 Key risks EV/EBIT (x) 11.0 10.7 9.8 9.3 9.3 i. Dairy demand slowdown; ii. Price competition. Income statement (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover 2,219 2,169 2,361 2,538 2,700 Company Profile Gross profit 618 617 682 725 764 Listed in Dec 2010, Greatview Aseptic Packaging EBITDA 468 487 532 555 574 (Greatview) supplies aseptic packs for dairy and non- carbonated soft drinks producers under the trade Depreciation and amortisation (62) (62) (63) (65) (67) name GA Pack. Its major customers include China Operating profit 406 425 469 490 508 Mengniu Dairy (Mengniu), Yili Group (Yili) and Net interest 10 7 6 6 6 Heilongjiang Hui'erkang Qingxin Dairy Industry Co Ltd Pre-tax profit 412 431 475 497 514 (Huierkang). The group is the second-largest aseptic Taxation (96) (97) (109) (115) (121) packaging manufacturer in China, with a c.15% Recurring net profit 339 336 366 381 393 market share. Cash flow (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital (82) 198 (110) (68) (48) Cash flow from operations 375 658 310 370 404 Capex (122) (115) (100) (100) (100) Cash flow from investing activities (106) (477) (92) (92) (92) Dividends paid (217) (252) (265) (265) (265) Cash flow from financing activities (463) (245) (265) (265) (265) Cash at beginning of period 490 268 206 160 173 Net change in cash (194) (63) (46) 13 47 Ending balance cash 292 206 160 173 220 Balance sheet (CNYm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total cash and equivalents 457 359 313 326 153 Tangible fixed assets 1,235 1,258 1,295 1,331 1,331 Intangible assets 58 57 57 57 57 Total other assets 46 53 53 53 53 Total assets 2,865 2,462 2,616 2,734 2,624 Short-term debt 87 105 105 105 105 Other liabilities 91 85 85 85 85 Total liabilities 661 605 619 621 649 Shareholders' equity 2,205 1,857 1,998 2,113 1,975 Total equity 2,205 1,857 1,998 2,113 1,975 Net debt (369) (255) (209) (222) (48) Total liabilities & equity 2,865 2,462 2,616 2,734 2,624 Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) (0.6) (2.2) 8.9 7.5 6.4 Recurrent EPS growth (%) 14.5 (0.3) 9.0 4.2 3.2 Gross margin (%) 27.8 28.4 28.9 28.6 28.3 Operating EBITDA margin (%) 21.1 22.4 22.5 21.9 21.3 Net profit margin (%) 14.3 15.4 15.5 15.0 14.6 Capex/sales (%) 5.5 5.3 4.2 3.9 3.7 Interest cover (x) 113 286 224 234 243 Source: Company data, RHB See important disclosures at the end of this report 2 Greatview Aseptic Packaging Hong Kong Results Review 28 March 2017 Consumer Non-cyclical | Packaging FY16 Results FY16 results discussion Sales in FY16 declined 2% YoY (2H: -7%) due to a major decline in sales volume in Mainland China in 2H16 from dairy producers. Mainland China sales dropped 10% YoY (2H: -16%) to CNY1,628m due to general weakness in lower-end dairy demand. It was also from losing a portion of Yili Group’s (Yili) business to key competitor Tetra Pak.