20201223-招银国际-中国飞鹤-06186.HK-Well_positioned_to_gain_market_share_26页_1mb

Summary of CMB International Securities Equity Research on China Feihe (6186 HK)

Core Content

China Feihe (6186 HK) is a leading player in the infant milk formula (IMF) market in China, with a market share of 18% as of September 2020. The company is positioned to gain further market share, driven by its effective marketing strategies, a single-layer and in-depth distribution system, and its focus on producing high-quality, fresh milk-based products. CMBIS initiates coverage with a Buy rating and a target price of HK$24.00, which is based on a 23.7x FY21E P/E ratio, reflecting a 40% premium over the average P/E of Chinese IMF peers.

Main Points

• Market Position: Feihe is the largest IMF company in China by retail sales value, with strong brand recognition and a growing presence in both tier 1-2 and lower-tier cities.
• Marketing Strategy: The company has implemented effective and innovative marketing initiatives, including face-to-face seminars, online interactivity, and targeted media exposure. These efforts have led to a high conversion rate of 20–30% and significantly outperformed competitors.
• Distribution Network: Feihe operates a single-layer distribution system, enabling better inventory control and faster response to market changes. It has an extensive offline network with over 1,900 customers and 119,000 retail points of sale (POS), which is unmatched by many competitors.
• Product Strategy: The company is expanding its product portfolio to include A2 milk and goat milk, while also introducing super-premium products to align with the premiumization trend in the market.
• Financial Performance: Feihe's adjusted EPS is forecasted to grow at 32% CAGR from FY19 to FY22E, driven by a 38% CAGR in high-end IMF sales. This growth rate is higher than the industry average of 15%.
• Valuation: The target price of HK$24.00 is based on a 23.7x FY21E P/E, which is higher than the industry average, justifying the Buy rating due to its leadership position and strong growth prospects.

Key Information

• Market Share: 18% in Sep 2020, with a target of 30% by 2023.
• Sales Channels: 87% of revenue comes from the offline channel, with 13% from online sales in 1H20.
• Product Innovation: Feihe has launched the Astrobaby series (114% CAGR) and Organic Zhenzhi to meet consumer demand for natural and premium products.
• Distribution System: Single-layer system allows for direct sales to retailers, better control over inventory, and higher distributor profitability.
• Raw Materials: Feihe uses high-quality fresh milk, sourced from YST Group, and avoids artificial flavoring and low-cost sweeteners like sucrose or maltodextrin, opting for lactose instead.
• Regulatory Environment: The 2016 Registration Measures have increased market concentration by requiring rigorous safety and quality standards, favoring established players like Feihe.
• Growth Drivers:
  • Continued premiumization trend due to rising disposable income and health awareness.
  • Urbanization and economic growth, increasing the purchasing power of families in lower-tier cities and rural areas.
  • Low breastfeeding rates (29% in 2019), leading to higher demand for infant milk formula.
• Competitive Advantages:
  • Strong brand recognition and association with "More Suitable for Chinese Babies."
  • In-depth retail penetration and extensive distribution network.
  • Higher conversion rates from marketing events compared to peers.
  • High-quality raw materials and strict safety standards.

Financial Forecast

Risks

• Weaker-than-expected sales
• Slump in China's newborn population
• Keen competition
• Food safety issues

Peer Comparison

• Feihe is the market leader with the highest gross margin percentage (GMP).
• It has the most in-depth penetration compared to peers.
• Feihe's selling expenses are higher than peers, indicating a strong focus on marketing and sales.

Valuation Highlights

• Adj. EPS CAGR from FY19 to FY22E is 32%, higher than peers' average of 15%.
• Target Price: HK$24.00 (up 37% from current price of HK$17.50).
• P/E Ratio: 23.7x FY21E, 40% premium over Chinese IMF peers' average of 16.9x P/E.

Share Performance

• 1-month: -0.9%
• 3-months: -0.5%
• 6-months: 10.3%
• 12-months: Not specified in the text.

Shareholding Structure

• Leng Youbin: 49.90%
• Morgan Stanley: 10.72%

Conclusion

Feihe is well-positioned to continue its growth trajectory in the Chinese infant milk formula market, leveraging its strong brand identity, efficient distribution system, and commitment to product quality and safety. Its strategic focus on premiumization and expansion into new product segments, such as A2 milk and goat milk, further supports its long-term growth potential. With a Buy rating and a target price reflecting strong future earnings growth, Feihe presents an attractive investment opportunity in the evolving IMF sector.