20140429-杰富瑞-Raw_Milk_Price_Hikes_Could_Be_Over_Maintain_Hold_12页_534kb

China Modern Dairy Holdings (1117 HK) Summary

Core Content and Key Points

China Modern Dairy Holdings (CMD) is a major player in China's dairy industry, being the largest dairy farming company by herd size and the largest raw milk producer in the country. The report discusses CMD's Q1 2014 results, future earnings expectations, and valuation adjustments.

Business Update

• CMD had 191.5k dairy cows as of Q1 2014, of which 105k were milkable cows (54.8% of total cows).
• Sales rose 86% year-over-year (YoY) to RMB1.2bn, primarily driven by a 22% YoY increase in raw milk prices (RMB5.15/kg) and strong performance in own-branded UHT milk (+236% YoY to RMB157m).
• Milk yield reached 9 tons in Q1 2014, with management maintaining its 2014 guidance of 8.7 tons.
• Gross profit margin expanded 12.8ppt YoY to 35.4%, with raw milk margin at 37.3% (+14.5ppt YoY) and UHT milk margin at 22% (excluding upstream synergy).
• Core net profit increased 283% YoY to RMB284m, with a core net margin of 23% (+11.8ppt YoY).

Earnings Outlook

• CMD expects the milkable cow herd size to grow 15% YoY to 113.5k (55.4% of total cows) in 2014, with milk yield increasing 4% YoY.
• Raw milk prices are expected to decline in Q3 2014 due to peak season and industry capacity expansion, with a forecasted ASP of RMB5/kg in 2014.
• The undersupply issue is anticipated to be resolved by the end of 2016 as industry capacity increases.
• CMD's own-branded UHT milk continues to grow, but intensifying competition with Mengniu and Yili may increase marketing expenses.
• Earnings forecast for 2014 includes:
  • Sales: RMB4.6bn (+39% YoY)
  • Blended GP margin: 38.2% (flat YoY)
  • SG&A/sales ratio: 13% (-1.7ppt YoY)
  • EBIT margin: 26.7% (+2.8ppt YoY)
  • Core net profit: RMB893m (+58% YoY), with a core net margin of 19.5%.

Valuation and Price Target

• The price target (PT) is revised down to HKD3.8 from HKD3.9, based on a blended DCF (6.6% WACC, HKD3.5) and PE (16x forward EPS, HKD4.1).
• The stock currently trades at 16x 2014e PE, below the historical median of 18x.
• Catalysts for growth include improvement in yield and pullback in feed costs.
• Risks include animal pandemic, relationship with Mengniu, execution risk, food safety, and negative news flow.

Financial Summary

Key Ratios

Analysts

• Jessie Guo, PhD
• Kevin Chee, CFA
• Edwin Fan, CFA

All are employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC, and are not registered with FINRA. Their compensation is based on firm performance, not individual recommendations.

Valuation Methodology

Jefferies uses a combination of methodologies to assign ratings, including:

• Market capitalization
• Maturity
• Growth/value
• Volatility
• Expected total return over the next 12 months

The price targets are based on:

• Discounted Cash Flow (DCF)
• PE (Price-to-Earnings)
• EBITDA
• EPS (Earnings Per Share)
• Free Cash Flow (FCF)
• EV/EBITDA
• P/CF
• P/FCF
• Dividend returns
• Return on Equity (ROE)

Ratings

• Buy: Expected total return of 15% or more within 12 months.
• Hold: Expected total return of plus or minus 15% within 12 months.
• Underperform: Expected total return of minus 10% or more within 12 months.
• NR: Price target suspended.
• CS: Coverage suspended.
• NC: Not covered.
• Restricted: Communications and recommendations are restricted.
• Monitor: No financial projections or investment opinions are provided.

Summary

CMD's Q1 results were strong, driven by raw milk price increases and the performance of own-branded UHT milk. However, the price hikes are expected to slow, and the undersupply issue is anticipated to be resolved by the end of 2016. Despite growth in UHT sales, competition with Mengniu and Yili may increase marketing expenses. The core net profit is projected to grow significantly in 2014. CMD's valuation is adjusted downward to HKD3.8, with a Hold rating due to underperformance relative to the HSCEI and risks in the industry. The stock price has underperformed by 1% in the last three months.