The dairy farming sector in China is expected to see raw milk prices reach their bottom in the first quarter of 2015 due to weak import volumes and the resolution of channel inventory for milk powder.
Global milk powder prices are near their historical trough since 2009, which may affect future production growth.
The sector has underperformed the Hang Seng Index (HSI) by 50% year-to-date (YTD) due to a shift in market sentiment from supply shortages and rising ASP to high inventory and declining ASP.
Key Points
Valuation: China Modern Dairy (1117.HK) is valued at 7.3x, which is considered extremely attractive given its leading position, diversified product mix, and high earnings growth.
Performance: The dairy farming sector has tumbled 47% in 2014, trading at 9.3x 12-month forward PE, close to the historical trough of 8.8x.
Raw Milk Price: Raw milk price dropped 10% from its peak in February and closed at Rmb3.84/kg in November 2014. It has risen 13% YTD despite this decline.
Feed Costs: Declining feed costs (soybean meal and alfalfa) have kept the milk-to-feed ratio at ~1.59x, 9% above the historical average of 1.45x.
Import Trends: Milk powder import volume is expected to decline in 2015, with shipments in the first half of October and September dropping 72% and 59% YoY, respectively.
Import Impact: The weak import volume is attributed to the unfavorable dairy market in China, and the threat from imported milk powder is expected to be alleviated in 2015.
Import Tariff: The withdrawal of import tariff on Australian dairy products is expected to have limited impact due to its small contribution to retail prices and the fact that Australia exports only 75% of its milk powder domestically.
Company Valuation
China Modern Dairy (1117.HK): Traded at 7.3x, with a 44% decline since February 2014. The recent negative news is expected to have limited impact on fundamentals.
Yuanshengtai (1431.HK): Traded at 4.5x PE, with risks including lack of economies of scale and sensitivity to raw milk price changes.
Huishan (6863.HK): Traded at 9.2x PE, with risks involving margin squeeze and rising competition.
Shengmu (1432.HK): Traded at 11.8x PE with low trading volume.
TMT Sector Highlights
Core Content
The TMT sector reported several key developments in December 2014, including new product launches, investments, and acquisitions.
Key Points
Alibaba Healthcare App: Alibaba is set to launch a healthcare app for prescription purchases, allowing users to upload or speak their prescriptions.
21Vianet Investment: 21Vianet received US$296 million in investment from Kingsoft, Xiaomi, and Temasek.
Fuchun Communication Acquisition: Fuchun Communication plans to acquire a 100% stake in Dream Network Technology for RMB 900 million.
Cmune Mobile Game: Cmune launched the mobile FPS game "Bullet Rush" in China.
Shanghai Startup: A Shanghai-based startup combining Slack, Dropbox, and Trello raised $5 million from IDG.
Stock Market Performance
Core Content
Stock market indices in Hong Kong, China, and Asia showed mixed performance with varying levels of change and trading volumes.
Key Points
HK Equities: HSI closed at 23,833 with a 1.7% increase. H-share Index closed at 11,481 with a 3.8% increase.
China Equities: CSI 300 Index closed at 3,104 with a 4.6% increase. Sh Composite Index closed at 10,030 with a 4.0% increase. Sz Composite Index closed at 1,482 with a 2.0% increase.
Asian Equities: Nikkei 225 increased by 0.9%, Korea KOSPI by 0.8%, and Taiwan TWSE by 0.5%. India Sensex 30 increased by 0.4%.
US/European Equities: DJIA, S&P500, and NASDAQ showed slight declines, while UK FTSE 100 and Germany DAX had notable declines.
Other Indicators
Core Content
Commodity prices, currencies, and interest rates showed varied movements across the market.
Key Points
Commodity Prices: WTI oil closed at $66.8/bl, Gold at $1,207.0/troy oz, and Copper futures at $6,380.0/metric ton.
Currencies: CNY, HKD, USD, and others showed minor fluctuations, with CNY at 6,1549.
Interest Rates: HIBOR 3m at 0.383%, USD LIBOR 3m at 0.235%, and SHIBOR 3m at 4.195%.
Bond Yields: US 3m yield at 0.015%, US 10y yield at 2.234%, and China 10y yield at 3.660%.
Peer Comparison Table
Core Content
A detailed comparison of various dairy and other companies based on financial metrics.
Key Points
China Modern Dairy (1117.HK): Price at HK$2.25, EPS next 1 yr at 12.25%, PE next 1 yr at 8.5x.
China Huishan Dairy (6863.HK): Price at HK$1.37, EPS next 1 yr at 3.0%, PE next 1 yr at 22.3x.
China Shengmu Organic Milk (1432.HK): Price at HK$2.40, EPS next 1 yr at 17.4%, PE next 1 yr at 53.7x.
Yuanshengtai (1431.HK): Price at HK$0.78, EPS next 1 yr at 30.7%, PE next 1 yr at 22.6x.
Other Companies: Includes data for China Mengniu, Biostime, Yashili, Inner Mongolia Yili, Bright Dairy & Food, etc.
