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Mengniu Dairy (2319 HK) Equity Research Summary

Core Content Overview

This report provides an equity research analysis of Mengniu Dairy (2319 HK), initiated with a Buy rating and a target price of HK$33.88. It outlines the company's strategic initiatives, financial performance, and valuation expectations for the period up to 2020.

Main Points and Key Information

Industry Outlook

• The dairy sector is exiting a period of supply-demand imbalance.
• Domestic raw milk and milk powder supply is shrinking, with inventory continuing to decrease.
• Global dairy cow inventory growth is slowing, and full cream milk powder inventory is declining.
• The competitive landscape is expected to improve, leading to increased industry concentration.
• Growth in health products such as yogurt and pasteurized milk will benefit the sector.

Mengniu Dairy's Strategic Position

• Mengniu has entered a "strategically offensive" mode following internal organizational restructuring.
• The company is leveraging its exclusive FIFA global sponsorship to enhance brand influence.
• It is launching a series of new products in 2018, which are expected to provide tailwinds for revenue.
• China Modern Dairy (1117 HK), now under Mengniu's management, is expected to see improved earnings in 2018.
• The vertical integration with China Modern Dairy will strengthen counter-cyclical cooperation against seasonal milk supply issues.

Financial Performance and Projections

• Revenue is projected to grow at a steady rate of 10-12% annually from 2016 to 2018.
• EBITDA and Net profit are expected to significantly increase, with EBITDA growing from negative Rmb -646 million in 2016 to Rmb 9,038 million in 2020.
• EPS is forecasted to rise from Rmb -0.19 in 2016 to Rmb 1.29 in 2020.
• P/E ratio is projected to decrease from 28.97x in 2018 to 17.65x in 2020, indicating improving valuation.
• Gross margin (GPM) is expected to increase, while selling and administrative expense ratios are projected to decline, contributing to profit growth.

Growth Drivers

• Supply chain enhancement and business internationalization are identified as long-term growth engines.
• The company's cooperation with Lingshoutong and Huixiadan will help expand into lower-tier cities, improving distribution efficiency.
• Divisional system reform and improved incentive mechanisms are expected to benefit Mengniu over the next three years.

Valuation and Investment Thesis

• The DCF valuation is used to estimate the target price of HK$33.88.
• Key assumptions include a WACC of 6.81%, a terminal growth rate of 0.00%, and a tax rate of 21.00%.
• The value per share based on DCF is estimated at HK$33.88.
• The sensitivity analysis shows that the target price is relatively stable across different WACC and terminal growth scenarios.

Risks

• Food safety risks
• Lower-than-expected sales of new products
• China Modern Dairy's earnings missing expectations

Earnings Forecasts (2016-2020)

Key Financial Ratios

Company Ratings

• Buy: Stock is expected to outperform the Hong Kong Hang Seng Index by more than 15%.

Analyst Certification

• The research analyst certifies that the views expressed reflect their personal opinions and not influenced by any compensation tied to specific recommendations.

Disclosure of Interests

• GF Securities (Hong Kong) and its affiliates do not hold any shares or have investment banking relationships with the mentioned companies.
• No analyst or associate serves as an officer of the company and has no financial interests in its securities.

Disclaimer

• This report is for informational purposes only and does not constitute an offer to buy or sell securities.
• The report does not guarantee future performance and should not replace professional investment advice.
• GF Securities (Hong Kong) may issue other communications with different views or conclusions.