20150803-高盛-Inventory_and_execution_issues_to_drive_earnings_miss__down_to_Sell_14页_434kb

Mengniu Dairy (2319.HK) Summary

Core Content

Mengniu Dairy (2319.HK) has been downgraded to Sell from Neutral by Goldman Sachs due to a high risk of earning miss and multiple de-rating. The downgrade is based on two main concerns: high inventory levels and execution issues that are contributing to market share loss.

Key Concerns

• High Inventory Levels: Mengniu is believed to hold over six months of milk powder inventory, sourced from more expensive domestic raw milk. This is expected to lead to lower sales and margins due to higher-than-expected COGS and pressure to discount to destock.
• Execution Issues: Mengniu's restructuring of its distributors and sales teams and inefficiencies in marketing spend have led to structural loss in market share. Despite acquiring Yashili and CMD in 2013, these acquisitions have not performed as expected, leading to returns erosion.

Earnings Forecasts

• 2015-17E Net Profit Cuts: Net profit is expected to be cut by 10-22%.
• 2015/16E NPAT Below Consensus: NPAT growth is forecasted to be 2.5% / 6.5% YoY, which is 12-21% below Bloomberg consensus.
• Sales Growth: The forecasted sales growth for 2014-17E is 5% CAGR, down from 7% previously.
• NPAT Growth: NPAT growth is expected to be 4% CAGR, down from 14% previously.

Valuation

• 12-Month Target Price (TP): Reduced to HK$30.10, implying a 14% potential downside from the current price of HK$35.05.
• P/E Multiple: Reduced from 23x to 18.4x, reflecting 20% discount.
• P/B Ratio: Reduced from 2.6x to 2.0x.
• EV/EBITDA: Reduced from 15.5x to 11.3x.

Key Risks

• Better-than-expected sales growth
• Control of marketing expenses

Financial Performance

Cash Flow and Balance Sheet

Market Share and Competitor Analysis

• Yili's Dominance: Yili's sales of RMB54bn in 2014 were 8% higher than Mengniu's RMB50bn.
• Yili's Premium UHT Milk Sales: Grew by 60% YoY in 2H14, outpacing Mengniu's Milk Deluxe growth (high teens).
• Marketing Spend: Yili consistently spent more on online advertising than Mengniu, including 32% more in 1H15.
• TV Sponsorship: Yili was the sole sponsor of three of the top 10 most viewed variety TV shows in 2014 and 1H15, while Mengniu sponsored none.

Acquisitions and Returns

• Acquisition P/E Multiples: CMD's implied P/E was 15x, and Yashili's was 27x in 2013. However, using 2016E attributable earnings, the implied P/E for CMD is 13x, and for Yashili is 59x.
• ROE Decline: Mengniu's ROE has halved since 2006 to around 10%, while Yili's has doubled to around 24%.
• Dupont Analysis: Mengniu's net margin and asset turn have slowed, leading to return deterioration.

Conclusion

Mengniu's challenges stem from high inventory levels, execution issues, and inefficient marketing spend, which are undermining its competitive position and financial performance. Despite the decline in milk prices, the weak consumer demand is not translating into margin benefits due to discounting pressures and inventory destocking. The acquisitions made at the peak of the cycle are not yielding the expected returns, and management restructuring has not led to the anticipated market share recovery. These factors, combined with lower growth expectations, have led to a downgrade to Sell and a 14% potential downside.