20140611-高盛-Peeling_off_the_EU_milk_cap__Reiterate_CL-Buy_on_Chr_Hansen_20页_359kb

Summary: Europe Consumer Staples - Dairy Industry Analysis

Core Content

This report from Goldman Sachs Global Investment Research provides an analysis of the global dairy industry, focusing on the impact of structural changes in milk production and consumption, particularly in Europe and China. The main drivers of change include the removal of EU milk quotas, increased US farm profitability, and substantial Chinese commercial farm investment. These factors are expected to lead to a period of global milk surplus, with supply growth outpacing consumption growth over the next five years.

Main Viewpoints

• Global Milk Supply Growth: The report forecasts a 2.6% annual increase in global milk supply from 2014 to 2020, driven by:

  • The end of EU milk quotas in April 2015
  • Higher US farm profitability
  • Increased Chinese commercial farm investment

• Dairy Consumption Trends: Global dairy consumption is expected to grow at 2.0% annually, with:

  • Lower growth in EU, Russia, and Japan due to modest economic growth
  • Slower growth in China and Brazil due to natural moderation in income elasticity and below-trend economic growth
  • US consumption growth above its long-run average at 1.9% pa due to strong cheese demand and population growth

• Competitive Positioning Framework: A key tool to identify winners and losers in the dairy market:

  • Highlights the importance of Access to Growth, Cost Advantage, Pricing Power, and Risk
  • Companies with higher market share, concentrated markets (measured by HHI), and strong gross margins are better positioned

Key Companies and Ratings

Buy Recommendations

• Chr Hansen (CL-Buy):
  • Expected to benefit from increased product innovation by customers due to EU quota removal
  • Strong competitive positioning with high market share and concentrated market
  • Forecasted 21% annual TSR in FY15-17E
  • Likely to see higher dividend yields due to excess cash distribution

Sell Recommendations

• Dairy Crest:

  • Faces structural issues in all three divisions (Cheese, Spreads & Dairies)
  • Poorly positioned to manage pricing pressures in a competitive retail environment
  • Likely to suffer from cheaper dairy product imports into the UK due to increased EU production

• Danone:

  • Despite strong organic revenue growth, operating margins have declined since 2009
  • Expected to see a 47 bp decline in EBIT margin in FY14 due to cost pressures
  • May face increased competition from private label products

Winners and Losers in the Global Dairy Landscape

Theme	Main Winners	Main Losers
Structural change in Chinese production	China Modern, Huishan Dairy	Sub-scale farming
End of European quotas	Ingredients producers & consumer brands in lower cost areas	Dairy Crest
Price sensitivity concerns in emerging Asia	Value-for-money consumer brands	Premium consumer brands
Increased productivity in US milk production	US dairy ingredients companies	-
Substantial Chinese commercial farm investment	-	-

Impact of EU Quotas Removal

• Expected Production Increase: 6% by 2018, driven by 12 EU countries within 5% of quota
• Cost Advantage: Lower-cost countries like Ireland and France are expected to increase production
• Price Trends: EU farmgate milk prices are likely to fall due to increased supply and cost-advantaged regions
• Retail Environment: Increased competition from private label may pressure margins for companies reliant on higher-cost regions

Competitive Positioning (CP) Scores

• Chr Hansen scores highest in the CP framework with a 98.7% percentile
• Dairy Crest scores lowest with a 0.0% percentile
• Danone scores 78.6% percentile but faces margin pressures
• Nestle India and Juhayna are highlighted as strong growth opportunities in emerging markets

Conclusion

The global dairy industry is entering a period of surplus, driven by increased supply in key regions. Competitive positioning becomes crucial in determining which companies can thrive and which may struggle. Chr Hansen is seen as a key beneficiary due to its strong market position and cash generation potential, while Dairy Crest and Danone are viewed as vulnerable to margin pressures and competitive shifts.