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Biostime International Summary

Core Content

Biostime International is a leading baby product company in China, with a strong focus on infant formula and a growing portfolio of baby-related products. The company has demonstrated solid management and a sophisticated client relationship management system, which has enabled it to achieve a 6% market share in the infant formula segment in just five years. It also operates a comprehensive e-commerce platform, Mama100, which is a key growth driver for the company.

Main Points

• Market Position: Biostime is a major player in the baby product market, primarily focused on infant formula, but with a broad range of products including baby food, baby care, and nutraceuticals.
• Growth Drivers:
  • Mama100 O2O Platform: A key platform for distributing baby products and managing customer relationships, which is expected to drive future growth.
  • New Product Launches: The AdiMil product, a nutrient-enriched infant formula, has shown strong initial performance with 77% of its consumers being new customers, indicating effective market expansion.
  • Potential M&A: Biostime is exploring M&A opportunities to expand its product offerings and strengthen its market position.
• Performance:
  • Biostime's management has confirmed that the AdiMil product has exceeded expectations, leading to an increase in the 2014 EPS forecast by 3%.
  • The company's revenue is projected to grow significantly, from RMB 4,769 million in 2013 to RMB 7,510 million in 2015.
• Valuation:
  • The target price (TP) is raised to HKD70.50, set at 25x FY14E PE, which is considered undemanding compared to Chinese F&B peers.
  • Biostime's market cap has surpassed USD4 billion, and the small-cap discount is no longer applicable.
• Investor Confidence:
  • Biostime's strong performance and growth potential have led to a "Buy" recommendation from BNP Paribas.
  • The company's high ROE and strong cash flows further support its investment appeal.

Key Information

• 2013 Annual Conference: Biostime hosted its annual conference in Macau, inviting 4,000 retailers and presenting its business plan, highlighting new product launches and the Mama100 platform.
• AdiMil Performance:
  • Soft-launched in Q3 2013, with an average daily sales of RMB600,000 and a run rate of RMB200 million per year.
  • 77% of consumers are new to Biostime, indicating strong market capture without cannibalizing existing customers.
• Mama100 Platform:
  • Expected to become a significant growth driver in the mid-to-long term.
  • The platform is being developed with a team of 100 IT staff and is aiming to consolidate multiple baby product retailing portals.
• Government Policy Risk:
  • The main risk is regulatory changes in the infant formula industry, which could increase operating costs and negatively impact margins and ROE.
• Financial Highlights:
  • Recurring EPS: RMB1.80 in 2013, projected to RMB2.20 in 2014.
  • Gross Margin: Maintained at 64.9% in 2013, despite slightly lower margins for AdiMil.
  • ROE: Expected to reach 45.8% in 2014, showing strong returns on equity.
  • Dividend Yield: Projected to be 3.3% in 2014, indicating a generous dividend policy.
• Market Cap: Exceeded USD4 billion, with an average daily trading volume of USD11 million over the last three months.
• Key Executives:
  • LUO Fei (Chairman and CEO)
  • KONG Qingjuan (ED, COO)
  • Zhao Li (GM of Sales and Marketing)
  • Frank CAO (CFO)
  • Laetitia Garnier (Director of International Cooperation)

Investment Thesis

Biostime is a high-quality consumer product company with strong management, a robust distribution network, and a diverse product portfolio. It is expected to benefit from market share gains in the infant formula segment and long-term growth from its e-commerce platform and new product launches. The company's growth potential is further enhanced by its expandable business model and the potential for M&A.

Catalysts

• AdiMil Launch: Strong performance and market acceptance of AdiMil.
• Wal-Mart Partnership: Wal-Mart has agreed to display AdiMil products in all its stores in China, enhancing brand visibility and consumer reach.
• Mama100 Platform: The platform's potential to expand the company's reach and consolidate multiple retailing channels.

Risks

• Government Policy Changes: Regulatory tightening in the infant formula industry may impact Biostime's profitability and ROE.
• Market Saturation: While the company is not simply an infant formula company, the infant formula market may become saturated, affecting future growth.

Key Assumptions

• Revenue Growth: Expected to grow at 41% in 2013 and 28% in 2014.
• EPS Growth: Recurring EPS is projected to increase by 47.2% in 2014.
• Valuation Metrics:
  • P/E Ratio: 25x FY14E PE is considered appropriate.
  • EV/EBITDA: Expected to decrease over time, reflecting improved efficiency and profitability.
  • Price/Book: Projected to decrease, indicating potential value creation.

Financial Statements

• Profit and Loss Statement:
  • Revenue is expected to grow from RMB2,189 million in 2011 to RMB7,510 million in 2015.
  • Gross profit and operating EBIT are also projected to increase, with a stable gross margin.
• Cash Flow Statement:
  • Free cash flow to equity is expected to grow from RMB477 million in 2011 to RMB1,502 million in 2015.
  • Dividends paid are projected to increase, with a strong dividend payout ratio.
• Balance Sheet:
  • Total equity is expected to grow from RMB1,978 million in 2011 to RMB3,946 million in 2015.
  • Net debt is projected to increase, but the company maintains a strong balance sheet.

Conclusion

Biostime International is a well-positioned company with strong growth potential, driven by its new product launches, e-commerce platform, and strategic partnerships. Despite the risks associated with government policy changes, the company's solid financials and management capabilities support a positive investment outlook. The raised target price of HKD70.50 reflects the company's potential to outperform the market and achieve a 25x FY14E PE valuation.