20131107-高盛-Raw_milk_cost_inflation,_higher_opex_drive_EPS_risk__down_to_Neutral_11页_329kb

Mengniu Dairy (2319.HK) Investment Summary

Core Content

Goldman Sachs has downgraded Mengniu Dairy from a "Buy" to a "Neutral" rating due to the stock reaching its target price after outperforming in the past. The downgrade is based on several factors including raw milk cost inflation, higher operating expenses, and a softening market share.

Main Points

• Raw Milk Cost Inflation:

  • Raw milk prices in China increased by 12% YoY in July-October 2013, compared to 5% in 1H13.
  • This inflation is expected to impact Mengniu's gross profit margin (GPM) and sales volume in 2H13 and 2014.
  • The company's GPM is forecasted to decline by 50 basis points YoY in 2H13, reaching 24.2% from 26.7% in 1H13.

• Higher Operating Expenses:

  • Increased marketing and integration costs, restricted share expenses, and interest costs from the Yashili acquisition are expected to reduce earnings.
  • These costs almost entirely offset the contribution from Yashili upon consolidation.

• Market Share Challenges:

  • Mengniu's market share in UHT milk and yoghurt drinks has declined YoY, and Yili has gained ground in both categories.
  • Despite Mengniu's focus on premium products, the market share remains soft, and the growth in these segments is not enough to offset the cost pressures.

• Earnings Revisions:

  • Mengniu's underlying EBIT (excluding Yashili) is cut by 6-15% for 2013-2015.
  • The 2013-15E EPS is revised by -9% / 0% / -2% due to the above factors.
  • The new 12-month price target (TP) is set at HK$33.50, in line with the last close.

• Financial Forecasts:

  • FY13E/14E underlying GPM (ex Yashili) is revised to 25.5% / 26.2%.
  • FY13E/14E underlying EBIT is reduced by 6-15% due to cost pressures and lower sales growth.
  • FY13E/14E EPS growth is revised to 6.9% / 37.3%, while the overall growth is expected to be lower than previously anticipated.

• Valuation Metrics:

  • P/E (analyst) for 2013E is 33.5, and for 2014E is 24.1.
  • P/B is 3.4 for 2013E and 3.1 for 2014E.
  • EV/EBITDA is 17.5 for 2013E and 12.3 for 2014E.
  • The 12-month TP is based on a 24x 2014E P/E, consistent with the sector average.

Key Information

• Price Performance:

  • Since being added to the Buy list on Feb 22, 2013, Mengniu's stock has gained +47%, outperforming MSCI China by -3%.
  • The stock has had a 12-month return of +43.2% and a 6-month return of +53.3%.

• Investment Profile:

  • Current price: HK$33.65
  • 12-month TP: HK$33.50
  • Market cap: HK$59,313.9 million / US$7,651.7 million
  • Dividend yield: 0.9% (current) to 1.1% (2015E)
  • ROE: 10.5% (2012) to 14.5% (2015E)

• Risks:

  • Raw milk price and production fluctuations
  • ASP growth on premiumization
  • Food safety issues

Financial Highlights

• Profit Model:

  • FY13E sales are expected to grow by 17.9% YoY, but this is driven by price increases rather than volume.
  • EBITDA growth is projected at 22.3% in 2013E and 45.5% in 2014E.
  • EBIT growth is expected at 21.6% in 2013E and 61.8% in 2014E.

• Cash Flow:

  • FY13E cash flow from operations is expected to grow by 25.2% to 2,527.7 million RMB.
  • Capital expenditures are forecasted to increase in 2013E and 2014E.

• Balance Sheet:

  • Total assets are expected to rise from 20,915.9 million RMB in 2012 to 41,459.5 million RMB in 2015E.
  • Net debt/equity is projected to be 32.3% in 2013E and 22.1% in 2015E.

Conclusion

Mengniu Dairy remains a long-term attractive investment due to its premiumization strategy, but near-term earnings risks are significant due to rising raw milk costs, increased operating expenses, and softening market share. The downgrade reflects a more cautious outlook on the company's ability to maintain profitability in the short to medium term.