20181119-东英亚洲证券-澳优-01717.HK-Nurturing_by_global_layout_26页_2mb

Equity Research Summary: Ausnutria Dairy Corporation Ltd (1717 HK)

Core Content

Ausnutria Dairy Corporation Ltd is a paediatric milk formula company with a strong presence in the premium imported goat infant milk formula (IMF) market in China. The company operates production facilities in the Netherlands and markets its products globally, including in China, Europe, North America, and the Middle East. With the implementation of new regulations in the IMF industry, the company is well-positioned to benefit from the ongoing consolidation and vertical integration trends.

Main Points

• Investment Recommendation: BUY with a target price of HK$12.50, representing a 33% upside from the close price of HK$9.38 on 16/11/2018.
• Market Consolidation: The new IMF registration regulations (effective since 1 Jan 2018) have led to the elimination of approximately 80% of brands due to the difficulty in securing qualified processing plants. Ausnutria has already established a global supply chain and is expected to benefit from this consolidation.
• Premium Goat IMF: The goat IMF segment is growing at a higher rate than the overall IMF market, with a 40% price premium over cow IMF. Ausnutria's Kabrita brand leads in market share and penetration, with a forecasted expansion to 25.7% by 2022E.
• Nutrition Business: The nutrition market in China is significantly larger than the IMF market, with a market size of RMB148bn in 2017 (10x IMF market size). It also enjoys a higher gross margin, with an average of over 60% for major players, compared to Ausnutria's self-branded IMF products which have a lower GPM (around 50%).
• Strategic Move with CITIC Agri Fund: Ausnutria introduced CITIC Agri Fund as its largest shareholder through a share issue in October 2018, leveraging the fund's resources in nutrition projects to expand into the nutrition market. This move is seen as a win-win strategy to enhance market share and product development capabilities.
• Vertical Integration: Ausnutria has actively integrated upstream and downstream resources, acquiring key processing plants and distributors in multiple countries. This vertical integration helps in securing stable milk supply, enhancing product traceability, and improving margins.

Key Information

• Financial Highlights (FY16–FY20E):

  • Revenue: RMB2,740.3m (FY16) to RMB10,090.0m (FY20E)
  • Adjusted Net Profit: RMB212.7m (FY16) to RMB1,085.6m (FY20E)
  • Adjusted Diluted EPS: HK$0.204 (FY16) to HK$0.819 (FY20E)
  • ROE: 15.3% (FY16) to 23.6% (FY20E)
  • P/E: 45.9x (FY16) to 11.5x (FY20E)
  • P/B: 6.6x (FY16) to 2.5x (FY20E)
  • Yield: 0.5% (FY16) to 3.0% (FY20E)
  • DPS: HK$0.050 (FY16) to HK$0.279 (FY20E)

• Regulatory Landscape:

  • Double registration requirements for imported IMF products: both CFDA and CNCA approvals are necessary.
  • CBEC (Cross-border E-commerce) channel provides a temporary grace period for unregistered products, but it is unlikely to change the long-term consolidation trend.
  • Ausnutria's overseas processing plants are already licensed and registered, giving it a competitive edge.

• Market Position:

  • Ausnutria is a market leader in the goat IMF segment with a 33% sales contribution and 52% gross profit margin from Kabrita in FY17.
  • The company is expanding into the nutrition market, which has high margins and significant growth potential.
  • Ausnutria's global supply chain and strategic acquisitions support its position in the premium market.

Investment Risks

1. Product Safety Issues: Any safety concerns could impact consumer trust and market performance.
2. Grace Period for CBEC: Continued reliance on CBEC may delay the full consolidation benefits.
3. Delayed Approval for Cow IMF: Regulatory delays could affect the company's ability to expand its product range.

Strategic M&A Activities

• 2011: Acquired 51% stake in Hyproca Dairy Group (Netherlands), largest goat milk producer in the country.
• 2014: Acquired Sanimel and Farmel Holdings B.V. (Netherlands) for local milk collection.
• 2016: Acquired Darnum plant (Australia) for RMB10.4m.
• 2017: Acquired ADP (Australia) and OZFarm Australia (Australia), and expanded into New Zealand with Westland.
• 2018: Acquired OZFarm HK (China) and HNC Group (China) for distribution and market expansion.

Outlook

Ausnutria is expected to benefit from the ongoing consolidation in the IMF industry and the growth of the premium goat IMF segment. The company's strategic move into the nutrition market, supported by its established distribution channels and the introduction of CITIC Agri Fund, is likely to drive long-term growth and margin expansion. The target price of HK$12.50 is based on a 20x FY19E P/E ratio, reflecting its strong earnings growth and strategic positioning.