20141124-高盛-China__Consumer_Staples-Turning_sourer_on_Dairy；Biostime_down_to_Neutral；GAPack_to_Sell_21页_579kb

China: Consumer Staples - Dairy Sector Summary

Core Content

The report provides an analysis of the Chinese dairy sector, highlighting deteriorating fundamentals and the impact of increasing competition from imported dairy products. It outlines the firm's revised earnings forecasts and target prices for key players in the sector, including Biostime, Mengniu, and GA Pack.

Main Points

• Dairy Sector Deterioration: The dairy industry in China is experiencing declining demand and increasing competition from imported dairy products, which are both cheaper and of high quality. This is leading to reduced profits and a weakened market position for domestic players.

• Earnings Forecasts Cut:

  • Biostime: Earnings per share (EPS) forecasts for 2014-2016 have been cut by 15-47%, and the company has been downgraded from Buy to Neutral.
  • Mengniu: EPS forecasts for 2014-2016 have been cut by 5-12%, and the company remains at Neutral.
  • GA Pack: EPS forecasts for 2014-2016 have been cut by 22-30%, and the company has been downgraded from Neutral to Sell.

• Import Threat: The influx of imported dairy products is worsening due to:

  • Global Production Growth: Raw milk production in the EU, NZ, and the US has increased rapidly, creating a surplus.
  • Price Disadvantages: China's dairy prices are significantly higher than those in countries like New Zealand and Europe, with corn prices in China being much higher than global prices.
  • Policy and Trade Agreements: China and Australia signed an FTA that will eliminate tariffs on Australian dairy products over time, increasing competition.

• Market Promotions: Promotional activities have intensified in the second half of 2014, with companies like Yili and Modern Dairy offering substantial discounts. This trend is expected to continue into 2015.

• Inventory and Demand: There is a surplus of domestically sourced milk, leading to inventory buildup. This is driving down milk powder prices and increasing the competitiveness of imported products.

• Sector Outlook: The report suggests that the dairy sector is facing structural challenges, and the government's protection is insufficient. The best-positioned players are those with cost advantages through vertical integration or efficient farming practices, and those with exposure to segments less affected by imports.

Key Data Highlights

• Liquid Milk Sales: 12-month volume growth in September 2014 was 0.3% compared to 11.8% a year ago.
• IMF Sales: IMF volume growth was 1% in the 12 months to September 2014.
• Raw Milk Prices: China's raw milk prices have fallen below the average unit cost of RMB3.90/kg, and culling activities are increasing.
• Import Growth: Imported liquid milk volume rose 150% year-over-year in September 2014.
• Price Differential: The landed price of imported liquid milk in September 2014 was US$1,277/ton (RMB8/kg), down from US$1,543/ton (RMB9.60/kg) in January 2014.

Target Prices and Ratings

• Biostime: 12-month target price cut to HK$17.90 from HK$39.60, rating downgraded to Neutral.
• Mengniu: 12-month target price cut to HK$31.10 from HK$37.40, rating remains Neutral.
• GA Pack: 12-month target price cut by 17%, rating downgraded to Sell.

Conclusion

The Chinese dairy sector is facing significant challenges due to declining demand, increased competition from imports, and structural issues in the domestic market. The report suggests that the sector's fundamentals are deteriorating, and the outlook for key players remains negative. The firm advises caution and recommends a more conservative approach to investment in the sector.