20140403-法国巴黎银行-YUANSHENGTAI_DAIRY_15页_562kb

Yuanshengtai Dairy (1431 HK) Summary

Core Content

Yuanshengtai Dairy (YST) is a leading dairy farming company in China, specializing in high-quality raw milk production. It operates four dairy farms in Heilongjiang and Jilin, with a total herd of 21,544 milkable cows and 18,852 calves and heifers as of December 2013. The company's strategy involves expanding its cow farm capacity to 108,000 cows by 2017, which is expected to support a 23% CAGR in revenue from 2013 to 2017.

YST's revenue is projected to grow from RMB881m in 2013 to RMB1.683bn in 2016, with recurring net profit expected to increase from RMB203m in 2013 to RMB681m in 2016. This growth is attributed to its strong pricing power, efficient operations, and the removal of interest costs from financial liabilities after its successful IPO in 2013.

Main Points

• Industry Growth: China's dairy market is expected to grow at a CAGR of 6.2% by volume and 6.3% by retail value from 2013 to 2018. High-quality fresh liquid milk is a key growth driver.
• Market Consolidation: The Chinese government is promoting consolidation in the cow farming industry, which benefits YST by allowing it to sell to top dairy companies and access better pricing.
• Capacity Expansion: YST plans to expand its capacity to 110,000 cows by 2017, with two more farms under construction and land secured for future expansion.
• Financial Performance:
  • YST's recurring net profit is forecasted to grow by 118.9% in 2014, 21.6% in 2015, and 14.3% in 2016.
  • The company's financial costs are expected to drop sharply in 2014 due to the removal of interest payments on pre-IPO liabilities.
• Valuation:
  • The target price is set at HKD2.83, which is based on a conservative 17x FY14E P/E multiple.
  • This is lower than China Modern Dairy's 19x FY14E P/E, reflecting YST's smaller size and shorter track record.
• Investment Thesis: YST is expected to benefit from both industry growth and market consolidation, supported by its strong financial position and efficient operations.

Key Information

• Current Price: HKD1.34
• Target Price: HKD2.83 (114% upside)
• Market Cap: USD675m
• EPS Growth:
  • 2014E: 118.9%
  • 2015E: 21.6%
  • 2016E: 14.3%
• P/E Ratio:
  • 2014E: 8.5x
  • 2015E: 7.0x
  • 2016E: 6.2x
• P/BV Ratio:
  • 2014E: 1.0x
  • 2015E: 0.8x
• EV/EBITDA:
  • 2014E: 5.2x
  • 2015E: 5.4x
• Key Executives:
  • Zhao Hongliang (Chairman/Founder)
  • Wang Shaogang (Vice Chairman)
  • Fu Wenguo (CEO/General Manager)
  • Su Shiqin (CFO)

Catalysts

• Government policies supporting the dairy sector, including direct subsidies and prioritized land use for large-scale farms.
• Consolidation in the market, which increases demand for high-quality raw milk.
• Positive earnings growth due to the removal of interest costs on financial liabilities.

Risks

• Industry-Wide Risks:
  • Animal disease outbreaks could lead to significant losses and damage the sector's reputation.
  • Food safety incidents, even not caused by YST, may harm consumer confidence in the dairy industry.
• Company-Specific Risks:
  • Oversupply in the raw milk market could lead to a decline in raw milk prices.
  • YST's high raw milk ASP may face pressure from the growth of large-scale, consolidated farms.

Valuation Comparison

Conclusion

YST is a promising player in the Chinese dairy industry, with strong growth prospects due to industry expansion and consolidation. The company's financial position and operational efficiency support its potential for significant earnings growth. However, investors should be aware of the risks associated with the sector, including animal disease and food safety concerns, which could impact performance and valuation. The target price of HKD2.83 reflects a conservative valuation based on its peers and growth potential.