The performance exceeded expectations, and the management guided the expansion of operating profit margins in 2021 to maintain "buy".
China Mengniu Dairy's 1H21 net profit rose 143 per cent year-on-year to 2.95 billion yuan, 10 per cent higher than Huatai's forecast, mainly due to the larger contribution to the profits of associated companies and the lower effective tax rate than we expected. We expect revenue growth to reach 17% in 2021 and operating margins to increase by 0.1 basis points over 2019.
We believe that Mengniu's continuous investment in brand image and product innovation will help to build its differentiated competitive advantage and support long-term profit growth. We are optimistic about Mengniu's strategy to expand into areas with high profit margins and huge market potential, such as fresh milk and cheese, and expect operating profit margins to maintain an upward trend in the long run. We forecast that the basic EPS of 2021-23e is RMB 1.29 WACC:8.4% and maintain the target price of HK $55.0 (WACC:8.4%) based on the DCF valuation method. Keep buying.
Strong revenue growth in core categories
Mengniu's revenue in the first half of the year rose 22.3% year-on-year to 45.9 billion yuan, mainly due to strong demand for dairy products after the epidemic. Mengniu further improved its distribution channels, brand awareness and product portfolio. From the perspective of product categories, the year-on-year growth rate of pure milk / Trensu / cryogenic products / ice cream products is more than 20% / about 40% / more than 7% / 34.8% respectively. New business continues to grow rapidly, with fresh milk revenue growing by more than 120% year-on-year (of which daily fresh language revenue is up more than 120% year-on-year) and cheese revenue up 68% year-on-year. The market share of 1H21 room temperature liquid milk / fresh milk increased by 0.7% 1.9% to 28.8% compared with the end of 2020.
Operating profit margin is expected to pick up gradually in the second half of the year.
1H21 gross profit margin shrank 0.8 percent year-on-year to 38.2 percent, mainly due to higher raw milk prices (management said the gross margin was reduced by 4 percentage points), but partially offset by the positive impact of product structure upgrading and production economies of scale. Due to the reduction of epidemic-related costs, donations and inventory clearance costs, 1H21's operating profit margin was 6.1%, unchanged from the same period last year, but lower than the management's guidance on expanding operating margins by 50 basis points in 2021. Given the softening of raw milk prices and the continued upgrading of product mix, management expects operating margins to expand in 2021, and we expect full-year expansion of 0.1 percentage points to 5.6%.
Lower the target price to HK $55.0 to maintain "buy"
We will slightly adjust the net profit forecast for 2021-23-1.3 Universe 1.4 pound 0.3% to RMB 50.8 pound 63.2 billion 7.45 billion, mainly considering that its operating expenses are higher than expected. We expect the operating profit margin of Mengniu to expand by 1.0 percentile 0.5 hectare 0.4 percentage points over the same period. We keep the target price of the DCF valuation method unchanged at HK $55.0m (WACC:8.4%). Mengniu's current stock price corresponds to a 12-month dynamic PE of 25.0 times, and the valuation is not high. Keep buying.
Risk tips: 1) rising prices of raw milk; 2) intensified competition; 3) recurrence of the epidemic; 4) weak growth of new products; 5) food safety problems.