According to the feedback from the channel terminal, the mobile sales of Mengniu liquid milk have warmed up month by month recently. The company's liquid milk revenue is expected to grow by about 12% to 15% next year. The cost side of 2021H2 is still stable, and the tone of cost management and control in 2022 is expected to remain unchanged. At the same time, the company will optimize the allocation of costs in product, channel and regional dimensions. It is optimistic that the dairy industry will enter a profit-oriented high-quality development stage. Mengniu, as a necessary consumer target with valuation advantages, is expected to maintain low income, 20% profit growth and "buy" rating in the next 2-3 years.

The terminal sales of Q4 company are improving month by month, and liquid milk revenue is expected to continue to maintain double-digit growth next year. Under the influence of Q3 flood and epidemic situation, it is judged that the company's Q3 liquid milk revenue slowed down to single-digit growth. After entering the Q4 company, the terminal mobile sales pick up, and the revenue is expected to accelerate month by month; considering the stock support before the December festival, we are optimistic about the double-digit growth performance of the company's Q4 liquid milk revenue. (1) the 2021H2 of Terunsu is expected to increase by 20%, and the high end of white milk will continue next year. Volume and price are expected to promote the same increase of 20% in 2022. (2) the 2021H2 of basic white milk is expected to grow by more than 15%. The company will still benefit from the white milk consumption dividend brought by the epidemic in the short term, and the basic white milk is expected to increase by about 15% in 2022. (3) Jennifer 2021H2 is expected to decline in double digits, and the demand of room temperature yogurt industry is under pressure for a short time or difficult to reverse, and it is expected to remain stable in 2022; (4) fresh milk 2021H2 is expected to double growth, consumption upgrading to promote fresh milk demand, fresh milk is expected to achieve 50% + high growth in 2022; (5) milk beverage 2021H2 is expected to decline compared with the same period last year, but considering that the beverage industry is expected to pick up, milk beverage growth is expected to resume next year. To sum up, we judge that the company's liquid milk revenue is expected to achieve a growth rate of 12% to 15% next year.

The increase of raw milk has narrowed but the price of large packets of powder has risen, the company is still under cost pressure, and product price increase-structure optimization is expected to maintain a steady rise in gross profit margin. The increase in milk prices narrowed from the medium to high double digits in the first half of the year to the median since the second half of the year, and low single digits are expected to rise next year. Although the cost pressure of raw milk has slowed down, the cost pressure of large packages of powder shows signs of climbing, with the auction price of GDT whole milk powder up 13% since August. At the same time, since the second half of the year, the cost of energy and packaging materials has risen significantly, and the company's cost-side pressure still exists next year. However, looking forward to next year, we think that the company will keep the gross profit margin rising steadily through product price increases and product structure optimization: 1) Product price increases: on July 1, the company raised the price of basic white milk by 5%. Recently, the channel feedback company raised the price of some low-temperature yogurt products by 3% to 5% to cope with cost pressure. 2) the optimization of product structure, the improvement of Trensu with high gross margin and the proportion of fresh milk are expected to continue to improve the overall gross profit level of the company.

The control tone of the fee investment has not been loosened, and the cost is expected to continue to shrink next year, while the cost input will be optimized to a certain extent. Under the cost pressure and the overall demand boom, this year Mengniu reduced the promotion efforts and controlled the cost. According to the recent channel survey, the trend of cost control in the first half of the year will continue in the second half of the year, and next year's expenses are expected to continue to be stable, reducing unnecessary expenses. At the same time, according to the performance of different categories, we judge that the company may adjust the priority of category cost investment next year, and it is expected that the two advantageous categories of Trensu and fresh milk will continue to receive key investment. in view of the weak demand in the room temperature yogurt industry and the large gap between competitive products, Jennifer is not expected to adopt a radical cost investment strategy. At the same time, in view of the changes in channel flow after the epidemic, the company will also optimize channel cost investment, reduce the input of passenger flow reduction channels, promote channel sinking, and improve cost-effectiveness ratio.

The structure of the new board of directors is more diversified, and it is optimistic that the company will enter a high-quality development stage in which profit margins continue to improve. Recently, the board of directors of Mengniu has completed the transition, and the members of the new board of directors are more diversified and balanced in terms of industry background and gender, which can better ensure the modern corporate governance of the company. at the same time, the continuation of management also reflects the support of Cofco to Mengniu management. We believe that the strategic focus of Mengniu has changed greatly in recent years, from the share priority of President Lu Minfang when he first took office to profit-oriented gradually. Taking into account the increase in profit demands of competing pairs and the current equity incentive interest binding of leading dairy management, we are optimistic that the dairy industry will move from years of fierce price competition to a high-quality development stage where competition slows down. Mengniu is expected to maintain low income double growth rate and net profit 20% + growth rate in the short and medium term.

Risk factors: food safety risk, policy change risk, milk price cost risk, industry demand decline risk.

Investment advice: considering the spread of the epidemic and the impact of the flood in the second half of the year, we slightly downgrade the company's revenue forecast, but maintain the company's annual EPS forecast of 1.32pm in 2021-22-23, with the current price corresponding to PE as times as much as 29-23-19. With reference to the comparable company valuation, the 2022 target PE is valued at 28 times the target price of HK $55, maintaining a "buy" rating.