Net profit growth slows due to pressure on gross profit margin and foreign exchange losses
Hyundai Dairy reported 1H22 results on August 24, with revenue up 77 per cent year-on-year, mainly due to the acquisition of new farms, but net profit rose only slightly to 508 million yuan from a year earlier, mainly due to weak raw milk prices, rising feed costs and foreign exchange losses. Excluding gains and losses on foreign exchange and financial instruments, 1H22's adjusted net profit rose 47 per cent year-on-year. Management expects raw milk prices to remain stable for the rest of 2022 and expects the stock of dairy cows to reach 500000 by the end of 2024, earlier than at the end of 2025. We expect the tight supply of raw milk to ease, which may put pressure on the future gross profit margin of the farm. As a result, we have lowered the basic EPS forecast for 22-24 by 38%, 23%, 20% to RMB 0.11, 0.17, and 0.21 to reflect the weak gross profit margin and 1H22 foreign exchange losses. We have lowered the target price by 29% to HK $1.63, corresponding to the 12-month dynamic basic EPS RMB 0.15 and 9.4 times (the average PE since 2019) 12-month dynamic PE. Maintain a "buy" rating.
Acquisition and per unit yield increase contribute to strong sales growth
1H22 revenue rose 77 per cent year-on-year to 5.6 billion yuan, mainly due to a number of acquisitions made by the company in the past year, such as Fuyuan and Central Plains. According to the segment, the sales of raw milk / feed business accounted for 86% of the total sales, respectively. Specifically, 1H22 milk prices fell 2.5% year-on-year, while sales rose 56.7% year-on-year. According to management, 1H22 per unit yield has rapidly increased by 11% to 12.3 tons compared with the same period last year, and the company aims to achieve more than 12 tons in 2022 (2021: 11.3 tons).
Feed prices continue to put pressure on profit margins
1H22 raw milk gross profit margin fell 5.0% year-on-year to 32.2%, mainly due to a decline in raw milk prices while unit feed costs rose 5.2% year-on-year. Thanks to the increase in per unit yield, the increase in the company's unit feed cost is smaller than the market price. According to Wande, 1H22 China corn / soybean prices have increased by 1% 12% year-on-year since July, with year-on-year changes in corn / soybean prices-1%. After factoring in the low gross margin feed business (1H22 11.7%), 1H22's overall gross margin fell 7.8 percentage points to 29.4%. The company's foreign exchange loss was 229 million yuan, mainly due to the depreciation of the company's dollar-denominated bonds due to the devaluation of the RMB against the US dollar. After factoring in foreign exchange losses and lower changes in the fair value of biological assets, 1H22 net interest rates fell 6.6 percentage points year-on-year to 9.0 per cent.
Lower the target price to HK $1.63; maintain the "buy" rating
We raised our sales forecast by 3%, 3%, 5% in 2024 to reflect the rapid expansion of the number of dairy cows and the increase in per unit yield; we lowered our net profit forecast by 38%, 23%, and 20% to RMB 100 million in 8-13-16 to reflect the weak gross profit margin and 1H22 foreign exchange losses. Based on the stock's historical PE average of 9.4 times since 2019, we cut our target price by 29% to HK $1.63. The company's current stock price corresponds to 6.1x 12-month dynamic PE. Maintain a "buy" rating.
Risk tips: 1) raw milk prices are lower than we expected; 2) feed costs are rising rapidly; 3) capital expenditure is higher than we expected; and 4) implement higher-cost external financing programs.