China Feihe (6186.HK) earned 21.3 billion dollars in '22, down 6.4% from the previous year, and net profit of 4.95 billion yuan, down 28% from the previous year. Mainly, increased competition in the industry, which put pressure on performance, but the company's market share was 21.5%, which continued to rise from the end of '21. Sales increased year-on-year in the second half of the year as channel inventories declined and new products were launched one after another.
The gross profit margin in '22 was 65.5%, down 4.8 pct from the previous year, and the net interest rate was 23.2%, down 7 pct from the previous year. The decline in profit margin was mainly due to changes in product structure and increase in cost rates. Considering increased competition in the industry, we lowered our net profit for 23/24/25 to 49.8/51.2/51.2/5.53 billion yuan. The corresponding EPS was HK$063/0.65/0.70. Maintain a “buy” rating. Taking into account market sentiment and valuation, we gave a target price of HK$8.4, with room for a 56% increase from the current stock price.
Report summary
After the first half of the year went out of stock, the worst time was over. The company's revenue in the first half of the year was 9.67 billion, down 16.2% year on year, and revenue in the second half of the year was 11.6 billion yuan, up 3.6% year on year. The industry is under great pressure against the backdrop of a decline in the birth population. The company took the initiative to control channel inventories. At the end of '22, the inventory was 1.5 times higher, returning to a healthy level. Ultra-high-end milk powder amounted to 12.57 billion, an increase of 4% over the previous year. Among them, Starfeifan's revenue declined, but the strong performance of the newly listed Xingfei Fan Zhuo Rui made up for the decline to a certain extent. High-end milk powder was 6.5 billion, down 12% from the previous year. According to Nielsen data, the company's market share in the milk powder industry reached 21.5% at the end of '22, with offline channels accounting for 23% and online channels 13.5%. Even during the industry's downturn, the company's market share continued to increase.
Profit margins have declined. The company's gross profit margin in '22 was 65.5%, down 4.8pct from the previous year. The reason for the decline in gross margin is mainly due to changes in the product structure, the increase in the share of Starfeifan Zhuo Rui, which has higher costs and lower gross margins, and the increase in the share of adult fans, which has lowered the overall gross profit margin. In terms of expenses, the sales expense ratio was 30.7%, an increase of 1.2 pct over the previous year. The main reason was a decline in revenue and the sales team expenses were relatively rigid; the management expenses rate was 7.2%, an increase of 1.9 pct over the previous year, mainly an increase in R&D costs and an increase in wages. The above factors led to the company's net interest rate of 23.2%, a year-on-year decrease of 7 pct. In the future, the company will refine operations, reduce promotional expenses, increase brand investment, and continue to increase the number of activities to improve internal skills.
Cash is plentiful, and dividends are expected to continue to grow. The company's cash flow was strong, with operating cash inflows of $6.28 billion in '22, down 7.9% year on year, less than net profit. The company has cash on the books of 19.08 billion, interest-bearing debt of $1.31 billion, a balance ratio of 28.3%, and a stable asset position. The milk powder business is for cash cows. Regarding sufficient cash reserves, the company said that future dividends will maintain double-digit growth, and at the same time, the company will consider investing in projects conducive to long-term development. Considering the current stock price, it is expected that the future dividend rate will reach 5-6%, which has investment value.
Considering increased competition in the industry, we lowered our net profit for 23/24/25 to 49.8/51.2/51.2/5.53 billion yuan. The corresponding EPS was HK$063/0.65/0.70. Maintain a “buy” rating. Taking into account market sentiment and valuation, we gave a target price of HK$8.4, with room for a 56% increase from the current stock price.
Risk warning: The decline in the number of births exceeded expectations; serious safety incidents occurred in the industry or company; the performance of new products fell short of expectations.