Despite the government's introduction of a series of measures to encourage childbearing, there has been no sign of a significant improvement in the birth rate. Currently, the market is unanimous in expecting a rebound in the birth rate to occur as soon as 2024. We judge that the overall market demand for infant formula is still weak in 2023, and industry stock competition continues.

Against this backdrop, although the 2023 performance of players such as Ao Yu and Flying Crane is expected to record a large rebound from a low base, it is more difficult for the valuation of baby formula players to reverse in the short term. Amid weak market sentiment, we lowered Australia's premium target price to HK$4.3 to maintain the company's “hold” rating.

The following is our profit forecast for Australia Premium in 2023:

Revenue side: We forecast an 11% year-on-year increase in Australian Premium's overall milk powder revenue in 2023 (compared to the company's double-digit growth target). Among them, milk powder revenue increased 15% year over year (compared to the company's high double-digit growth target), and goat milk powder revenue increased 10% year over year (compared to the company's lower double-digit growth target).

On the gross profit side: With terminal sales and channel inventories returning to normal, we predict that gross margin of various product lines will increase significantly from 2022 compared to 2022 and basically return to 2021 levels.

However, since the product structure has deteriorated compared to 2021 (HypnoKai's share of 1897 has declined sharply compared to 2021), we expect it will be difficult for the overall gross margin to return to the level of 2021.

In terms of operating profit: We expect the overall cost rate to remain stable year over year in 2023.

On this basis, we expect core operating profit to rebound 80% year over year, and core operating profit margin to expand 3.6ppt to 9.3% year over year, which is still below the level of 11.8% in 2021.