Main points of investment
The 2016 results were significantly lower than the market consensus: the company released its 2016 results announcement on the morning of March 21. The company realized operating income of 3.467 billion yuan, an increase of 11.8% over the same period last year; net profit of 681 million yuan, a decrease of 15.0% over the same period last year, and earnings per share of 0.11 yuan. Full-year revenue and net profit were 6 per cent and 28 per cent lower than Bloomberg's consensus market expectations for 2016, respectively. The significant decrease in net profit is mainly due to the adjustment loss of the fair value of biological assets of non-organic dairy cows and the substantial increase in trade receivables.
Terminal penetration accelerated, organic product core: the company continued to increase terminal penetration efforts, liquid milk sales revenue of 2.106 billion yuan, an increase of 27.2% over the same period last year; the reduction in delivery reduced raw milk sales revenue by 9.6% to 1.36 billion yuan. Liquid milk accounted for 60.8% of the company's sales revenue, up from 53.4% in 2015, and the lower proportion of takeout has also made the company more risk-resistant when the price of raw milk upstream is low. As far as the mode of production is concerned, the revenue of organic products reached 2.839 billion yuan in 2016, an increase of 19.9% over the same period last year, and the proportion of income further increased from 76.4% to 80.3%. Due to the fierce competition in non-organic raw milk, the income of non-organic products decreased by 14.3% to 628 million yuan.
The adjustment of fair value of biological assets and provision led to a significant decline in performance: due to the low price of raw milk, the value of biological assets of dairy cows decreased significantly, especially in non-organic pastures. In 2016, the company lost 15.73 million yuan after adjusting the fair value of its biological assets, compared with a profit of 52.72 million yuan in the same period last year. At present, the price of raw milk is also beginning to pick up, and we expect the loss to turn to profit this year. In addition, the company has increased the investment of Shang Chao in order to expand the terminal market of liquid milk, but the payback cycle of such customers is longer, resulting in an increase of 193 million yuan in trade accounts receivable over 15 years, and the company has also made a provision of 85.51 million yuan, which is also a drag on performance.
Our point of view: prior to this, the oversupply of international raw milk and the high inventory of domestic large packets of powder are the main reasons for the continued downturn in domestic raw milk prices. After years of adjustment, global dairy prices have picked up since mid-16, with the GDT price index rebounding about 40 per cent from its low. Domestic inventory digestion is also basically completed, and domestic raw milk prices are expected to rise steadily. After Yili joins the company, it will provide a stable downstream channel for the company's raw milk, and further enhance the competitiveness of liquid milk business in the terminal. According to the consensus expectations of the Bloomberg market, the company's share price is now 17 times higher than that of 2016. Investors are advised to pay close attention to it.
Risk tips: food safety issues; higher-than-expected fluctuations in raw milk prices; surge in accounts receivable