The current situation of the company
We held the China Holy Pastoral reverse Roadshow in Hong Kong and learned that the recent downstream sales challenge mainly comes from management saying that it is necessary to end the price war and bring the retail price of organic milk products back to a higher level to reflect the better quality of organic products. The development of new products and the expansion into special distribution channels may help ease the pressure on traditional channels and maintain sales growth momentum after a brief slowdown in the fourth quarter of 2016 and the first quarter of 2017. The company is trying to diversify its business through organic infant formula and joint ventures focusing on children's organic dairy products. It is expected that the equity acquisition may be completed by the end of June 2017, and Yili may take over in the second half of the year, which is expected to further enhance the company's growth prospects.
Comment
The management called an end to the price war, and we noticed that from the second half of 2016, the average sales price of Holy Shepherd in the retail market increased significantly compared with the same period last year. Retail price protection may lose some of the more price-sensitive consumers and affect the company's revenue growth (from 53 per cent year-on-year growth in the first half of 2016 to 4 per cent year-on-year growth in the second half of 2016). But this will help brand building, maintain long-term healthy growth prospects, but also in line with Yili's expectations.
It is expected that new products and channels may maintain the growth momentum of downstream sales. From the second half of 2016, the company began to layout yogurt machines, and it is expected that further production will be made in the first half of 2017, and the total number of yogurt machines will reach 40,000 by mid-2017. New channels and innovative product concepts will help the company maintain its sales growth momentum, so we believe that the company's revenue will still grow by more than 20% for the whole year.
The joint venture company in the long-term business reserve and the infant formula project may be put into production by the end of the year, which is expected to enhance the downstream advantage. The joint venture between Sheng Mu and Hong Kong United Foods will specialize in the production and sale of organic dairy products for children.
Yili's acquisition is expected to be completed by the end of June 2017, and the risk of the deal being cancelled is low. Considering the irrevocable agreement between the holy shepherd and the Erie and the half-year deadline, the final confirmation time may be April this year. If you add in the two-month tender offer, the acquisition is expected to be completed by the end of June this year. Considering the high certainty of forming synergy between the two sides, we are optimistic about the long-term growth potential of holy shepherds.
Valuation proposal
The profit forecast for 2017 will be lowered by 38.8%, mainly considering the postponement of Yili acquisition, and the profit forecast of 1.18 billion yuan for 2018 will be introduced. The current share price corresponds to a 2017 price-to-earnings ratio of 14 times. The target price was lowered by 29% to HK $2.73, mainly due to a reduction in profit expectations. Maintain the recommendation, optimistic about organic dairy products and Yili's ownership, is expected to increase the potential for profit growth.
Risk.
Organic dairy growth was lower than expected; Yili's acquisition was further delayed.