China's Holy Shepherd announces its annual results for 2016. In 2016, the company achieved operating income of 3.467 billion yuan, up 11.8% from the same period last year; gross profit of 1.675 billion yuan, up 13.4% from the same period last year; and net profit of 681 million yuan, down 15% from the same period last year. The fair value of biological assets has been adjusted for a loss of 15.73 million yuan this year, compared with a profit of 52.72 million yuan for the same period last year. Excluding changes in the value of biological assets, net profit was 973 million, down 5.6 per cent from a year earlier. Affected by the grim situation of the dairy industry as a whole and the impairment provision for large accounts receivable (86.3 million yuan), the company's profit margin decreased significantly: EBITDA profit margin decreased by 4 percentage points to 35.6%, operating profit margin decreased by 5.4 percentage points to 31.8%, and net interest rate decreased by 5.1 percentage points to 28.1%.
The strategic positioning of organic milk in the whole process has become increasingly clear, and the proportion of downstream own brands has increased steadily. The proportion of organic business of the company reached a new high in 2016, with operating income increasing from 76.4% to 81.9% and gross profit from 81.3% to 87.3%. The performance of downstream private brands is particularly outstanding, with organic liquid milk sales of 186400 tons in 2016, a year-on-year increase of 28.4%, and the share of operating revenue increased from 53.4% to 59.3%.
Driven by the increase in the proportion of private-brand liquid milk with higher profit margins, coupled with the company's promotion of fine management and effective control of sales costs, the overall gross profit margin rose slightly from 47.7% to 48.3%. In order to meet the increasing demand of its own brand downstream, the company has further strengthened the processing capacity of liquid milk on the basis of the existing 16 production lines (12 normal temperature, 4 yoghurt), invested in 3 new liquid milk production lines, and is expected to put 2017Q2 into production with a production capacity of 320t / day.
Adhere to intensive cultivation of channels, attach importance to terminal price control, and make every effort to create a high-end organic milk brand. At present, the company covers chain supermarkets, convenience stores, community stores and other channels, promoting channel standardization and standardization in key markets, deepening the construction of marketing network in third-and fourth-tier cities, and is expected to add 20,000 super community stores in 2017. In the case of fierce competition in the industry, resolutely withdraw from the price war and step up efforts to improve the brand image.
The company has now successfully completed the initial price increase, and organic milk products enjoy a 30% premium over ordinary non-organic milk. With reference to the 100% premium abroad, we think that there is still a lot of room for price increase in the future.
Innovation model continues to advance, new channels, new products, new cooperation is worth looking forward to. The company launched the "Shengmu yoghurt chiller" exclusively in May 2016, which is aimed at consumption scenes such as catering, office buildings and entertainment venues. At present, 15000 units have been put into operation, and it is conservatively estimated that there will be an increase of 20,000 to 30,000 units in 2017, with an estimated effective delivery rate of 75%. The average daily sales are 1 bag per unit (8.15L packaging), and the total daily sales volume will reach 250,260 tons. The company will launch a new product "Holy Shepherd Milk Jue" in early 2017, which focuses on high protein and refined lactose, which is suitable for people who are lactose intolerant.
In addition, the company has reached a cooperation with Food Union to establish Fuyou United Shengmu Dairy Co., Ltd., which mainly produces high-end organic children's milk with a planned production capacity of 750,800t / day and a production capacity of 150t / day. It is expected to be put into production in November this year, mainly for sales to the eastern coastal areas. In addition, the entry of Yili into the master is also carried out normally in accordance with the relevant procedures.
Investment suggestion: we expect that the loss of the company's biological assets will become profitable under the upward trend of raw milk prices in 2017. at the same time, the company plans to strengthen the evaluation and management of dealer credit lines to improve asset operation efficiency. We are optimistic about the scarcity of the company as the largest producer of organic raw milk in China for a long time. Under the current upsurge of consumption, the public's demand for organic liquid milk will be further released, which is expected to promote the steady growth of the company's performance. The company's current share price is 16.8x corresponding to the 2016A PPease E valuation, and investors are advised to keep an eye on it.
Risk tips: I) new business development is not as expected; ii) negative impact of food safety issues; iii) acquisition integration failed to fulfill as promised.