The company's recent situation
Recently, we had exchanges with China's Shengmu management and learned that upstream milk prices were still weak in the first half of the year, and the average sales price of downstream products stabilized. We expect the company's sales to drop about 5% year over year in the first half of the year, and continue to record continuous losses.
reviews
The sales price of raw milk was still weak in the first half of the year, and prices may remain the same throughout the year. Affected by heat stress, the company's organic and non-organic raw milk prices are expected to rise to 4.1 yuan/kg and 3.3 yuan/kg respectively in June. However, the overall average milk price for the first half of the year is expected to remain weak (organic and non-organic raw milk prices may be lower than 3.8 yuan/kg and 3.3 yuan/kg, respectively). Due to seasonal factors, prices in the second half of the year are expected to increase slightly compared to the first half of the year, so it is expected that the average price of raw milk throughout the year will remain basically the same year over year. We expect production to increase slightly by about 4% in the first half of the year. This is part of the reason why milk prices continue to weaken. Since 2017, the sharp contraction in downstream business sales has reduced internal sales, and Seimu needs to reduce prices to absorb excess raw milk.
The average sales price of branded milk stabilized in the first half of the year. We expect the price of the company's brand milk to stop falling and stabilize at around 9.6 yuan/kg in the first half of the year. This year, the company strengthened service and sales guidance for dealers, and no longer supports dealers to stabilize terminal retail prices through price discounts alone, but the recovery in sales still requires the company's further efforts to penetrate low-tier cities, expand the number of dealers (currently around 400 dealers) and new products. We expect downstream sales to drop around 5% year-on-year in the first half of the year.
Revaluation losses of the fair value of biological assets and impairment losses from bad debts of receivables may have dragged down profits in the first half of the year. Due to the stable size of the herd and the low price of raw milk in the first half of the year, a loss in the fair value of biological assets may be recorded in the first half of the year. At the same time, we expect that there will still be bad debts and losses to be calculated this year. These two factors may drag down the company's performance in the first half of the year.
Valuation recommendations
The current stock price corresponds to 13.8 times the 2018 core price-earnings ratio and 11.9 times the 2019 core price-earnings ratio. We lowered our profit forecasts for 2018 and 2019 to losses of 492 million yuan and 160 million yuan, mainly considering that the price of raw milk continues to weaken and that bad debt losses may occur again this year. We lowered our target price by 47.8% to HK$0.6, corresponding to 15 times the 2018 core price-earnings ratio, and there is 9% room for growth compared to the current stock price. Considering the recovery or the need for more time, we maintain our neutral rating.
risks
The price of raw milk has risen sharply; downstream sales have exceeded expectations.