The COVID-19 outbreak has seriously affected sales of vitamin milk. After China's epidemic prevention measures were suddenly upgraded on January 23, 2020, the company's product terminal sales declined sharply, leading to high dealer inventories. Entering March, as China's strict epidemic prevention measures achieved initial results, offline retail also began to gradually resume. However, the company needed to help dealers absorb previous inventory, and the shipment volume was not optimistic. Moreover, in supermarket channels, the company's soy milk products are still under pressure from huge promotions of dairy products. Hong Kong sales have also been severely impacted by the pandemic.

The company's gross margin has declined, and it is difficult to save on sales expenses. Although the vitamin milk factory (with the exception of the Wuhan factory) has begun to gradually resume work, due to insufficient demand, the company's production capacity utilization rate is still low, leading to a marked increase in unit production costs. On the other hand, market expenses launched before the Spring Festival did not have the desired effect due to the COVID-19 outbreak. In addition, there has been a marked increase in transportation costs. Therefore, we expect the company's gross margin and net interest rate to decline significantly in the fourth quarter of FY2020. We expect that the sharp decline in VitaMilk's earnings in the fourth quarter of FY2020 will significantly drag down performance throughout FY2020.

We have drastically lowered our earnings forecasts for FY2020 and FY2021, based on the assumption that consumer life will return to normal by May. The company's performance in FY2021 was mainly determined by the progress of the epidemic in mainland China and Hong Kong. We downgraded the Vitamin Milk rating to “neutral” and lowered the target price to HK$28.50, which is equivalent to 53.7 times/43.7 times/33.9 times the price-earnings ratio for FY202/FY2021/FY2022.