Profit warning profit is lower than we expected; profit target for 2023 may be challenged. Australian excellent issued a profit warning (March 10). Adjusted net profit (excluding one-time goodwill, intangible assets and deferred income tax impairment) is expected to fall by 50.5-56.3% year-on-year to 4.55-515 million yuan in 2022, lower than Huatai / Bloomberg expectations (570.75 million), mainly due to the weakness of its milk powder business. The net profit of homing fell 74.5-80.3% to 2.05-265 million. The management directs that revenue in 2023 will grow by double digits compared with the same period last year, and the adjusted net profit will return to the 2021 level (7.55-775 million). However, given the weak demand in the milk powder market, fierce competition and the lack of competitive advantage in the Australian Youniu milk powder business, we believe that achieving this goal will face challenges. After 2022E-24E adjustment, we have lowered our basic EPS forecast by 18% to $0.270.38 and the target price by 11% to HK $4.0, based on 8.9x PE (historical PE mean since July 2017 minus 1SD due to fierce competition) and rolling EPS of $0.39. "hold".
Double-digit year-on-year growth in the company's guided revenue in 2023
Management guides that revenue will grow by double digits in 2023 compared with the same period last year, mainly through improvements in the following aspects: brand side, enhance brand value proposition and strengthen consumer access and communication; product side, upgrade existing product formulations, and promote the launch of new products on the market. In 2023, the company will launch including Jiabei Yuebu, Heipnokai Platinum Edition, Hipnokai Happy, and so on. At the same time, actively promote the expansion of cattle and sheep milk powder business children powder category. At the operating end, make every effort to control the market order, strengthen the control of channeling goods and prices, maintain the health of channel inventory, and enhance marketing activities and channel sinking. We recognize the advantages of the Australian sheep milk powder business (Jiabeit's market share of sheep milk powder increased 5pp in 2022), but we believe that the recovery of the milk powder business is still challenging because of the homogenization of its products and competitive products, and weak channel penetration and control.
The profit guidance is challenging because of fierce competition in the industry and high investment to turn the business around, due to the controllable cost of raw materials; the improvement in inventory prices when inventories return to relatively healthy levels; and the improvement in discount rates, we expect GPM to improve in 2023 compared with 2023. However, we believe that Australian excellent is necessary to reverse the difficulties of the business, and the expense rate may still be under pressure from the same period last year, because the cost of obtaining customers will still be high in the face of fierce competition. While Aoyou plans to enhance its brand image and channel efficiency through three major marketing strategies, and plans to promote network expansion and sinking market channel penetration, improve the quantity and quality of activities, and enhance digital tools to enhance channel execution and channel operation efficiency. We expect net profit of 681 million in 2023, below the management guidance of 7.55-775 million.
Downgrade earnings forecast; maintain "hold" rating
We downgraded our adjusted net profit forecast for 2022-23-24 by 18% to 48,000,000, reflecting the weaker-than-expected performance in 2022 and the slower recovery of the company's profit margins under fierce competition. Australian excellent's current share price corresponds to 8.7 times the 12-month forward PE, maintaining the "hold".
Risk hints: downside risks: 1) the number of newborns in China continues to decline; 2) increased competition in the sheep milk powder market; 3) adverse changes in foreign exchange rate ratio; 4) food safety issues. Upside risks: 1) improvement in consumer demand for terminal milk powder; 2) accelerated recovery of milk powder business.