It will take time for demand to recover; the industry is highly competitive and will continue to consolidate
Despite the low base effect, Ausu 1H23's revenue/net profit recorded a year-on-year decline of 3.7/ 10.3% to 35.1/185 million. Mainly due to the continuous decline in the new population, the milk powder industry has still faced weak demand and fierce competition since this year. According to Nielsen, the sales volume of China's goat/milk powder industry fell 14.7/ 14.0% year-on-year respectively in 1H23. We believe it will take time for the industry to recover, and it is expected that the industry has strong channel control capabilities, brand power, and leading companies in segments will continue to expand their market share. 1H23 The share of Ausu Goat Milk Powder in the goat milk powder market increased by 0.6pp to 27.2% year-on-year; however, we remain cautious about its milk powder business. We lowered the 23-25E basic EPS by 27.1/12.9/ 11.2% to $0.25/0.34/0.38, and lowered the target price by 17% to HK$2.9, based on 8.4 times PE (average historical PE since July 2017 minus 1 SD, mainly due to intense competition) and dynamic EPS of $0.31. “Hold”.
In an environment of intense competition in the industry, the cattle and sheep business continues to adjust
Revenue from goat milk powder also fell 13.3% in the first half of the year, mainly due to weak demand in the domestic infant formula industry, and during the industry adjustment period, companies increased discounts to clean up the inventory of old brands, while streamlining distribution channels and slowing down delivery to merchants to stabilize the price market. With the launch of Jia Beite's new brand, Yuehuo, in June this year and the negative impact of adjustments to Yueshuang and Yuebai mitigates, we expect goat milk powder revenue to return to positive growth in the second half of the year. Despite last year's low base, milk powder revenue increased by only 2.4%. In 2Q23, the company merged Hypnocay and Capability Multi-Brand Division to enhance operational efficiency and effectively control costs. We maintain a cautious view of the milk powder business because its milk powder products are more homogenized than competing products, and channel penetration and control are weak.
Revenue from nutritional products grew strongly due to mergers
Revenue from 1H23 nutritional products increased by 88.8% to 149 million, accounting for 4.2% of total revenue (1H22:2.2%), mainly due to the company's merger with Jinqi Biotech (Ausu holds 61.1% of the shares in Jinqi Biotech) and the revenue of Aison, a probiotic product during the same period, +36.3%. However, due to Jinqi Biotech's low GPM, GPM for the nutritional products division shrank by 21.8pp to 44.0% year-on-year.
Effective cost savings and cost control offset the decline in gross margin
GPM contracted 5.6pp to 42.0% year-on-year in the first half of the year as the company increased discounts to clean up the inventory of the old brand Youzhuang, as overseas inflation drove up the cost of raw milk, and the appreciation of the euro against the RMB. Facing a difficult environment, Ausu focused on cost savings and cost control. Sales expenses/management expenses fell 1.0/3.9 pp to 9.5/ 27.4% year on year, so OPM expanded 1.2 pp to 7.0% year on year. The effective tax rate rose to 23.7% (1H22:14.5%) mainly due to the expiration of Hypnoke Hi-Tech Preferential Income Tax. NPM shrank 0.3 pp to 5.3% year over year. The current stock price of Ausu corresponds to 10.6 times the 12-month forward PE, which is 13% off from the historical PE average (12.3 times) since July 2017.
Risk warning: Downside risks: 1) the number of newborns in China continues to decline; 2) increased competition in the goat milk powder market; 3) unfavorable changes in the foreign exchange rate ratio; 4) food safety issues. Upside risks: 1) Consumer demand for terminal milk powder is improving; 2) The recovery of the milk powder business is accelerating.