Maintain "Buy" rating but cut TP to HK$5.90. We revise down our forecasts for China Feihe's (or the "Company") 2023-2025 sales revenue to RMB21,831 mn (-9.2%)/ RMB22,932 mn (-12.5%)/ RMB23,795 mn (-9.9%), respectively. We revise down our forecasts for its 2023-2025 EPS to RMB0.531 (-24.6%)/ RMB0.551 (-30.8%)/ RMB0.573 (-25.0%), respectively. At this stage, we think that the pessimism about demographics (as a structural headwind) has been priced in to a large degree. Going forward, China's infant milk formula industry is more likely to bottom out in 2024-2025. Although the market will continue to see intense competition, we are optimistic that China Feihe could consolidate market share and deliver profitable growth in 2024-2025, driven by 1) stronger presence in high-end segment, and 2) more efficient S&D model. Our new TP of HK$5.90 is based on 10.0x 2024F PER, implying a 22% upside.
Offline infant milk formula market continued to fall during 3Q2023 based on the Nielsen data and our channel check. Specifically, volume/ ASP saw high-teen/ low-single-digit percentage yoy decrease for the overall infant milk formula market in China. Mom & baby channel slightly outperformed modern trade channel in 3Q2023. By comparison, online infant milk formula sales saw mid-to-high single-digit percentage yoy decrease in 3Q2023 on Tmall/ Taobao and JD combined. In terms of online trade, high-end brands (including Feihe, Aptamil, a2 and Yili) recorded positive yoy growth amidst structural headwind. We expect that childbirth in China may see marginal rebound in 2024-2025 as short-term birth rate drop is approaching a historic level and the introduction of more favorable government policies cannot be ruled out. Investor sentiment in China's infant milk formula industry will then see marginal improvement.
It is visible that China Feihe will keep its leadership position. Based on the Nielsen data, China Feihe's market share remained flat at 23% in 1-9M2023, followed by Yili (14%) and Junlebao (9%), among domestic infant milk formula brands, in terms of offline sales value. Leading local brands further captured market share from both MNCs and smaller brands, in line with our expectation. Price competition has eased in the past quarter. For China Feihe, destocking/ sales turnover has been smooth and its pricing system is to stabilize. Coupled with continuous investment in brand building/ A&P activities, we forecast that its super-premium Astrobaby/ premium series will deliver 6%/ 2% yoy growth in 2024, still outpacing the industry average (despite a downward revision).
Catalysts: 1) Potential "Year of the Dragon" baby boom in 2024; 2) expansion of high-end infant milk formula sales may exceed expectations; and 3) China may step up policy coordination to boost fertility rates.
Risks: 1) slower-than-expected demand recovery; 2) food safety issues; and 3) intensified market competition.