The company's recent situation

Recently, we attended the company's 2024 Global Partner Conference, where management and investors had in-depth exchanges.

reviews

2H23 growth is expected to slow due to weak consumption and a high base. Room temperature white milk remains the main driving force for growth. We expect revenue from Mengniu 2H23 liquid milk to achieve low single-digit year-on-year growth, with a month-on-month slowdown, mainly due to weak consumption and a high base for the same period last year. By category, we expect that the main growth category for 2H is still room temperature white milk. Among them, Trenso's revenue will maintain double digit growth in 2023, and basic white milk will achieve medium to high single-digit growth. According to Nielsen data, the overall market share of big white milk in 2023 will surpass competitors; in terms of other categories, we expect that this year's milk drink revenue will remain basically the same year on year, room temperature yogurt will still decline year on year, while low temperature yogurt has achieved positive growth against the trend, demonstrating the results that the company has always advocated for low temperature yogurt. In terms of international business, we expect overseas Aixue's revenue to increase by more than 20% throughout the year, continuing its previous positive trend. Bellamy will benefit from the recovery of cross-border e-commerce and a marked year-on-year improvement in the low base, and the growth rate may exceed 40%. We expect full-year endogenous income growth in low to medium to high single digits, including Miocolanto and to achieve medium to high single-digit revenue growth after the merger.

OPM is expected to increase by 50 bps throughout the year, and net profit may be disrupted by associated companies and impairment. Our grassroots research shows that 2H offline price competition is relatively rational, and the Telunsu price is relatively stable. The company appropriately targets basic white milk price promotions to absorb excess milk sources. Benefiting from the decline in milk prices and the low base, we expect 2H23's gross margin to improve year over year; in terms of cost, considering the low advertising cost base, we expect the 2H23 sales expenses ratio to rise year over year; overall, we expect the 2H23 OPM high base to be under slight pressure, and OPM will increase by 50 bps throughout the year. Considering the year-on-year decline in profits of the joint ventures Hyundai Animal Husbandry and Shengmu, as well as the risk of impairment of 2H powder, we expect net profit to be disrupted throughout the year.

The margin of valuation safety is sufficient, and the long-term investment value is prominent. Looking ahead to next year, we expect the company's white milk and fresh milk business to remain resilient. In addition, the company continues to expand in the fields of low-temperature yogurt, cheese, pan-nutrition and health, and internationalization. Big White Milk and new businesses are expected to continue to drive overall revenue growth. On the other hand, the company will continue to adhere to high-quality development and continue to improve profitability in the future. We expect the company to increase net interest rates by optimizing product structure and improving marketing efficiency by opening up resources and saving money. Looking at the medium to long term, we are optimistic about the steady growth trend of the company's future fundamentals. Furthermore, we expect the company to start or increase its dividend ratio in 2023. Currently, the valuation in 2023 is about 15xPE. If a 50% dividend is assumed, the implied dividend return is about 3.4%; the company's current stock price is marginal and sufficient, and long-term investment value is prominent.

Profit forecasting and valuation

The company traded 15/12 times 23/24 P/E. Considering weak demand, the profit forecast for 2023/24 was lowered by 11%/11% to $52/6 billion; considering declining market valuations, the target price was lowered by 21% to HK$30, corresponding to 21/17 times 23/24 P/E and 38% of the upward space in stock prices. Maintain an outperforming industry rating.

risks

Demand is weak, competition intensifies, and raw material prices fluctuate.