Steady operation, looking forward to improved demand and increased profits
Revenue of $98.62 billion (YoY +6.5%), operating profit of 6.17 billion yuan (YoY +13.8%), net profit to mother of 4.81 billion yuan (-9.3% YoY); 23H2 revenue of 47.51 billion yuan (+5.9% YoY), operating profit of 2.09 billion yuan (YoY -0.2%), net profit to mother of 1.79 billion yuan (YoY +15.3%).
The company's liquid milk business performed steadily in '23, and the milk powder business was under pressure; on the profit side, factors such as falling milk prices/increased cost-efficiency ratio combined to increase the company's operating profit margin by 40 bps to 6.3%, continuing to lead the industry with high-quality growth. Looking ahead to 24 years, the company is expected to continue to improve its operations under the influence of steady improvement in demand, expansion of innovative products, and low costs. We expect the company's 24-26 EPS to be 1.39/1.53/1.66, respectively. Referring to a comparable company's 24-year PE average of 16x (Wind's consistent expectation), the company will be given a 24-year 16xPE with a target price of HK$24.19 (previous value of HK$41.00) to “buy”.
The liquid milk business is stable overall. High-end white milk and low-temperature white milk continued to grow well, excluding the combined influence of Miracolandot. The company's revenue over 23 years was about +3%. The company's revenue in '23 was 820.7/60.3/38.0/43.6/2.37 billion, respectively, +4.9%/+6.6%/-1.6%/+229.8%/-32.1%; 23H2 revenue +4.7%/-1.8%/+6.6%/+170.9%/-41.3%. Liquid milk maintained steady growth. Room temperature white milk continued its growth in the first half of the year. Among them, high-end white milk Trensu benefited from declining market gift demand and good sales performance; the low temperature business achieved positive growth throughout the year, and its leading share continued to expand, and the trend is expected to continue to improve in 24 years based on the company's continued investment in brand building and consumer education. The market share of the milk powder business is expected to continue to increase as inventory is digested and small brands are cleared. The main reason for the high growth in the cheese business was the merger of Mirco Corando since December '22.
Milk prices continued to decline, with gross margin +1.8 pct year on year 23, OPM + 40 bps year on year 23, gross margin +1.8 pct to 37.2% year on year (23H2 +1.9 pct year on year to 35.8%), mainly benefiting from the continuous decline in milk prices throughout '23. The 23-year sales rate was +1.4pct to 25.5% (23H2 +2.3pct), corresponding to the 23-year gross sales margin +0.4pct to 11.6% yoy (23H2 -0.4pct yoy). In addition, inventory depreciation of $320 million was calculated over 23 years. The company's net profit margin in '23 was 0.9 pct to 4.9% year on year (23H2 +0.3 pct year on year); in '23, the company's OPM was +0.4 pct to 6.3% year on year (23H2 -0.4 pct year on year). Since 24.3.26, Lu Minfang has served as the vice chairman of the board of directors and stepped down as president; Gao Fei has served as president and executive director. Gao Fei has held many core positions, including general manager of Mengniu Marketing. He is a veteran talent of the company. After taking over, it is expected that the company will continue to develop well.
The dividend ratio increased in '23, maintaining the “buy” rating
In terms of dividends, the company's dividend ratio increased from 30% in '23 to 40%, and there is still room for improvement in the future. Considering the slow pace of improvement in consumer demand, we lowered our profit forecast. We estimated EPS of $1.39/1.53 for 24-25 ($1.74/2.04), introduced EPS of 1.66 yuan in '26, with a target market value of HK$95.227 billion and a target price of HK$24.19 to “buy”.
Risk warning: fluctuating raw material prices, lower-than-expected macroeconomic performance, food safety issues.