23 years of performance under pressure, 24 young players
Revenue in '23 was $7.38 billion (-5.3% YoY), EBITDA of $4.7 billion (-2.1% YoY), net profit attributable to mother of $170 million (-19.5% YoY); of these, 23H2 had revenue of $3.86 billion (-6.1% YoY) and net profit of $0.1 billion to mother. In '23, the company's milk powder and goat milk powder business profits were under pressure, and the nutritional products business performed well.
Looking ahead to 24 years, on the revenue side, the infant formula business expects the possibility of a recovery in demand due to a marginal increase in the number of newborns, and the nutritional products business is expected to maintain its growth rate; on the profit side, mid-to-tail companies in the infant formula industry may gradually withdraw, and the company's gross margin is expected to rise steadily in 24 years. The company's 24-26 EPS is expected to be 0.16/0.20/0.23, respectively. Referring to the 24-year average PE 10x of comparable companies, considering that its 23-26 net profit CAGR (32%) was higher than the comparable company average (10%), the company was given 15 xPE for 24 years, with a target market value of HK$4.27 billion, maintaining a target price of HK$2.57, “holding”.
The infant formula business continued to be under pressure in '23, and the nutrition business continued its good development trend. The company achieved revenue of 58.5/1.54 billion in infant formula and other businesses in '23, -10.3%/+20.0% over the same period last year. 1) Infant formula business: Goat milk powder/milk powder achieved revenue of 32.8/2.56 billion respectively in '23, -8.6%/-12.4% compared to the same period last year. The milk powder industry has faced the challenges of weak demand and fierce competition for 23 years. Looking ahead, in 24, the company will continue to control the pace of shipments/clean up old brands/streamline distribution channels, take more measures to stabilize the price market, and enter the market 24 young. 2) Other businesses: Nutritional products/private brands achieved revenue of $28/240 million respectively, +113.9%/+17.7% year-on-year; the good growth of the acquisition brand Genki Biotech and probiotic brand Aisen is expected to continue to contribute to revenue growth.
Gross margin was under pressure in '23, and gross margin may rise steadily to 38.6% (year-on-year) of GPM (adjusted) to 38.6% (year-on-year - 4.9pct), mainly because overseas raw milk prices continued to be high (overall milk prices have basically declined since '24). Due to the short-term mismatch between supply and demand, there was a certain reduction in value for large packets of powder, and the company cleared up old brand leisure wear inventory at a discount. Facing a market environment where demand is weakening and competition is fierce, the company continues to focus on cost savings and cost control. In '23, the company's sales and distribution expenses accounted for 25.8% of revenue, -2.0pct year on year, and management expenses ratio was 7.3%, -0.5pct; in the end, the company's net interest rate in '23 was 0.4 pct to 2.4% year on year. Looking ahead to 24 years, small brands in the infant formula industry are expected to clear up, and the company's gross margin may rise steadily; the company's sales expenses may increase year over year, but it will continue to work to improve the efficiency of spending. The company's dividend payout ratio in '24 was 46.3%, a slight increase over the previous year.
Looking forward to subsequent improvements and maintaining the “hold” rating
Considering that short-term demand in the infant formula industry is still weak and competition in the industry is still fierce, we slightly lowered our profit forecast. We expect EPS to be 0.16/0.20 yuan (previous 0.17/0.24 yuan) for 24-25, introduce EPS 0.23 yuan for 26 years, and give the company 15 xPE for 24 years, with a target price of HK$2.57 to maintain “holding”.
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.