Matters:
The company released its 2023 annual report. In 2023, it achieved main revenue of 98.624 billion yuan, +6.51% year over year; operating profit of 6.171 billion yuan, +13.8% year over year; net profit to mother of 4.809 billion yuan, -9.31% year on year.
2023H2 achieved main revenue of 47.506 billion yuan, +5.87% year over year; operating profit of 2,896 billion yuan, -0.25% year over year; net profit to mother of 1,789 billion yuan, +15.28% year over year. Excluding the influence of the Miracoland merger, in '23, 23H2's revenue was 945.8 billion yuan or 45.52 billion yuan, +2.56% and 2.33% over the same period last year.
Commentary:
23H2 liquid milk grew steadily, while cheese also thickened. By category, liquid milk achieved revenue of 820.71/40,431 billion yuan in 23-year/23H2, or +4.86%/+4.73% year-on-year, continuing steady growth. Among them, Mengniu White Milk became number one in the industry in 23 years, and the company focused on strengthening resources and continued to lead the industry in growth. Milk beverages achieved positive growth during the year through new products and channel expansion; sales of low-temperature milk bucked the trend and expanded its market leading share; fresh milk growth rate led sharply, and the daily fresh language ranked first in the industry. The milk powder business achieved revenue of 38.02/1,907 billion yuan in 2012/23H2, -1.56%/-3.07%. The company's operations were under simultaneous pressure against the backdrop of a sharp decline in the number of newborns, but Bellamy achieved 40% growth during the year, and profits also improved markedly. Ice Cream achieved revenue of 60.26/1,718 billion yuan in 23H2, or +6.61%/-1.79% year-on-year, with a slight decline due to storage in the second half of the year. The cheese business achieved revenue of 43.57/2.01 billion yuan in 2012/23H2, or +229.8%/+170.9% year-on-year, mainly due to the combined impact of merit. In addition, other businesses (dairy raw materials and distribution trade) achieved revenue of 23.68/1,348 billion yuan in 2013/23H2, or -32.13%/-24.03% year-on-year, which partially dragged down overall revenue.
The 23H2 fee increase led to a slight decline in OPM, and the increase in OPM was still well realized throughout the year. 23H2's gross profit margin was 35.81%, +1.86% year over year, sales expenses ratio was 23.76%, +2.28 pcts year on year, corresponding gross sales margin was 12.05%, -0.42pcts year on year. This is mainly due to a sharp drop in raw milk prices. While costs are declining, the company also needs to increase spending to absorb excess milk sources, compounding the impact of lean channels. 23H2 The company's management/finance expense ratio was 5.38%/0.02%, -0.10pct/+0.36pct year-on-year. The increase in financial expenses was mainly due to an increase in loan interest expenses. In addition, other operating expenses accounted for 1.80% of revenue, with a year-on-year decrease of 1.24 pcts (mainly due to Tiberami's impairment loss of 742 million in the same period last year), so the net interest rate to mother was 3.77%, +0.31 pcts year over year, which is a good recovery from the low base. In terms of operating profit, the increase in cost investment led the 23H2 company's operating profit margin of 5.66%, -0.42pcts year over year, but OPM steadily increased by 0.4 pcts to 6.3% throughout the year, which is better in line with the guidelines at the beginning of the year.
Under external pressure, the company is setting a more moderate tone, focusing on the quality of growth, and the return on capital is also expected to improve. In '23, the company has been steadily sinking channels, and the number of township outlets has reached 800,000. Competition has also been strengthened in segments such as low temperature and milk powder, and profits have entered improvement channels. Under external pressure, internal skills have been refined, and the operating foundation has continued to be consolidated. Looking ahead to 24 years, the company's core business conflict is still under external pressure, that is, demand is recovering weakly, and the downward trend in oversupply prices of raw milk is expected to continue. Therefore, the company will still face greater pressure from promotions and powder spraying, and animal husbandry joint ventures may continue to be dragged down. In this context, the company is expected to achieve low to medium single-digit revenue growth in 24 years, and continue OPM's goal of increasing 30-50 bps. Under external pressure, the company is setting a more moderate pace and focusing on improving the quality of growth. At the same time, as the company's production capacity was gradually put in place, the capital expenditure in '23 was 4.17 billion yuan, -17.8% compared to the same period. The dividend rate increased by 10 pcts to 40% with improved cash flow. It is expected that capital expenditure will continue to decline in 24 years, and dividend returns are expected to increase further.
Investment advice: focus on high-quality growth, value layout ranges, and maintain a “strong” rating. Considering the weak recovery in demand, and the declining gross margin of raw milk prices, the gross sales gap is expected to continue to increase, and the annual revenue growth rate is lowered to medium to low single digits. Profitability is expected to recover. The 24-26 EPS forecast is 1.39/1.59/1.82 yuan (the original 24-25 forecast was 1.76/2.03 yuan). The current 24-year PE valuation is only 11 times. Considering the company's leading position in the dairy industry, and capital return initiatives such as repurchases and dividends are expected to increase. Currently, it has reached the value layout range, and the target price is HK$25, corresponding to PE in 24 years, maintaining a “strong push” rating.
Risk warning: Demand recovery fell short of expectations, raw milk prices declined beyond expectations, industry competition intensified, etc.