Incident: On March 25, Mirco Land released the “2023 Annual Report”. The company achieved annual revenue of 4,049 billion yuan, a year-on-year decrease of 16.16%; realized net profit of 63.44 million yuan, a year-on-year decrease of 53.90%; and diluted EPS 0.126 yuan/share, a year-on-year decrease of 53.51%.
The decline in the Q4 low base narrowed, putting pressure on gross margin for the whole year. In the fourth quarter of '23, the company achieved revenue of 974 million yuan, a year-on-year decrease of 2.7%; realized net profit of 29.56 million yuan to mother, an increase of 588.4% over the previous year. The company's gross margin/net margin for the whole year was 29.24% and 1.97%, respectively, down 4.91 and 1.57pct from the previous year. The decline in gross margin was affected by double fluctuations in raw material market conditions and exchange rates, which was the main reason for the decline in profitability.
The growth of the industry has slowed, and its leading position has strengthened. By business, the cheese business achieved revenue of 3.137 billion yuan (-18.9%), the trading business achieved revenue of 567 million yuan (-5.4%), and the liquid milk business achieved revenue of 334 million yuan (-4.3%); in the cheese business, the ready-to-eat nutrition series achieved revenue of 1,902 million yuan (-23.9%), the family table series achieved revenue of 348 million yuan (-36.1%), and the catering industry achieved revenue of 888 million yuan (+7.6%). Against the backdrop of changes in consumption habits and weak consumer demand after the pandemic, on the one hand, the growth of the industry was limited. On the other hand, in '23, the company still held the top position in the cheese industry with a market share of 36.8% (+1.0 pct). Among them, the share of cheese sticks reached 42.8% (+1.7 pct). In the scenario, the recovery of the catering industry and the increase in the penetration rate of the cheese category on the B-side led to the expansion of TOB business, and the company achieved growth in the catering industry sector with the advantages of supply chains and specialized services.
Looking backwards, exchange rate fluctuations are still risky, but it is expected that the pressure on raw material costs will ease by locking up foreign exchange.
International raw milk prices and international cheese prices have dropped significantly from the previous two years of high prices. Domestic raw milk prices have continued to decline in the past two years, and transportation and logistics have gradually resumed after the epidemic ended. As the previous high-price inventory was exhausted, and the company began to strategically lay out domestic raw cheese to improve the company's supply chain system, the pressure on the cost side is expected to ease.
Mengniu expects the injection to be completed by July 9, and the company's cheese business will be strengthened while further focus will be placed on it.
Mengniu is expected to complete the injection of its cheese business, which includes trading in cheese and related raw materials, into Miracolando by July 9, and will also withdraw from the liquid milk business.
Constrained by the development of production, processing, transportation and storage capacity, China's dairy industry has generally experienced the milk powder era, the liquid milk era, and the solid milk era. Currently, consumption of mainstream dairy products such as liquid milk and milk powder is slowing down, and cheese consumption is growing the most. China's cheese penetration rate exceeded 30% in 2022, and the per capita consumption is only 0.2 kg. South Korea and Japan, which are also Asian countries, are 2.32 and 2.91 kg respectively, which is a bigger gap than Europe and America. In 2022, China's retail cheese market reached 14.294 billion yuan. From 2009 to 2022, it maintained rapid development over a long period of time. The CAGR exceeded 20%, and the growth rate of the cheese category far exceeded the industry average.
According to the China Dairy Industry Association's “Three-Year Action Plan for Cheese Innovation and Development to Help Improve the Competitiveness of the Dairy Industry”, it is planned that by 2025, the country's cheese production will reach 500,000 tons, and the national cheese retail market will exceed 30 billion yuan.
Cheese is “predatory” similar to soy wine to some extent, and has the characteristics of high nutritional value, high nutritional density, and wide application range, and can meet high nutritional functionality requirements. While the aroma of milk is more intense, cheese is mixed with salty, sweet, and sour flavors and special aromas brought about by fermentation, adding flavor memory and recognition to the product, and is widely used in the fields of tea, catering, baking, and snacks. The “Student Milk Drinking Program” helped complete the early nationwide promotion of dairy products. Through the “familiar+unexpected” formula, cheese is expected to gradually enter the diet structure of a new generation of young people and explore products and scenarios with national characteristics. Compared to the promotion process of cheese in Japan, cheese in China uses the label of fresh and exotic, cutting into casual eating to complete the initial understanding of the product, but this is only a primary application of cheese products, and it is highly regional, mainly in Tier 1 and 2 cities. Further extensive market education is that it can meet the functional needs of specific groups in terms of nutrition, cultivate rigid needs through the reflection of nutritional value, and make them a habit through innovation in form and usage.
Short-term pressure did not lose direction, and Nagasaka started calmly due to heavy snow. Mikolanduo is the only A-share main board listed company with cheese as its core business. Since entering the cheese business in 2016, it has achieved a compound growth rate of 45.4%/27.0% in operating income/net profit to mother until 2022. Facing the macro-environment of pressure that still exists since 2023, the company has worked hard and taken various measures to develop new categories to broaden the boundaries of cheese applications and find new growth points; continuously improve channel operation capabilities through channel sinking, and at the same time continuously improve organizational operation efficiency through management upgrades. In the future, the company will continue to focus on the cheese business, continue to maintain its first-mover advantage, pay close attention to market changes, seize market recovery opportunities, and further consolidate its position as a leader in the cheese category. Although the external environment has affected the consumption scenario and growth rate of cheese in the short term, in the long run, cheese is still an inevitable trend in the upgrading of dairy consumption, and there is still plenty of room for the future of the Chinese cheese market and companies.
Investment advice: As the most growing racetrack in the dairy sector, cheese conforms to consumption trends and national policy guidelines. It is an inevitable trend in dairy consumption upgrading, and has far higher growth rate and spatial potential than the industry. As the “first Chinese cheese stock”, the company does not change direction in the face of short-term macroeconomic pressure and works hard at internal skills. With the gradual improvement of the external environment and the gradual implementation of the company's strategy, an inflection point in performance can be expected. We predict that the company's 2024-2026 EPS will be 0.24, 0.35, and 0.47 yuan/share, corresponding to the current PE price, which is 56.7x, 39.5x, and 29.3x, respectively. This is the first coverage, giving a “buy” rating.
Risk warning: Consumption recovery falls short of expectations; price trends fall short of expectations; food safety issues; risk of market fluctuations.