Although gross margin continued to rise in 2023, net profit decreased by 9.3%, offset by non-operating projects.
The new president, Mr. Gao Fei, will lead Mengniu to focus on new developments.
The “Buy” rating was reaffirmed and the target price was lowered to HK$25.50 (15.9 times 2024 P/E).
The English version of this Hong Kong Stock Connect report was released by Huaxing Securities (Hong Kong) at 6:30 a.m. on March 28, 2024. The Chinese version was reviewed by Jiang Xuefeng (Securities Analyst Registration Number: S1680519070001) of Huaxing Securities. If you would like to further discuss the views expressed in this report, please contact your sales representative at Huaxing Securities.
Non-operating projects dragged down 2023 results. Mengniu Dairy's revenue in 2023 increased 6.5% year-on-year, mainly driven by the strong performance of high-end liquid milk, the expansion of ice cream products in Southeast Asia, and the contribution of Mirco Lando (600882CH, not covered) acquired in November 2022. Thanks to lower raw material prices and consumer product upgrades, Mengniu's gross margin increased 1.8 percentage points year over year, driving up operating profit margin by 0.4 percentage points. However, net profit fell 9.3% year on year due to the drag of non-operating projects, including a decrease in revenue from asset disposal, a decline in revenue contributions from associated companies, and an increase in tax rates related to dividends; while adjusted net profit after adjusting one-time projects was 5.6 billion yuan, the same as the previous year.
The new president will lead Mengniu into a new era. Mengniu announced the appointment of Mr. Gao Fei as Group President to replace the outgoing Mr. Lu Minfang, effective March 26, 2024. Mr. Gao was the Group's senior vice president and head of the Room Temperature Division. At the results meeting, management said that China's dairy industry has entered a stage of slow growth, and the problem of oversupply of raw milk will continue. Under the leadership of the new president, Mengniu said it will focus on digitalization, R&D innovation, and brand building to create more value for consumers and investors. The company anticipates that China's traditional dairy market is likely to grow by a low number of units in the next few years. In response, Mengniu will prioritize new product development — especially in the field of sports health and health products, while focusing on channel development for the low-tier market in the short term.
Increase shareholder returns in the context of slowing revenue growth. Mengniu management guided low to medium revenue growth in 2024 (compared with revenue CAGR of 7.4% in 2018-23) and an increase in operating margins by 30-50 basis points. The company increased its dividend payout ratio from 30% in 2022 to 40%. During 2023, Mengniu also repurchased and cancelled 26.9 million shares (about 0.7% of total tradable shares) at a total price of HK$795.6 million. Management said it will continue to control capital expenses and continue to seek appropriate ways to increase shareholder returns.
Reiterating the “Buy” rating, the target price was lowered to HK$25.50: Based on our forecast adjustments, we used Bloomberg's consistent global peer average expectations, that is, 15.9 times the 2024 P/E (previously 22 times the 2023 P/E) value for Mengniu, and obtained our new target price of HK$25.50 (previously HK$43.00). We believe that management's guidance on low revenue growth and the weakness of China's capital market no longer support Mengniu's valuation premium compared to its peers.
Risk warning: increased competition, rising raw milk prices, food safety issues.