What’s new
Shengmu announced that Yili would acquire a stake of ~37% inthe company at a price of HK$2.25/share, triggering a tenderoffer at the same price. The completion of the deal will generatepositive synergies for both companies, while Shengmu can takeadvantage of Yili’s strong distribution network to further expandits organic business.
Comments
Core members of management along with certainnatural person shareholders retained their combined26.7% stake （4 executive directors of Shengmu, namely Yao,Wu, Gao and Cui retained their combined stake of ~10.5%without selling to Yili） and have promised not to accept the shareoffer, which will ensure management and governance remainconsistent. We believe this reflects management’s confidence inits ability to significantly enhance Shengmu’s future performanceafter Yili’s acquisition.
Shengmu’s revenue +13.1% YoY over 1~3Q16 （+6.8% YoY in3Q16） with its blended GPM +2.7ppt to 48.4% （+3ppt YoY to49.5% in 3Q16） thanks to the price premiums of its organicproducts and its effective risk management that has lowered unitproduction costs under an overall downturn in domestic raw milkprices. We believe Shengmu will continue to maintain the highgrowth of its organic products and benefit from the growingdemand for organic food and its diversified downstream productmix （including chilled yogurts and organic IMF）。
Valuation and recommendation
We maintain our earnings forecasts for the company, though the2017e forecast seems a bit aggressive, since the time for theacquisition to be completed may be later than previouslyexpected （by mid-2017 by our estimate）， as the deal will besubjected to the approvals of the National Development andReform Commission and the Anti-Monopoly Bureau of theMinistry of Commerce. Maintain end-2017e TP of HK$3.86 andreiterate BUY. Risks: Lower-than-expected growth of organicdairy products; Yili’s acquisition is rejected.
What’s new
Shengmu announced that Yili would acquire a stake of ~37% inthe company at a price of HK$2.25/share, triggering a tenderoffer at the same price. The completion of the deal will generatepositive synergies for both companies, while Shengmu can takeadvantage of Yili’s strong distribution network to further expandits organic business.
Comments
Core members of management along with certainnatural person shareholders retained their combined26.7% stake （4 executive directors of Shengmu, namely Yao,Wu, Gao and Cui retained their combined stake of ~10.5%without selling to Yili） and have promised not to accept the shareoffer, which will ensure management and governance remainconsistent. We believe this reflects management’s confidence inits ability to significantly enhance Shengmu’s future performanceafter Yili’s acquisition.
Shengmu’s revenue +13.1% YoY over 1~3Q16 （+6.8% YoY in3Q16） with its blended GPM +2.7ppt to 48.4% （+3ppt YoY to49.5% in 3Q16） thanks to the price premiums of its organicproducts and its effective risk management that has lowered unitproduction costs under an overall downturn in domestic raw milkprices. We believe Shengmu will continue to maintain the highgrowth of its organic products and benefit from the growingdemand for organic food and its diversified downstream productmix （including chilled yogurts and organic IMF）。
Valuation and recommendation
We maintain our earnings forecasts for the company, though the2017e forecast seems a bit aggressive, since the time for theacquisition to be completed may be later than previouslyexpected （by mid-2017 by our estimate）， as the deal will besubjected to the approvals of the National Development andReform Commission and the Anti-Monopoly Bureau of theMinistry of Commerce. Maintain end-2017e TP of HK$3.86 andreiterate BUY. Risks: Lower-than-expected growth of organicdairy products; Yili’s acquisition is rejected.
