As the birth rate continues to decline and market demand has hardly increased, China's milk powder industry will enter stock competition. This is bound to result in increased short-term competition in the industry, pressure on profit margins, and continued sluggish market sentiment. As a result, we lowered our profit forecast for Ausu 2022-2024, but kept the company's “holding” rating and target price unchanged.

The company's 1H22 revenue and net profit to the parent fell 15% and 63% year-on-year, respectively, which were better than the predictions of 18.0-21.6% and 73.1-84.0%, respectively, given by the Yingguang period. However, management's outlook for 2H22 is far weaker than we expected. Management expects 2H22 goat milk powder to maintain double-digit growth, while milk powder will only return to single-digit growth, and overall revenue will reach low double-digit growth. At the same time, management predicts that 2H22 gross margin and sales expenses will be the same month-on-month, which means that both gross margin and sales expenses ratio have declined year over year. 2H22 net profit margin was basically the same year on year, and net profit increased by double digits year on year. Judging from the company's guidelines, gross margin will continue to be under pressure, and the company will have to maintain profit margin levels by cutting expenses.

We slightly lowered our 2022 E/23E/24E revenue forecast by 1.2%/1.4%/1.6%, respectively. Considering continued competitive pressure and continued pressure on profit margins in the second half of the year, we lowered the 2022/E/23E/24E net profit forecast by 22.6%/21.1%/22.4%, respectively. Based on 11x 2023E P/E, our target price remained unchanged at HK$6.9, with a potential share price increase of 9.4%.