For the first time, coverage gave a “hold” rating, with a target price of HK$5.6
For the first time, we covered Ausu Dairy (Ausu) and gave it a “hold” rating. Although we value Ausu's leading position in the goat milk powder industry and believe that after Ausu is acquired by Erie (600887 CH), cost control and operational efficiency will have an opportunity to improve, we believe it may take some time and effort for Ausu milk powder to recover. After adjusting for non-recurring expenses such as inventory impairment preparations, hedging losses, accounts receivable impairment, and merger and acquisition costs, we expect the company's adjusted basic EPS forecast for 2022-24 to be RMB 0.46/0.55/0.63 yuan, corresponding year-on-year growth rates of -37%/+19%/+16%, respectively. Our target price of HK$5.6 is based on 9.6 times PE and a 12-month dynamic adjusted basic EPS forecast of RMB 0.52. The target PE is 1 standard deviation lower than the average historical PE in Australia to reflect the unfavorable situation in the market.
The company's current stock price is based on 10.3 times 12-month dynamic PE, a 7% premium over our target PE.
The leader in goat milk powder in China
We believe that as consumption upgrades and consumers' awareness of goat milk powder continues to rise, the growth of the domestic goat milk powder market will continue to lead the overall infant formula (infant formula) market growth. At the same time, as a leader in the goat milk powder industry, Ausu has established its Jabeyite as the leading goat milk powder brand in China.
Ausu may benefit from the synergistic effects of Erie's acquisition
Following a partial acquisition by Erie in March 2022, Ausu consolidated its position as a leader in domestic goat milk powder, while also further strengthening its position among high-end imported milk powders (Erie focuses on domestically produced milk powder). We expect Ausu to strengthen cooperation with Erie in channel expansion and maintenance, and also enjoy the cost advantages of purchasing from Erie.
The milk powder race track is fiercely competitive
Ausu's milk powder brands Hypnokai and Nengliduo are famous for having originated in the Netherlands. Together, the two brands accounted for 3.0% of the domestic infant formula market share in 2021, lagging behind leading international brands Nestle (11.5%) and Danone (10.1%). In the face of fierce competition in the milk powder market, we anticipate that the two milk powder brands Hypnocke and Liangduo may increase marketing and customer acquisition expenses. We are cautious about the recent sales growth prospects of the Ausu milk powder brand.
We expect the adjusted net profit CAGR for 2022-2024 to be -3.2%. We expect the company's adjusted net profit to drop 36% year on year in 2022, mainly due to drastic channel de-inventory and increased competition, which may lead to an increase in sales channel expenses. We expect the company's adjusted net profit to rebound 22%/16% year on year in 2023/2024, corresponding to the predicted compound annual growth rate (CAGR) of -3.2% for 2022-2024. Our adjusted net profit forecast is 8%/9%/7% lower than Bloomberg's unanimous forecast, reflecting our more cautious assumptions about the growth rate of the infant formula market and our concerns that market competition will increase or put pressure on the company's profit margin recovery.
Risk warning: The number of newborns in China is declining, competition in the goat milk powder market is intensifying, unfavorable changes in foreign exchange rates, food safety issues, and the milk powder business is recovering.