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China / Hong Kong Industry Focus
China Dairy Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity
Awakening of the rising giants
24 July 2015
HSI: 25,399
•
Dairy demand should continue to outperform the F&B
sector on favourable consumption trends in the
medium term
•
Prefer downstream dairy giants over upstream players;
cautious on infant milk formula plays on pricing
pressure concerns
Alison Fok +852 2971 1938
[email protected]
•
Stock picks: China Mengniu and Bright Dairy
Recommendation & valuation
Expect dairy to outperform overall F&B sector. Despite
near term challenges, dairy demand should continue to
outstrip most other F&B segments, on consumption upgrades
and continuing shift towards products with healthy
proposition. But the change in competitive landscape (as more
global players get in), as well as shift in distribution channels
(in particularly e-commerce) and supply dynamics (local
production vs imported raw milk sources) would have different
implications on different players along the dairy supply chain.
Prefer downstream; pricing pressure for infant formula
and upstream. We are more positive on downstream dairy
players, in particularly market leaders such as Mengniu and Yili.
A segment where market concentration is the highest along
the chain, we expect leaders will continue to gain market
share given their dominant presence, strong product
innovation ability and ASP flexibility. We are cautious however,
on the infant milk formula market which remains very
fragmented in China with downward pricing pressure going
forward. As for upstream dairy farms, their near-term
profitability would undoubtedly be affected by the sharp
decline in raw milk prices since last year, but in the longer run,
major players in the field should still have room for market
share gains as industry consolidation continues.
Top picks – China Mengniu and Bright Dairy. We maintain
our BUY rating on China Mengniu as we expect the company
to record consistent earnings growth with its JV with Danone
providing a new earnings driver in the medium to longer term.
We initiate coverage on Bright Dairy with BUY given its strong
foothold in East China with room for further earnings upside
as scale ramps up and impact from its acquisitions kick in. In
the longer run, the increasing popularity of pasteurised milk
would make Bright Dairy a key beneficiary. While we are
cautious on the near term earnings outlook for upstream
farms, we maintain our BUY rating on China Modern Dairy as
current valuation should have already priced in the weaker
outlook, with the company remaining as a key beneficiary of
market consolidation.
www.dbsvickers.com
ed- JS / sa- CW
ANALYST
Alice HUI CFA, +852 2971 1960
[email protected]
Pric e T arget Upside Rec F Y 16
Mkt
Local$
Pric e
%
PE (x )
Cap
Local$
US$bn
Bright Dairy 'A'
(600597 CH)
CNY
18.08
19.70
9
Buy
25.2
3.6
China Mengniu Dairy
(2319 HK)
HKD
38.35
47.10
23
Buy
19.6
9.7
China Modern Dairy
(1117 HK)
HKD
2.53
3.35
32
Buy
9.1
1.7
Yashili International^
(1230 HK)
HKD
2.27
n.a.
n.a.
NR 18.8
1.4
Inner Mongolia Yili
'A'^ (600887 CH)
CNY
18.63
n.a.
n.a.
NR 17.7
18.4
Biostime International^
HKD
(1112 HK)
21.60
n.a.
n.a.
NR 11.3
1.7
China Huishan Dairy#^
HKD
(6863 HK)
2.17
n.a.
n.a.
NR 16.1
4.0
^ Consensus
# FY16: FY17
Source: Thomson Reuters, DBS Vickers
Industry Focus
China Dairy Sector
Table of Contents
Dairy growth to outperform overall F&B sector
3 Liquid milk and milk beverages – product upgrades are keys
5 Upstream dairy farms – Margin pressure from raw milk price decline
10 Infant formula – plagued by price wars and channel evolution
14 Stock recommendation
18 Stock Profiles
22 Bright Dairy & Food (600597 CH)
22 China Mengniu Dairy (2319 HK)
42 China Modern Dairy (1117 HK)
48 Yashili International (1230 HK)
54 Inner Mongolia Yili (600887 CH)
58 Biostime International (1112 HK)
62 China Huishan Dairy (6863 HK)
66 Appendix
70 PE & PB band charts
78 Page 2
Industry Focus
China Dairy Sector
attractive in the F&B universe, helped by the following key
drivers:
Dairy growth to outperform overall F&B sector
While the dairy sector has not been immune to the overall
slowdown seen in the China consumption market facing most
F&B players in general, the sector’s growth has nonetheless
displayed stronger momentum than most. The
outperformance has also been apparent for listed dairy
companies, which saw higher growth in general against players
in other sectors.
Dairy sector growth vs. other F&B beverages – 2014
(i) Still room to grow on consumption per capita
Despite the strong growth in the past with China already
becoming the third largest market for dairy products, China’s
per capita consumption remains well below the global average.
Even compared with other Asian countries with more similar
dietary preferences (such as Taiwan, where per capita
consumption of milk is c.40% higher than in China), China’s
current level still represents abundant room for growth.
Milk - Per capita consumption (2014)
Juice
Carbonates
kg per capita
120
RTD tea
110
109
100
Bottled water
90
80
Drinking milk
60
Sports drinks
40
Yogurt
31
15
20
-10%
0%
10%
20%
30%
Source: Euromonitor, DBS Vickers
0
Australia
2014 sales growth – key F&B players
11
United
New
Zealand States
Japan
Taiwan
China
Source: ilat.il, DBS Vickers
(ii) Continual urbanisation
Tingyi
One driver to boost demand growth ahead would be China’s
urbanisation. Although there has been significant growth in
consumption of dairy products in rural areas in the past few
years, the gap between rural and urban consumption remains
large. As China’s urbanisation continues, this would further
increase demand for dairy products.
UPC
Want Want
China Foods
Tsingtao Brewery
Yili
Mengniu
Bright
CMD
(20)
0
20
40
60
Source: Company data, DBS Vickers
We are positive on the dairy sector in the medium to long run,
with overall sector growth expected to remain one of the most
Page 3
Industry Focus
China Dairy Sector
consumers are becoming more sophisticated and demanding
more varieties of dairy products with higher focus on quality.
As a response, the dairy companies have come up with higher
value-added and premium products, which have been well
received by consumers.
Dairy consumption – urban vs. rural
RMB
350
300
234
198.5
91.7
200
150
0
100
2009
2010
2011
2012
Urban
2013
2014
Rural
50
0
Source: Frost & Sullivan, DBS Vickers
(iii)
China consumer’s changing appetite
While not a traditional diet for Chinese, dairy consumption has
been rising on government support and shifting of food
consumption patterns as incomes rise. As consumers are now
more health conscious, the strong nutritional value of dairy
products perceived by most is also one reason for rising
popularity of dairy products.
Chinese consumption patterns trends
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
3%
11%
3%
10%
4%
11%
10%
3%
10%
14%
4%
14%
17%
63%
1991
Grain
Meats
54%
2001
Produce
Sugar & Fat
6%
15%
47%
2011
Dairy & Eggs
Others
Source: National Geographics, DBS Vickers
(iv)
Consumption upgrading
Another trend which is becoming more prominent is trading
up by consumers. Instead of consuming just plain UHT milk,
Page 4
76
81
88
97
106
115
125
38
43
47
24
32
27
30
34
36
41
46
52
57
64
2018E
50
2017E
91.3
RMB bn
250
2016E
100
120.5
179.4
160.2
2015E
150
144.3
2014
196.1
2013
200
Consumption of dairy products by type – trend
2012
250
292.6
272.9
253.6
Yogurt
Fresh milk
UHT milk
Source: Frost & Sullivan, DBS Vickers
While the overall outlook for the dairy sector remains positive
in the medium to longer run, there are also many challenges
facing the industry, including the sharp volatility of raw milk
prices in the past 1-2 years, the significant change in
distribution channels and the intensifying competition from
both domestic and global plays. Meanwhile, heightened food
safety concerns means the Chinese government would also be
more incentivised to encourage market consolidation.
Against this backdrop, not all players will be able to benefit
from the growth trend. In our view, liquid milk and milk
beverage players should see the best potential on margin
expansion, while upstream and infant formula players may see
more pricing pressure down the road.
Industry Focus
China Dairy Sector
Liquid milk and milk beverages – product upgrades are
keys
Relatively high market concentration with leaders
dominating…
Among the three dairy segments that we covered in this report,
downstream liquid milk and beverage segment has the highest
market concentration. The top three players, Mengniu, Yili
and Bright Dairy account for over 42% share in the liquid milk
market in China. Despite this, compared with other F&B
segments, the concentration is not particularly high, indicating
there is room for leaders to grow market shares further.
Dairy - Market shares of top players
Wahaha
5%
Bright
7%
Nestlé SA Hebei
4% Yangyuan
Zhihui
4%
Want Want
4%
Coca-Cola
Co, The
2%
Beijing San
Yuan
2%
Yili
18%
… but there is still abundant room for market share gains
With already a strong lead over its smaller players, leading
players like Mengniu and Yili should continue to gain market
shares given their strong scale, established supply chain and
extensive market penetration. In fact, their combined market
share has been growing in the past few years, with the trend
likely to continue.
Market share trend
%
50
45
40
35
30
25
20
15
10
5
0
4.1
14.2
5.2
14.4
5.1
5.5
5.7
6.3
7.1
16.2
18.1
17.9
17.8
18.3
15.8
18.8
19.7
18
18.2
18.7
18.9
2006
2008
2010
2012
2013
2014
2015
Mengniu
Yili
Bright Dairy
Source: Euromonitor, DBS Vickers
Mengniu
Dairy
19%
Others
35%
Source: Euromonitor, DBS Vickers
Market share: Top 3 players vs. other sectors
%
100
90
80
70
60
50
40
30
20
10
0
2.3
29
10.8
13.2
63.3
39.4
1
14
13.6
18.4
16.8
18.3
23.2
23.3
18.9
2
7.1
3
Source: Euromonitor, DBS Vickers
Page 5
Industry Focus
China Dairy Sector
Intense competition at the mass-end, yet a necessity
Growth to be driven by new products…
While we expect top players to maintain their leading positions
in the UHT plain milk category, the real growth drivers should
come from new and value-added products or new categories.
The mass market UHT plain milk category, although still a big
component of dairy sales, is already a commoditised market
where even key players are not having much pricing power.
This is also a market where we see increasing, and viable,
competition coming from imported UHT milk through the ecommerce channel.
To tackle this, domestic leaders have been increasingly focusing
on newer and valued-added products. Following the success
of Mengniu’s Milk Deluxe, which created a whole new
premium milk market in China (market size now estimated at
c.Rmb35bn), the good market reception of UHT yogurt, first
launched by Bright Dairy in 2010, is another such example.
%
25
China UHT milk imports
%
250
20,000
10
100
15,000
50
10,000
10
12
11
11
13
5
0
Fresh milk
O rigin
Dev ondale
New Zealand
Siz e (x no) Pric e Pric e/ml
ML
RM B
RM B
200 x 24
79.0
0.016
A nc hor
Australia
250 x 24
94.0
0.016
Weidendor
Germany
200 x 30
79.0
0.013
O ldenburger
Germany
200 x 24
69.9
0.015
M eadow F resh
New Zealand
250 x 24
69.9
0.012
0.014
Premium loc al UHT milk
M engniu - Milk Deluxe
250 x 12
52.5
0.018
Bright Dairy - U+
250 x 12
39.8
0.013
Y ili - Satine
240 x 12
50.6
0.018
China M odern Dairy - Modern F arming
250 x 12
42.8
0.014
New Hope - Hobuxun
250 x 12
39.0
0.013
0.015
Source: YHD.com, DBS Vickers
2015
2014
2013
2012
… an area where domestic players have clear advantages
UHT milk pricing comparison: local brands vs imported
brands
Name
2011
Source: Euromonitor, DBS Vickers
% yoy
Source: WIND, DBS Vickers
Int ernat ional
2008
0
(50)
2007
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
5,000
Page 6
18
15
150
25,000
23
15
200
30,000
22
20
2010
35,000
Launch of
Momchilovtsi
2009
MT
40,000
0
Bright Dairy – market share in yogurt had double since
launch of UHT yogurt Momchilovtsi
For the downstream liquid milk and dairy beverages market,
we expect new products would be the key to drive growth, as
well as margins. Domestic brands, given their better
understanding of consumer tastes and preferences, are in
stronger positions compared to their international peers. This,
coupled with their extensive distribution network, should
continue to give domestic leaders some competitive
advantages in launching new products and categories.
Room for margin expansion
We expect launch of new premium products to remain the key
focus for most domestic players. The resultant improvement
in product mix, coupled with lower raw milk costs, bodes well
for margins going forward. Currently, operating margins for
the three major domestic players range between 2-6%, below
international peer (Danone at 10% in FY14), partly on
differences in product mix.
Industry Focus
China Dairy Sector
Breakdown of current dairy retail sales %
China raw milk cost
RMB/kg
4.50
Milk - UHT
28%
4.00
Powder
Milk
5%
Yoghurt
and Sour
Milk Drinks
26%
3.50
Other
Dairy
1%
Cheese
1%
3.00
Jul-15
Mar-15
Jul-14
Nov-14
Mar-14
Jul-13
Nov-13
Mar-13
Jul-12
Nov-12
Mar-12
Jul-11
Nov-11
Jul-10
Nov-10
2.00
Mar-11
2.50
Milk Fresh
8%
Flavoured
Milk Drinks
31%
Source: CEIC, DBS Vickers
Source: Euromonitor, DBS Vickers
Operating margins – Mengniu, Yili, Bright Dairy
Given that production of fresh dairy products such as
pasteurized milk would require support of consistent local
source of quality raw milk, this would provide domestic dairy
leaders some competitive advantages over their global peers
given their established raw milk supply locally. Bright Dairy,
with a long operating history in pasteurized milk
manufacturing, is the leader in this market. Its pending
acquisition of Tnuva Food, which is well-known for its cottage
cheese products in Israel, could also provide some advantages
to Bright in expanding its product line to niche category such
as cheese.
%
9
8
7
6
5
4
3
2
1
0
2010
2011
Mengniu
2012
2013
Bright
2014
Yili
Source: CEIC, DBS Vickers
Is fresh the next big trend?
Pasteurised milk definitely has strong potential and despite
good growth in the past few years; it still represents a relatively
small portion of overall dairy consumption. As consumers
continue to trade up, together with continual development of
the cold chain infrastructure in China, pasteurized milk, as well
as other “fresh” products (such as cheese and butter), should
see further penetration into China. In fact, Mengniu has been
increasingly active in pursuing the refrigerated product
category through its JV with Danone.
Page 7
Industry Focus
China Dairy Sector
Key financials
Sales
Mengniu
Bright
Yili
Sales grow t h (% )
Mengniu
Bright
Yili
Av erage
G ross margin (% )
Mengniu
Bright
Yili
Av erage
O perat ing margin (%)
Mengniu
Bright
Yili
Av erage
Net prof it (RM B m)
Mengniu
Bright
Yili
Net margin (% )
Mengniu
Bright
Yili
Av erage
Net c ash (debt ) (RM B m)
Mengniu
Bright
Yili
CA PEX (RM B m)
Mengniu
Yili
Bright
O perat ing c ash f low (RM B m)
Mengniu
Yili
Bright
Source: Company data, DBS Vickers
Page 8
2010
2011
2012
2013
2014
30,265
9,572
29,665
37,388
11,789
37,451
36,080
13,775
41,991
43,357
16,290
47,779
50,049
20,385
54,436
17.7
20.5
22.0
19.9
23.5
23.2
26.2
24.6
-3.5
16.8
12.1
6.0
20.2
18.3
13.8
17.0
15.4
25.1
13.9
16.2
25.7
34.0
30.0
28.7
25.7
32.9
28.7
27.9
25.1
34.6
29.1
28.4
27.0
34.2
28.2
28.6
30.8
34.2
32.8
32.2
4.8
2.2
1.9
3.0
5.1
1.7
4.4
3.7
4.1
2.6
4.1
3.6
4.3
3.8
5.5
4.5
5.3
3.9
8.3
5.9
1,237
194
777
1,589
238
1,809
1,257
311
1,717
1,631
406
3,187
2,351
568
4,144
4.1
2.0
2.6
3.2
4.3
2.0
4.8
4.2
3.5
2.3
4.1
3.6
3.8
2.5
6.7
4.9
4.7
2.8
7.6
5.7
5,707
1,319
734
6,099
584
314
6,264
929
(366)
5,416
(578)
838
(4,034)
4,087
1,314
(1,084)
(1,987)
(343)
(2,293)
(3,789)
(977)
(1,960)
(3,102)
(1,091)
(2,867)
(3,241)
(1,195)
(2,931)
(3,946)
(1,796)
2,485
1,475
534
2,520
3,670
89
2,007
2,409
1,242
3,284
5,475
1,305
3,080
2,436
336
Industry Focus
China Dairy Sector
Mengniu – FY14 sales breakdown (%)
Ice cream
6%
Yili – sales FY14 breakdown (%)
Other dairy
products
1%
UHT milk
51%
Yogurt
16%
Milk
powder &
dairy
related
Ice-cream 11%
8%
Mixed feeds
1%
Liquid milk
78%
Milk
beverages
26%
Source: Company data, DBS Vickers
Source: Company data, DBS Vickers
Bright Dairy – FY14 sales breakdown (%)
Others
6%
Milk powder
and others
19%
Other liquid
milk
39%
Momchilovtsi
29%
Ubest
6%
Changyou
1%
Source: Company data, DBS Vickers
Page 9
Industry Focus
China Dairy Sector
What happened to raw milk prices?
One of the key concerns facing upstream dairy farms in the
past one year or so is the sharp decrease in raw milk prices.
Following the strong surge in 2013, raw milk prices in China
have fallen by c.20% from its peak in early 2014, alongside
with the volatility seen in the international price. Fonterra’s
WMP prices, a key benchmark of dairy prices, plunged c.60%
during the same period, on increased supply from EU as well as
weaker demand from China due to overstocking of milk
powder.
Imported milk powder prices versus China raw milk
price*
%
200
150
100
50
0
(50)
Milk powder
(100)
% yoy
As such, we expect raw milk prices to remain at a low level for
most of 2015, with full year average estimated to record a
20% decline y-o-y. In 2016, we believe dairy prices may start
to normalise as excess inventory of milk powder in China
should have been largely exhausted.
May/15
Jul/14
Dec/14
Feb/14
Sep/13
Apr/13
Nov/12
Jan/12
Jun/12
Aug/11
Mar/11
Oct/10
May/10
Was there an over-supply of raw milk in China?
Fonterra raw milk (RMB/kg)
China raw milk (RMB/kg)
Source: CEIC, DBS Vickers
*imported milk powder inclusive of VAT, import tax & transportation
cost est. & milk powder to raw milk conversion ratio of 1:9
While China raw milk prices appear to have stabilised in recent
months, international prices remain weak with the latest
Fonterra auction in July seeing another c.10% decline in WMP.
The price weakness, coupled with the sharp decline in milk
powder imports, indicate that there is still excess milk powder
inventory held by industry players. Based on USDA’s earlier
projection of 300,000 tonnes of stocks that were carried over
from 2014, the excess inventory may not be fully digested until
towards the end of 2015. This would likely cap any potential
upside in raw milk prices in the near term.
Page 10
MT
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Source: CEIC, DBS Vickers
Dec/09
Jul/09
RMB/kg
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
China’s milk powder imports
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Upstream dairy farms – Margin pressure from raw milk
price decline
Despite strong growth in production capacity from major dairy
farms during the past few years, China’s milk demand remains
well above domestic supply. But the supply gap has been
easily filled by imported milk powder, especially considering the
abundant supply overseas as well as pricing differences
(Fonterra’s WMP prices are at a 47% discount to China prices).
Industry Focus
China Dairy Sector
Dairy farms distribution in China (based on herd size)
Estimated supply gap in China
100%
m tonnes
80
90%
70
60
49
50
40
35.3
52.3
37.3
54.8
13.7
15
70%
10%
13%
60%
15%
19%
10%
11%
17%
24%
50%
37.7
30
20
58.6
69
63.7
80%
10%
17.1
38.5
20.1
39.6
24.1
40.8
28.2
40%
30%
67%
59%
47%
20%
10%
0%
10
2009
0
2013
2014
2015E
2016E
Supply
Demand
2017E
Gap
2018E
Source: Euromonitor, DBS Vickers
We expect dairy demand in China will continue to be satisfied
by a mix of both domestic and imported products. As such,
local raw milk prices, to a certain extent, would still be highly
affected by prices of imported milk powder. Despite this,
domestic prices are likely to remain at a premium over
international prices (given cost differences). And we do not
expect imports to replace domestic raw milk production, as (i)
there are products, such as those labeled as pure milk and
pasteurised milk, which can only be produced from raw milk,
and not milk powder; (ii) it is in the downstream producers’
interest to have a steady source of local raw milk to ensure a
consistent supply; (iii) following the melamine incident in 2008,
the government is encouraging the development of an
integrated dairy supply chain, which is a necessity in order to
ensure food safety.
2014
2018E
<100 heads
500-999 heads
100-499 heads
>1000 heads
Source: MoA, Frost & Sullivan, DBS Vickers
Major dairy farms in China & respective market share
Companies
China Modern Dairy
Huishan Dairy
Shengmu
J apfa
Bright Dairy -related
F ontera
YST Dairy
No. c ow s
201,507
180,331
103,252
57,000
50,000
49,000
44,623
%
1.4%
1.2%
0.7%
0.4%
0.3%
0.3%
0.3%
21,433
0.1%
707,146
14.5m
4.9%
Zhongdi Dairy
Top ten
A s of 2014 (China)
Source: Company data, CEIC, DBS Vickers
Large-scale farms to gain market share
Despite the fast development of big scale farms in the past few
years, which already represented 14.6% of total herd size in
China in 2014 (vs 10% in 2009), there should still be further
market consolidation as the market remains highly fragmented
and smaller and less efficient players will continue be phased
out.
Near term margin pressure remains
While we see further growth potential for big scale farms in
China, earnings outlook in the near term would nonetheless be
affected by the low raw milk prices. YTD, raw milk prices of
major farms such as CMD have declined by 8%, and are likely
to remain at a relatively low level in 2H15. This would take a
toll on margins, despite favourable feed costs and potential
yield improvement.
Page 11
Industry Focus
China Dairy Sector
Is funding a necessity?
We believe the upstream segment requires the most funding
compared to the other dairy segments. In terms of cash flow,
committed expansion in dairy farms as well as cultivation of
milkable cows have consistently hampered companies’ free
cash flow generation. Hence, developing downstream
operations will be necessary to support cash flow and any
potential dividend payouts. CMD should see the most
improvement in its net gearing, having recently done a new
share placement as well as having less capex commitment with
a more mature herd size to grow organically.
Net gearing (%)
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
2012/13
Huishan
2013/14
YST
2014/15
CMD
Source: CEIC, DBS Vickers
In summary, we believe the raw milk price decline remains the
biggest concern for dairy farmers in the near term, with earnings
expected to take a hit in FY15. However, with the possibility of
dairy prices bottoming out in 2016 and continual gain in market
shares as smaller players phase out, we expect large scale farmers
like China Modern Dairy to see some recovery in earnings in
FY16.
Page 12
Industry Focus
China Dairy Sector
Upstream sector - Peer comparison
Consolidat ed sales (RM B m)
China Modern Dairy
Huishan Dairy
YST Dairy
Upst ream sales (RM B m)
China Modern Dairy
Huishan Dairy
YST Dairy
Upst ream as % of t ot al
China Modern Dairy
Huishan Dairy
YST Dairy
Dow nst ream sales (RM B m)
China Modern Dairy
Huishan Dairy
YST Dairy
G ross margin (%) - c onsolidat ed
China Modern Dairy
Huishan Dairy
YST Dairy
Gross margin (%) - upst ream
China Modern Dairy
Huishan Dairy
YST Dairy
Herd siz e
China Modern Dairy
Huishan Dairy
YST Dairy
M ilk able c ow s % of t ot al
China Modern Dairy
Huishan Dairy
YST Dairy
Sales v olume (t onne/annum)
China Modern Dairy
Huishan Dairy
YST Dairy
Raw milk A SP (c onso)
China Modern Dairy
Huishan Dairy
YST Dairy
M ilk y ield (t onne/annum)
China Modern Dairy
Huishan Dairy
YST Dairy
2011
2012
2013
2014
1,392
1,333
149
2,040
2,552
689
3,289
3,530
881
5,027
3,923
1,163
1,384
1,143
149
1,978
1,825
689
2,968
1,240
881
4,194
1,491
1,163
99
86
100
97
72
100
90
35
100
83
38
100
7
190
0
62
727
0
321
2,290
0
833
2,432
0
20.0
38.4
34.5
22.0
54.0
37.8
25.0
65.5
42.6
16.4
61.9
45.7
31%
49%
35%
32%
59%
38%
40%
62%
43%
41%
60%
46%
128,759
90,254
32,219
176,264
112,851
37,000
186,838
144,191
40,396
201,507
180,331
44,623
42
35
46
44
44
56
53
43
53
53
41
58
366,656
213,920
35,722
496,979
352,411
168,070
679,722
482,428
183,702
931,334
577,071
230,121
3.8
4.5
4.2
3.9
4.5
4.1
4.8
5.0
4.8
5.0
4.9
5.1
7.8
8.6
9.2
7.9
9.1
8.9
8.5
9.0
9.0
8.9
9.1
9.4
Source: Company data, DBS Vickers
Page 13
Industry Focus
China Dairy Sector
Infant formula – plagued by price wars and channel
evolution
120%
A battlefield for all
Among the various segments in the dairy supply chain, infant
formula commands the highest margins, but also attracts the
strongest competition from both domestic and global players.
We expect price competition will continue to intensify in this
segment, due to the following:
(i)
Top 3 players market share – China vs. overseas
Low market concentration. The infant formula market
in China is relatively fragmented. The top three players
command only 33% of the market whereas in
developed markets, the top three typically account for
75%+ of the market. This suggests that there is lots of
room for market consolidation. In fact, it is also the
government’s intention to consolidate the market by
encouraging M&A activities.
100%
80%
Friesland
6%
Yili
6%
Beingmate
7% Danone
8%
Mead
Johnson
9%
India
Mead Johnson
Heinz
8%
9%
14%
China
Abbott
Beingmate
Source: Coriolis, DBS Vickers
Others
33%
Biostime
5%
12%
Nestle
Danone
American
Dairy
Abbott 3%
4%
Mengniu
5%
74%
48%
New Zealand Philippines
(ii)
China infant formula – market share
64%
20%
0%
6%
3%
43%
60%
40%
4%
20%
Nestle
14%
High ASP risk imminent. Infant formula products in
China are in general commanding on average a 30% 90% premium over the same product overseas. It is
also one of few IMF markets where a premium segment,
in which products are selling at more than double the
mass market products, exists. Price promotions have
been more aggressive in recent months, partly a result
of certain brands preparing for product upgrades. We
expect aggressive promotions and price cuts to
continue across all segments, helped by highly
favourable raw material costs.
Going forward, we expect the infant formula category
to transform into a two tier structure – the first as
locally manufactured & locally manufactured with
imported sources targeting mass market, and the
second as imported packaging focusing on a more
premium segment. The price difference between the
two tiers is likely to narrow in due course.
Source: Euromonitor, DBS Vickers
IMF product – price comparison
B ased B ran d
F rance
UK
UK
USA
USA
Aptamil
Cow & Gate
F riso
Wy eth
Abbott/ Similac
V o l (g )
R M B p ric e
O v erseas Ch in a
900
900
900
900
900
Source: Tesco UK, JD.com, DBS Vickers
Page 14
115.4
101.0
173.2
150.2
92.1
149.0
179.0
255.0
186.0
175.0
Premiu m
(% )
29%
77%
47%
24%
90%
Industry Focus
China Dairy Sector
(iii)
Rapid changes in distribution dynamics. It is well
known that the infant formula segment is experiencing EBIT margins (%)
a more significant shift in distribution channel from the
40.0 traditional ones to baby stores and e-commerce than
35.0 any other F&B products. The online platform, in
particular, offers improved price transparency and also
30.0 increases competition as it provides a formalised low25.0 cost platform for any brand to enter into China.
20.0 International competitors along with domestic players
are facing the same issues at the moment. For example, 15.0 Mead Johnson traditionally enjoyed a dominant market 10.0 share in Hong Kong, a significant infant formula
5.0 distribution channel particularly in South China, and
0.0 now also faces a significant number of online
2012
2013
competitors. The pilot roll-out of free trade zones and
Mead Johnson
Biostime Yashili O2O shopping centres recently is likely further fuel
potential online competition.
Source: Company data, DBS Vickers
IMF – distribution channels
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1.88
3.42
24.62
25.08
73.5
2010
7.17
9.9
11.7
25.63
26
26.2
67.2
64.1
62.1
71.5
2011
Modern channels
Internet retailing
2012
2013
2014
Traditional channels
Source: CEIC, DBS Vickers
As such, we expect a continual pressure on product pricing, and
hence further margin pressure going forward. In fact, EBIT
margins have declined across the board for both domestic and
global players in 2014. To drive growth, infant formula players
would have to rely more on volume and product mix.
2014
Beingmate
Unlikely to stop players from competing. Despite falling ASPs,
domestic players are unlikely to give up on this segment as IMF
sector margins remain well above other dairy segments. Infant
formula capacity expansion is ongoing with Yili partnering with
one of the largest global processors, Dairy Farmers of America,
and Yashili’s expanding capacity with recent commencement
of New Zealand plant.
Demand – both good and bad
The good – One catalyst for the infant formula demand in
China would be the potential relaxation of the one-child
policy. With China’s fertility rate fallen to a low 1.5x, versus
Japan’s 1.4x and India’s 2.5, and the replacement rate of 2.1x,
there is obviously strong urgency for policy relaxation. In fact,
some local media has reported recently that China may do so
by the end of the year, allowing couples to have a second
child.
Last time when there was a change in the one-child policy was
back in late 2013, when the government relaxed the rules and
allows couples to have a second child if one of them is an only
child.
While a policy relaxation is positive, we believe it is unlikely to
cause a sharp surge in birth rates and the impact would likely
to be gradual. For example, following the relaxation in 2013,
new births in 2014 rose only mildly by 3%. There were only
on average 80-90k couples applying for second birth
applications every month since the relaxation, with total
application representing less than 10% of total eligible. As
economy expands, there are also more cost concerns on raising
a second child in China.
Page 15
Industry Focus
China Dairy Sector
The bad – Apart from a slower economy, China’s State Council
aims to raise the breast feeding rate, targeting 50% by 2020
from less than one-third at the moment. This could potentially
dampen demand growth stemming from new births and
income growth. There is also recent news that China is
considering a ban on advertisements for infant formula, a
move which illustrates the government’s intention to promote
breastfeeding.
Birth rates
(%)
12.50
12.40
12.30
12.20
12.10
Cautious outlook, but M&A possibilities exist
12.00
11.90
11.80
11.70
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
11.60
Source: CEIC, DBS Vickers
Based on the above, we are cautious on the IMF market, as we
believe in terms of price competition, it is likely to be the most
intense along the dairy supply chain. At the same time,
however, there are lots of M&A and partnership opportunities.
International players have been actively seeking local
partnerships to strengthen their market position. For example,
Danone entered as a strategic shareholder of Yashili in early
2015 with a 25% stake, while Fonterra now holds an 18.8%
stake in Beingmate.
Overseas partnerships
D at e*
F eb-15
D o mes t ic
Yashili
(1230 HK)
St ak e
Paid
(% )
25%
HK$3.70/share
Danone
or HK$4.4bn
Beingsmate
RMB18/share
Mar-15
18.80%
(0002570:CH)
or RMB3.5bn
A pr-15
Huishan Dairy
(6863 HK)
* date of completion
Source: CEIC, DBS Vickers
Page 16
n.a
In t ' l
p lay er
F onterra
RMB692m for
F riesland
a 50% J V
Campina
stake
D esc rip t io n
Ex is t in g b ran d s
o w n ed b y in t ' l p lay er
Intends to use Yashili as an infant formula
product segment arm; Mengniu may inject
its existing infant formula business into
Yashili in future. In addition, Yashili and
Mengniu w ill study the possibility of
inv esting in Dumex China.
Dumex, Nutrilon, A ptamil
With intention to raise to 20% equity
stake; establish J V to purchase Darnum
plant in A ustralia, and exclusiv e distribution
agreement for F onterras A nnum in China
A nnum
Includes a purchased plant in Xiushui plant
near Sheny ang. The Companies w ill be
running their existing infant-related
Dutch Lady , F oremost,
businesses separately - meaning Huishan w ill F risian F lag, Peak, F riso
market its ow n brands, w hile F riesland's
F riso w ill be independent as w ell.
Industry Focus
China Dairy Sector
Infant formula - Peer comparison
Sales (RM B m)
Yashili
Biostime
Beingmate
Sales t urnov er (y - o- y %)
Yashili
Biostime
Beingmate
Gross margin (%)
Yashili
Biostime
Beingmate
SG &A of sales (% )
Yashili
Biostime
Beingmate
Operat ing margin (%)
Yashili
Biostime
Beingmate
Pret ax margin (%)
Yashili
Biostime
Beingmate
Net margin (%)
Yashili
Biostime
Beingmate
Net c ash (debt ) (RM B m)
Yashili
Biostime
Beingmate
Operat ing c ash f low (RM B m)
Yashili
Biostime
Beingmate
2010
2011
2012
2013
2014
2,954
1,234
4,028
2,958
2,189
4,727
3,655
3,382
5,354
3,890
4,561
6,117
2,816
4,732
5,049
14.2
120.7
24.1
0.1
77.5
17.3
23.6
54.5
13.3
6.4
34.9
14.2
(27.6)
3.7
(17.5)
56.9
71.1
61.4
52.0
66.5
62.9
53.7
65.9
63.3
53.5
65.2
60.2
51.3
61.9
52.7
38.6
43.5
46.7
42.2
36.1
51.3
39.0
35.3
49.8
41.5
37.1
45.5
46.2
37.3
51.0
20.0
27.1
14.4
10.6
32.6
11.5
15.3
31.1
13.5
12.4
25.7
14.5
9.1
25.5
1.4
20.0
27.1
13.6
12.7
32.6
12.5
17.7
31.1
13.5
14.8
25.5
15.7
11.0
23.7
2.1
17.0
21.5
10.5
10.4
24.1
9.2
12.8
22.0
9.5
11.2
18.0
11.8
8.8
17.1
1.4
2,643
1,728
(177)
2,623
1,974
1,777
2,654
2,341
2,197
410
1,767
1,514
37
2,083
558
313
381
250
458
516
420
772
947
1,009
141
660
210
264
972
(188)
Source: Company data, DBS Vickers
Page 17
Industry Focus
China Dairy Sector
Stock recommendation
To conclude, our preferences in the dairy industry chain are the
downstream dairy giants. Amid competition, we expect their
strong market dominance, extensive distribution and product
innovation efficiency will enable them to gain further market
share and drive out smaller regional players. There is also room
for margin improvement as product mix improves, while raw
material costs remain generally favourable in the near term.
We maintain our BUY rating on Mengniu, and initiate coverage
on Bright Dairy with a BUY. Meanwhile, we believe Yili (Not
Rated) would also be a strong performer under this trend.
We are cautious on the infant milk formula sector, as we
expect price competition to intensify, which coupled with the
shift in distribution channel will put pressure on margins. We
expect the high-end market will continue to be dominated by
global brands but there could be potential for domestic players
at the mass market end.
As for the upstream dairy farms, the key concern would be on
raw milk prices which dictate profitability. But in the longer
run, we continue to see market consolidation potential for
major farms, with growth expected to be more driven by top
line. Despite weakness in near-term earnings, we maintain
BUY on China Modern Dairy on possible bottoming out of milk
prices towards the year end and on valuation ground.
Bright Dairy (600597: CH, Buy). We like Bright Dairy for its
solid positioning as the market leader in Shanghai. As of endFY14, it also has a dominant market share in pasteurised milk
(53%) and low-temperature yogurt (31%) nationwide, which
suggests some immunity from rising competition in the UHT
dairy segment. Although Bright Dairy’s profitability and
operating efficiency lags behind peers Mengniu and Yili, we
believe its’ product mix, coupled with expanding distribution
network will help margins to catch up over the medium run. In
addition, the pending acquisition of Israel’s Tnuva Foods via a
new share placement should help transform Bright Dairy as an
integrated dairy player with a solid overseas footprint. However,
it will take time for benefits from restructuring and integration
to materialize. Bright Dairy offers the highest earnings CAGR of
25% among its peers. Initiating coverage with BUY, TP at
Rmb19.7/sh, pegged to 27.5x FY16F PE, equivalent to 1.1x
PEG.
China Mengniu (2319: HK, Buy). Product mix upgrades
(yogurt and milk beverages) and margin expansion will be key
drivers to decent earnings growth in the next 1-2 years. We
expect China Mengniu to continue gaining market share with
Page 18
earnings expected to grow at 14.2% CAGR for FY14-16F. Its
JV with Danone, despite limited scale but growing fast, could
be a more significant driver in the medium term considering
the strong know-how of Danone and Mengniu’s strength in
branding and distribution. The stock is currently trading at 19x
FY16F PE, below its historical (24x) as well as sector average
valuation (25.5x). Our TP is now rolled over to HK$47.1 (Prev.
HK$45.8/sh), based on 24x FY16F PE. BUY.
Yili (600887: CH, NR). An even fiercer competitor than
Mengniu, Yili has consistently outperformed its peers through
improving product mix and strong operating efficiency. We
believe Yili will likely beat its own guidance of 12% and 15%
growth on FY15 sales and profit respectively, via stronger
contribution from high-margin products such as Satine, QQ
Star, Ambrosial and Chang Qing. Based on consensus
estimates, Yili trades at 17.7x FY16F PE, undemanding against
its peers.
China Modern Dairy (1117: HK, Buy). Weaker earnings in
FY15, a 17% decline under our estimates, should have been
largely priced in at the current valuation, with possible
resumption of earnings growth in FY16. In the medium term,
we believe leading upstream players should continue to benefit
from rising demand from downstream, in particular pasteurised
operations, as well as market consolidation. Our new TP is
HK$3.35 (Prev. HK$3.45ps), based on DCF valuation. BUY.
Yashili (1230: HK, NR). A leading domestic infant milk formula
manufacturer, Yashili holds a 5.4% market share in China as of
FY14. With the introduction of Mengniu and Danone as its
controlling and second largest shareholders respectively in the
past couple of years, Yashili is undergoing restructuring and
changes in strategy. While Yashili is unlikely to see a
turnaround in FY15, we expect Mengniu and Yashili’s potential
investment in Danone’s Dumex China, as well as opportunities
to leverage on Danone’s existing online platform, could be
potential re-rating catalysts. Valuation is at 18.8x FY16F PE
(based on consensus estimates), a premium to Biostime, owing
to distortion in earnings from the restructuring in addition to
heavy competition. However, with the backing of two giants,
Yashili will be a strong contender in the domestic market in the
long run.
Biostime (1112: HK, NR). Biostime is a major domestic infant
milk formula player in China with a 7.6% market share in FY14.
Since late 2014, Biostime has been clearing its old core-infant
formula inventory, paving the way for a re-launch of upgraded
products (new packaging) in Jul-15. There should also be
some margin benefits from lower raw material costs, partly
offset by higher marketing expenses associated with the
Industry Focus
China Dairy Sector
upgraded product launches. With rising competition and rapid
distribution channel changes within the infant formula sector,
Biostime’s product ASP faces the largest downside. Despite
relatively cheap valuation at 11x FY16F PE based on consensus
estimates, there is no re-rating catalyst in sight in the near term.
Huishan (6863: HK, NR). A vertically integrated dairy player,
Huishan’s key cost advantage is its ability to command lower
feed costs against peers, hence enjoying the strongest
upstream margins in China. However, Huishan’s FYMar15
profitability was still affected by the decline in raw milk prices
and weaker than expected downstream sales. It is yet to be
determined whether Huishan is able to successfully venture out
of NE China into East China, a strong foothold of Bright Dairy.
On a positive note, Huishan’s Chairman purchased c.427m
shares in the open market, in addition to Huishan’s own share
buyback of 338m since August-14, providing some support to
share price.
Peers valuation – Dairy Sector
Company Name
L iquid M ilk
China Mengniu Dairy *
Inner Mongolia Yili 'A'
Sany uan F oods 'A'
Huangshi Dairy 'A'
Bright Dairy 'A'*
A v erage
Currenc y
Pric e
Code
L oc al$
Mkt
Cap
US$m
PE
15F
x
PE
16F
x
Y ield
15F
%
Y ield
16F
%
P/Bk
15F
x
P/Bk
16F
x
RO E
15F
%
RO E
16F
%
11.9
26.4
1.6
13.0
15.2
13.6
12.3
27.7
1.1
15.0
17.8
14.8
2319 HK
600887 CH
600429 CH
002329 CH
600597 CH
HKD
CNY
CNY
CNY
CNY
38.35
18.63
10.44
69.48
18.08
9,705
18,383
2,517
2,980
3,581
22.3
22.6
261.0
143.3
31.4
96.1
19.6
17.7
261.0
66.2
25.2
77.9
1.0
2.1
n.a.
0.3
1.9
1.3
1.1
2.6
n.a.
0.5
2.4
1.6
2.5
4.7
2.8
11.6
4.6
5.2
2.3
4.4
2.7
10.2
4.3
4.8
Inf ant F ormula
Yashili International
1230 HK
Ausnutria Dairy
1717 HK
Biostime International
1112 HK
Beingmate Baby & Child F ood 'A' 002570 CH
Sy nutra International#
SYUT US
A v erage
HKD
HKD
HKD
CNY
USD
2.27
3.03
21.6
18
6.52
1,390
386
1,698
2,963
374
23.6
n.a.
12.0
36.9
n.a.
24.2
18.8
n.a.
11.3
37.5
n.a.
22.5
1.3
n.a.
3.8
0.5
n.a.
1.9
1.9
n.a.
4.0
0.7
n.a.
2.2
1.2
n.a.
3.1
4.5
n.a.
2.9
1.2
6.8
7.0
n.a.
n.a.
n.a.
2.7 28.1 25.2
4.9
4.9
7.6
n.a.
n.a.
n.a.
2.9 13.3 13.3
M ult inat ional Brands
Nestle 'R'
Mead J ohnson Nutrition
Meiji Holdings#
Danone
A v erage
NESN V X CHF
72.6 241,525
MJ N US USD 91.17 18,467
2269 J P J PY 17250 10,630
BN F P EUR 62.16 44,528
21.6
24.7
28.8
21.3
24.1
20.3
22.4
31.2
19.4
23.3
3.1
1.8
0.7
2.5
2.0
3.2
2.0
0.9
2.7
2.2
3.3
20.7
3.1
3.0
7.5
3.1 15.0
14.9 104.0
2.9 11.4
2.7 14.4
5.9 36.2
Dairy F arm
China Modern Dairy *
China Huishan Dairy #
Yuanshengtai Dairy F arm
A v erage
1117 HK HKD
6863 HK HKD
1431 HK HKD
11.0
17.4
4.7
11.0
9.1
16.1
4.0
9.7
0.0
1.2
0.0
0.4
0.5
1.4
0.0
0.6
0.7
1.7
0.5
0.9
0.6
1.5
0.4
0.9
2.53
2.17
0.71
1,730
4,009
358
8.2
9.8
8.5
8.9
15.6
85.5
10.0
14.7
31.4
6.9
10.7
8.3
8.6
# FY15: FY16; FY16: FY17
Source: Thomson Reuters, *DBS Vickers
Page 19
Industry Focus
China Dairy Sector
Peers valuation – F&B
Company Name
HK list ed
Brew ery Sec t or
Tsingtao Brewery 'H'*
China Res.Enterprise
A v erage
Dairy Sec t or
China Mengniu Dairy *
China Modern Dairy *
Biostime Intl.Holdings
China Huishan Dairy #
Yashili Intl.Holdings
Yuanshengtai Dairy
A v erage
Inst ant Noodle & Bev erage
Tingy i*
Want Want China*
Uni-President China Hdg.*
V itasoy Intl.Hdg.*#
China F oods*
Code
Pric e Rec om
HK $
Mkt
Cap F isc al
HK $m
Yr
PE Y ield
16F
15F
x
%
Y ield
16F
%
P/Bk
15F
x
P/Bk
16F
x
RO E
15F
%
RO E
16F
%
168 HK
291 HK
44.35
24.1
Hold
NR
59,916
58,638
Dec
Dec
25.1
103.4
64.3
23.8
59.2
41.5
1.2
0.9
1.0
1.3
0.9
1.1
2.9
1.2
2.0
2.7
1.1
1.9
11.9
2.0
6.9
11.6
7.1
9.3
2319 HK
1117 HK
1112 HK
6863 HK
1230 HK
1431 HK
38.35
2.53
21.60
2.17
2.27
0.71
Buy
Buy
NR
NR
NR
NR
75,216
13,421
13,162
31,075
10,772
2,775
Dec
Dec
Dec
Mar
Dec
Dec
22.3
11.1
12.0
17.4
23.6
4.7
15.2
19.5
9.1
11.3
16.1
18.8
4.0
13.1
1.0
0.0
3.8
1.2
1.3
0.0
1.2
1.1
0.5
4.0
1.4
1.9
0.0
1.5
2.5
0.7
3.1
1.7
1.2
0.5
1.6
2.3
0.6
2.7
1.5
1.2
0.4
1.4
11.9
8.2
28.1
9.8
6.8
8.5
12.2
12.3
6.9
25.2
10.7
7.0
8.3
11.7
Hold 87,421
Buy 109,913
Hold 30,229
Hold 12,685
Hold 11,385
Dec
Dec
Dec
Mar
Dec
24.7
20.4
38.0
29.7
55.4
22.6
18.5
31.7
25.4
35.6
2.0
2.7
0.8
2.3
0.0
2.2
3.0
0.9
2.7
0.0
3.4
5.8
2.1
6.0
1.9
3.2
5.1
2.0
5.4
1.8
14.4
31.0
5.7
21.2
3.4
14.6
29.2
6.5
21.2
5.1
33.6
26.8
1.6
1.8
3.9
3.5
15.2
15.3
n.a. 37.0
11.5 10.4
11.5 23.7
22.8 19.0
0.0
2.7
1.3
1.4
0.0
3.0
1.5
1.6
0.3
1.8
1.0
2.4
0.3
1.6
0.9
2.2
(0.1)
0.8
16.0 16.0
8.0
8.4
12.4 12.4
and O t hers
322 HK
15.60
151 HK
8.37
220 HK
7.00
345 HK
12.20
506 HK
4.07
A v erage
Slaught er Sec t or
China Yurun*
1068 HK
WH Group
288 HK
A v erage
HK - list ed av erage (ex Y urun,CRE)
# FY15: FY16; FY16: FY17
Source: Thomson Reuters, *DBS Vickers
Page 20
PE
15F
x
2.5
5.46
Hold
NR
4,557
77,878
Dec
Dec
Industry Focus
China Dairy Sector
Peers valuation – F&B (continued)
Company Name
A - share list ed
Wine Sec t or
Yantai Changy u Pion.Wine 'B'
A v erage
Currenc y
Pric e
Code
L oc al$
Mkt
Cap F isc al
US$m
Yr
PE
15F
x
PE Y ield
16F
15F
x
%
Y ield
16F
%
P/Bk
15F
x
P/Bk
16F
x
RO E
15F
%
RO E
16F
%
200869 CH HKD
27.59
3,266
Dec
13.5
13.5
12.1
12.1
2.0
2.0
2.0
2.0
2.0
2.0
1.8
1.8
15.6
15.6
15.3
15.3
Brew ery Sec t or
Beijing Yanjing Brew.'A'
Tsingtao Brewery 'A'*
A v erage
000729 CH CNY
600600 CH CNY
9.04
41.38
4,102
9,000
Dec
Dec
31.4
29.3
30.3
28.4
27.7
28.1
1.0
1.0
1.0
1.0
1.1
1.1
2.0
3.3
2.7
1.9
3.1
2.5
6.3
11.9
9.1
6.6
11.6
9.1
Dairy Sec t or
Inner Mongolia Yili Indl.Gp.'A'
Beijing Sany uan F oods 'A'
Bright Dairy & F ood 'A'*
Beingmate Baby & Child F ood 'A'
A v erage (ex . Sany uan)
600887 CH
600429 CH
600597 CH
002570 CH
CNY
CNY
CNY
CNY
18.63
10.44
18.08
18
18,383
2,517
3,584
2,963
Dec
Dec
Dec
Dec
22.6 17.7
261.0 261.0
31.4 25.2
36.9 37.5
30.3 26.8
2.1
n.a.
1.9
0.5
1.5
2.6
n.a.
2.4
0.7
1.9
4.7
2.8
4.6
4.5
4.6
4.4
2.7
4.3
4.9
4.5
26.4
1.6
15.2
4.9
15.5
27.7
1.1
17.8
7.6
17.7
Bev erage and O t hers
Hebei Chengde Lolo 'A'
Sanquan F ood 'A'
A v erage
000848 CH CNY
002216 CH CNY
18.01
15.6
2,183
2,020
Dec
Dec
27.8
101.3
64.5
23.9
68.1
46.0
1.5
0.3
0.9
1.6
0.3
0.9
7.6
6.4
7.0
6.2
6.1
6.1
30.6
5.6
18.1
27.6
8.0
17.8
Slaught er Sec t or
Henan Shuanghui Inv .& Dev .'A'
A v erage
000895 CH CNY
21.86
11,617
Dec
15.4
15.4
13.9
13.9
4.2
4.2
4.9
4.9
3.9
3.9
3.5
3.5
26.2
26.2
26.4
26.4
000858 CH CNY
27.9
600519 CH CNY 219.54
000568 CH CNY 25.61
17,051
44,401
5,782
Dec
Dec
Dec
17.5
16.5
21.9
15.2
15.0
18.3
2.1
2.0
2.0
2.5
2.5
2.6
2.4
4.2
3.3
2.2
3.6
3.0
14.4
27.8
15.6
15.2
25.8
16.7
Xinghuacun F en Wine 'A'
600809 CH CNY 20.15
2,809
J iangsu Yanghe Brew.J st. 'A'
002304 CH CNY
67.5 16,377
A v erage
A - share list ed av erage (ex Beijing Sany uan, Roy al G roup,
Sanquan F ood)
Dec
Dec
33.4
20.6
33.3
32.2
17.9
24.8
0.7
2.1
1.8
0.8
2.5
2.2
4.1
4.3
3.8
3.8
3.8
3.4
10.4
23.1
16.2
11.3
22.9
16.6
29.2
24.0
1.8
2.1
4.0
3.6
16.7
17.1
21.6
0.2
20.3
21.4
21.3
24.5
22.7
12.5
20.6
20.3
3.1
3.2
0.2 293.8 312.3
19.2
3.2
3.5
19.7
2.8
3.0
19.4
2.5
2.7
21.0
1.5
1.6
20.8
1.7
1.9
11.5
0.9
0.9
18.8
2.3
2.4
3.3
0.1
6.2
8.8
3.0
2.6
3.9
1.8
4.2
3.1
0.1
6.1
8.6
2.7
2.4
3.6
1.6
4.0
15.0
37.7
27.6
40.0
14.4
9.9
18.0
14.7
19.9
15.6
37.4
29.1
44.0
14.7
11.5
17.7
13.8
20.9
Chinese L iqueor Sec t or
Wuliangy e Yibin 'A'
Kweichow Moutai 'A'
Luzhou Lao J iao 'A'
M ult inat ional Companies
Nestle 'R'
Unilev er (Uk)
Coca Cola
Pepsico
Danone
Mondelez International Cl.A
Hormel F oods
Ty son F oods 'A'
A v erage
NESN V X
ULV R LN
KO US
PEP US
BN F P
MDLZ US
HRL US
TSN US
CHF
GBP
USD
USD
EUR
USD
USD
USD
72.6
29.05
40.84
96.87
62.16
42.12
57.66
43.13
241,525
128,581
178,009
142,301
44,528
68,513
15,238
13,112
Dec
Dec
Dec
Dec
Dec
Dec
Oct
Sep
# FY15: FY16; FY16: FY17
Source: Thomson Reuters, *DBS Vickers
Page 21
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Bloomberg: 600597 CH Equity
|
Refer to important disclosures at the end of this report
Reuters: 600597.SS
DBS Group Research . Equity
24 July 2015
BUY (Initiating Coverage)
TRANSFORMATION IN PROGRESS
Last Traded Price: RMB18.08 (CSI300 Index : 4,251)
Price Target: RMB 19.70 (9% upside)
dairy player with an overseas footprint. Bright Dairy is a leading dairy
Market leader in Shanghai, Bright Dairy is evolving into an integrated
player based in Shanghai. It has cultivated a household name under
Potential Catalyst: Star products to drive profitability; expansion in
distribution network coverage
Where we differ: We are more conservative in our sales estimate for
Momchilotvsi
‘Bright’ with product offerings including both pasteurised and UHT dairy
Analyst
Alice HUI CFA, +852 2971 1960
[email protected]
Shanghai Dairy’s upstream assets. While the restructuring and integration
Alison Fok +852 2971 1938
[email protected]
Despite intense competition, Bright's strong product capability would
share placement with gross proceeds of c.Rmb9bn in exchange for Tel
Aviv-based Tnuva Foods, the largest food company in Israel, and parent
will take time, it will transform Bright Dairy into an integrated dairy player
with a solid overseas footprint.
continue to support product mix enhancement and drive higher-thanpeers earnings growth of 25% in FY14-17. We estimate sales to grow at
Price Relative
RM B
FY14-17F CAGR of 13%. We expect Bright Dairy’s organic sales growth
R e la t iv e In d e x
to be driven by cultivation of its core, high margin brands (Momchilovtsi,
338
UBEST, Changyou) through expansion of its distribution network further
2 7 .3
288
into South and Central China, where its penetration still lags behind
2 2 .3
238
1 7 .3
peers. Coupled with a larger scale and a favourable input cost
188
1 2 .3
7 .3
J u l-1 1
products, milk beverages and infant formula. It recently proposed a new
environment, there should be abundant room for margin improvement.
138
J u l-1 2
J u l-1 3
B r ig h t D a ir y & F o o d C o L t d ( L H S )
J u l-1 4
Premium valuation justified given strong earnings potential. Initiate
88
J u l-1 5
coverage with BUY, TP set at RMB19.7share. We believe Bright Dairy has
significant potential for growth from new products, distribution network
R e la t iv e S H S Z 3 0 0 In d e x ( R H S )
expansion, as well as being a key beneficiary of the SOE reform initiatives
Forecasts and Valuation
FY Dec (RMB m)
Turnover
EBITDA
Pre-tax Profit
Net Profit
EPS (RMB)
EPS Gth (%)
DPS (RMB)
BV Per Share (RMB)
PE (X)
P/Cash Flow (X)
P/Free CF (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (RMB)
Other Broker Recs:
2014A
20,385
893
714
568
2015F
23,013
1,132
907
708
2016F
26,036
1,410
1,132
883
2017F
29,151
1,734
1,412
1,102
0.46
0.58
0.72
0.89
39.1
0.29
3.67
39.2
66.3
nm
26.4
1.6
4.9
0.1
12.9
24.6
0.35
3.90
31.4
27.9
nm
22.0
1.9
4.6
0.4
15.2
24.8
0.43
4.18
25.2
20.8
nm
18.2
2.4
4.3
0.5
17.8
24.7
0.54
4.54
20.2
16.9
nm
15.2
3.0
4.0
0.5
20.5
New
0.66
B: 13
New
0.87
S: 0
New
1.06
H: 4
ICB Industry: Consumer Goods
ICB Sector: Food Producers
Principal Business: Leading dairy player with the largest market
presence in Shanghai.
Source of all data: Company, DBSV, Thomson Reuters, HKEX
www.dbsvickers.com
ed- JS / sa- AL
underway right now. We expect Bright Dairy will achieve earnings CAGR
of 25% in FY14-17F, against Mengniu’s 12%, and Yili’s 23% (based on
consensus estimates). Initiate with Buy; TP at RMB19.7/sh, pegged to
27.5x FY16F PE, equivalent to 1.1x PEG, but still below its historical 8year average of 35.5x
Valuation
The stock is currently trading at 25.2x FY16F PE, representing a premium
over Mengniu and Yili. This is likely due to Bright Dairy’s higher than
industry growth rate, and potential earnings re-rating from its recent
acquisitions.
Key Risks to Our View:
Food safety, rising penetration. Food safety issues, growing yogurt
competition and raw milk prices could affect Bright Dairy’s profitability.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (RMBm/US$m)
Major Shareholders
Bright Food (%)
Free Float (%)
Avg. Daily Vol.(‘000)
1,231
22,250 / 3,581
54.4
45.6
35,687
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
INVESTMENT THESIS
Profile
Listed on the Shanghai Stock Exchange in 2002, Bright Dairy
is one of the largest downstream dairy players in China. As
of 2014, Bright Dairy held a 22% market share in dairy
products in East China, where it has a dominant foothold in
Shanghai with a market share of 46%.
Rationale
We estimate Bright Dairy’s sales to grow at FY14-17F CAGR
of 13%, with organic growth driven by cultivation of its
core, high margin brands, through expansion of its
distribution network into South and Central China, where its
penetration lags behind peers.
We expect Bright Dairy will achieve earnings CAGR of 25%
in FY14-17F, against Mengniu’s 12% and Yili’s 23% (based
on consensus estimates).
Valuation
Our TP is at RMB19.7/sh, pegged to 27.5x FY16F PE,
equivalent to 1.1x PEG, but still below its historical 8-year
average of 35.5x
Source: DBS Vickers
Page 23
Risks
Food safety issue is a key concern to the dairy sector, and
Bright Dairy is subject to policy and regulatory changes. With
the inclusion of Israeli-based Tnuva Food, currency risks will
become a potential risk. Lastly, fluctuation in raw material
costs such as raw milk prices and milk powder costs may
have an impact on the company’s margins.
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
SWOT Analysis
Strengths
Weakness

State-owned background with strong presence in the
Shanghai region, where the company is the top player with
>40% market share in liquid milk products

Lack of scale against dairy giants such as Mengniu and
Yili


Established market position and brand reputation in the
pasteurised milk segment
The smaller scale also translates into weaker OP
margins against its bigger peers


Strong product innovation, as demonstrated by its success in
UHT yogurt Momchilovtsi
Weaker market penetration compared with major peers
with strong nationwide coverage

Relatively low ROE

Comprehensive product mix including liquid milk, yogurt,
milk powder as well as dairy-based products such as butter

Improving product mix with rising skew towards highermargin products. Its five key products are estimated to
account for 60% of its liquid milk sales in FY14, vs 40%
previously
Opportunities
Threats


Rising competition from domestic and international
players

Profitability could fluctuate on raw milk and milk
powder price volatility

Food safety scares

Weaker consumer demand due to slower macro
environment
As the first mover in the UHT yogurt category, Bright’s star
product Momchilovtsi should have more room to grow as it
expands into other regions and into lower tiered cities

Extending product offerings by rolling out other high-margin
products into Momchilovtsi’s existing distribution channel

Huge potential for pasteurised milk segment which Bright
already has an strong market position and expertise
Source: DBS Vickers
Page 24
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Company background
Dominant market player in East China. Listed on the Shanghai
Stock Exchange in 2002, Bright Dairy is one of the largest
downstream dairy players in China. As of 2014, Bright Dairy
held a 22% market share in dairy products in East China, where
it has a dominant foothold in Shanghai with a market share of
46%.
Strong SOE backing. Bright Dairy has a strong state-owned
background with Shanghai Municipal Government as its
principal shareholder. Bright Dairy is one of the four publicly
listed platforms for Bright Food. Other affiliated companies
include Shanghai Jinfeng Wine (600616.SH, alcohol related),
Shanghai Maling Aquarius (600073.SH, canned products &
other products), and Shanghai HaiBo (600708.SH,
transportation & logistics).
In Jun-15, Bright Dairy announced its intention to place out no
more than 559m shares for Rmb16.1/share to six strategic
shareholders. The gross proceeds of Rmb9bn will be used to
acquire a 77% stake in Israeli-based Tnuva Food from Parent
Company, as well as Shanghai Dairy’s upstream assets. As one
of the strategic shareholders in the placement, Bright Food’s
effective controlling stake will be lowered to 40.8% (from
54.4%). The new shareholders will be subject to a 3-year
holding period.
Part of SOE reform initiatives. The acquisition of Tnuva Food
has been well anticipated by the market as Parent Company
Bright Food had already announced its intention for the
injection after acquiring Tnuva in Jun-14. This is also part of the
SOE reform initiatives that aims to (1) bring in strategic
shareholders and introduce a mixed ownership scheme; (2)
consolidate assets to form a clearer and well defined corporate
structure, i.e. use Bright Dairy as the sole platform for dairyrelated business.
In addition to acquiring Tnuva Foods, Bright Dairy has been
consolidating the Group’s upstream assets. In 2014, Bright Dairy
purchased the remaining 20% stake in its upstream subsidiary,
Shanghai Bright Holstan from Parent Company Bright Food. In
Feb-14, Bright Dairy formed a 55%/45% JV with PE fund RRJ
Capital to develop its upstream capabilities. As of end-14, Bright
Dairy owns 14 farms with approximately 15,000 cows, and is
looking to expand to 20 farms in the next 3-5 years. With the
potential acquisition from Shanghai Dairy in the pipeline as well,
this should consolidate Bright Dairy’s control on upstream raw
milk sourcing. Shanghai Dairy holds c.35,000 cows under 24
dairy farms.
Pending shareholder structure (Before & after new share placement)
Bright F ood
Yimin Group (益 民 集 團 )*
B rig ht F o od
Xin Cheng Inv estments (信 晟 投 資 )
Cheng Chuang Inv estments (晟 創 投 資 )
Shangqi Inv estments (上 汽 投 資 )
Guosheng Inv estments (國 盛 投 資 )
Puke Yuanfuday i (浦 科 源 富 達 壹 )
Other inv estors
Source: Company data, DBS Vickers
*Owned by Bright Food
Page 25
B ef o re
Shares (m)
%
669
54.4%
0
0.0%
669
5 4.4 %
0
0.0%
0
0.0%
0
0.0%
0
0.0%
0
0.0%
562
45.7%
A f t er
Shares (m)
669
62.1
73 1
217.4
186.3
31.1
31.1
31.1
562
%
37.4%
3.5%
4 0.8%
12.1%
10.4%
1.7%
1.7%
1.7%
31.4%
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
UBEST, Changyou, AB100, Zhiwuhuoli) to account for 60% of
FY14 liquid milk sales, and this should continue to improve.
Growth drivers
Growth to outperform peers. Bright Dairy derives its revenue
from a range of dairy products which includes UHT dairy
Momchilotvsi sales
products (plain milk, premium milk, and yogurt), pasteurised
products, milk beverages, infant formula etc. We forecast the
RMB m
14,000
company to post FY14-17F earnings CAGR of 25% driven by an
enhanced product mix (skewing towards high-margin products
12,000
such as UHT yogurt), favourable raw material cost environment,
10,000
and synergies with overseas acquisitions. In the longer term, we
expect the possible spin-off of its upstream assets to be a
8,000
potential re-rating catalyst.
% yoy
300
250
200
150
6,000
Pre mium ca te gory Bra nd
100
4,000
Star product offerings
Es t. la unch
50
2,000
0
Pastuerised milk
U+ (优倍)
Sept-06
Fresh yogurt; kid's
yogurt
AB100 (健能)
July-10
Momchilovtsi (莫斯利
安)
Changyou (畅优)
Dec'10
UHT Yogurt
Fresh yogurt
Plant-based bacteria
Zhiwuhuoli (植物活力)
drink
Apr-12
Mar-13
0
2010 2011 2012 2013 2014 2015F2016F2017F
Momchilovtsi
% yoy
Source: Company data
(ii) Market leader in pasteurised milk
As of FY14, Bright is the market leader in pasteurised milk with
a 53.6% market share, of which it holds a dominant market
share of 84% in East China. Within fresh yogurt, Bright Dairy
holds a nationwide market share of 31.2%, with a 53% market
share in East China. We expect Bright Dairy in a better position
vs. its competitors as further competitions enters into the UHT
segment.
Nationwide & East China market share
Source: Company data
(i) Star products to lead profit growth
90%
84.0%
80%
70%
Bright Dairy is a pioneer in the UHT yogurt market in China,
with its first UHT yogurt product, Momchilotvsi, launched in
2010. Since inception, Momchilotvsi has achieved tremendous
growth, and is now the single largest contributor to topline at
35% of total. Targeting the premium market, we estimate this
product commands a gross margin that exceeds 40%, above
the average for its other UHT dairy products.
In FY14, sales of Momchilovtsi grew 85% y-o-y to c.Rmb6bn.
We expect sales to rise further to Rmb8bn in FY15, translating
into y-o-y growth of 35%. This will boost its contribution to
38% of overall sales (FY14: 35%). We also expect its other
higher margin brands including UBest, Changyou and AB100 to
sustain strong double-digit growth in FY15 as penetration
improves. We estimate its top-5 star products (Momchilotvsi,
60%
53.6%
53.1%
50%
40%
31.2%
30%
20%
5.7%
1.6%
10%
0%
Pastuerised milk Low-temp yogurt
National
UHT milk
East China
Source: Company data
Page 26
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
(iii) Deepening penetration.
(iii) A beneficiary of the SOE reform
The success of Momchilovtsi, which is a UHT product with
further reach compared to low-temperature or pasteurised
products, had enabled Bright Dairy to extend its distribution
network beyond its traditional stronghold in Eastern China.
With POS reaching 650K in FY14, the company plans to expand
it further to 1m POS in FY15. This also opens up opportunities
for the company to roll out other products using Momchilovtsi’s
existing channel, and provides an established distribution
platform for future product launches.
Parent Company, Bright Food, has been in the process of
dismantling and streamlining existing assets for a number of
years through management incentives, inviting strategic
shareholders and lately acquiring overseas assets. As a key
subsidiary of Bright Food, Bright Dairy should remain under the
spotlight, given dairy sector’s stronger-than-industry growth
and significant overseas acquisitions recently.
We expect South and Central China regions to exhibit stronger
growth, with increasing capacity expansion directed at both
regions. As scale picks up, we see room for improvement in
operating leverage. In fact, Bright Dairy’s SG&A expense to
sales ratio has been on a declining trend in the past two years,
but remains higher than bigger peers, an indication of its
smaller scale but also implies lots of room for improvement.
SG&A expense % to overall sales versus peers
32%
30%
28%
26%
24%
22%
20%
2013
Yili
Source: Company data
Page 27
2014
2015F
Bright
2016F
2017F
Mengniu
The latest share placement of 559m shares will generate gross
proceeds of Rmb9bn, which will be allocated in exchange for (1)
c.77% controlling stake in Israeli-Tnuva Food, estimated to be
worth c. Rmb6.87bn (implying c. 13.3x FY14 PE or 1.89x
P/NAV), and (2) Shanghai Dairy’s upstream dairy operations (no
financial details have been released yet).
With the expected injection of Tnuva Foods, Bright is well
positioned to become a diversified dairy player over the long
term. In addition, we expect Bright Dairy to spin-off its
upstream assets in due time after the consolidation of Shanghai
Dairy’s upstream assets. If we include Tnuva’s earnings
assuming flat earnings growth y-o-y, we expect the potential
impact on EPS will be milder at 8%/3%/0% in FY15-17F
inclusive of the enlarged share base.
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Bright Dairy’s earnings – before & acquisition inclusion
Initial thoughts on Tnuva acquisition. Given Tnuva’s strong roots of Tnuva*
in the Israeli community as the largest food manufacturer, we
expect profitability may be limited by government policies
1Q15
2015
(dominant market share in Israel, which could run into anti(RMB m)
Bef ore
A fter
Before
A fter
monopoly trust issues). However, we expect Tnuva’s product
Sales
4,991
6,672
23,013
29,810
technology expertise, as well as vast product offerings to be
Net profit
98
162
708
1,135
distributed to China.
We also highlight that Tnuva owns the franchising rights to
Yoplait yogurt in Israel, a brand which Bright Food had
attempted to acquire back in 2011 (but lost out to General
Mills). The acquisition of Tnuva should also be positive to ROE
with Bright’s FY14 ROE at 12.6% versus Tnuva’s at 14.2%
Profit margin (%)
Sales % diff
Net profit % diff
2.0
2.4
33.7
65.8
3.1
3.8
29.5
60.4
Source: Company data, DBS Vickers
*illustration of impact on earnings assuming Tnuva is
consolidated on Jan1st
Tnuva owns 7 of the 10 best known food brands in Israel
formed by farming communities eighty years ago. Tnuva Foods
is the largest food manufacturer in Israel with product offerings
spanning dairy related products (>70% market share in Israel),
pork, frozen vegetables and bakery goods. Besides its domestic
market, Tnuva Food’s products are also sold in the Middle East,
Europe and the US. Tnuva Food was granted the franchising
rights for General Mill’s Yoplait in Dec-01.
Tnuva Food’s product offerings
Brand
Produc t desc ript ion
Adom Adom
F resh beef
38% whipping cream, 32% mildly sweet whipping cream, 15% cooking cream, 10% reduced-fat cooking cream,
excellent Canaan cheese for baking and grated cheese.
Cottage cheese and white cheese
30% market share in egg market
Chef Lav an
Cottage and soft cheeses
Eggs
Hard Cheese and F resh salted
cheese
Hard Cheese , processed
cheese and butter
Harduf
Maadanot
Mama Of
Oliv ia
Soy products
Sunfrost
Tirat Zv i
Tnuv a Chocolate Milk
Tnuv a Milk
Yogurts
Under Piraeu - salted cheese
Tnuv a’s range of special cheeses includes Brie, Camembert, Mozzarella, Roquefort and other selected cheeses.
Organic cow, goat milk and y ogurt
F rozen pastries including pizzas, burekas (filled pastry ), Yemenite products and other dough products
Chilled, fresh ready to eat poultry products, the brand also serv es the institutional market with customers such as
McDonalds, Burger Ranch, and leading café chain
Sauces, spread
Soy products and desserts
Leading frozen v egetables company in Israel
Specialises in the dev elopment, production and marketing of meat delicacies: pastrami, cold cuts, sausages and
others
Directed at children
Milk Cartoon, UHT Milk, Milk bags, Milk packs
Yogurts and puddings, and franchising rights to Yoplait
Source: Company data, DBS Vickers
Page 28
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Financial analysis
Cost of sales breakdown % (FY14)
Revenue breakdown. The bulk of Bright Dairy’s revenue is
derived from Momchilovtsi. The company is now ramping up its
product offerings towards higher margin brands including UHT
yogurt Momchilovtsi, pasteurised products UBEST, and lowtemperature yogurt Changyou. Higher margin products account
for approximately 45% of overall sales.
Labour
3%
Production
costs
14%
Revenue breakdown % (FY14)
Direct
materials
83%
Others
6%
Milk powder
and others
19%
Momchilovtsi
29%
Source: Company data
Ubest
6%
Other liquid
milk
39%
Changyou
1%
Cost structure. Bright Dairy’s cost of sales mainly comprises of
raw material costs such as raw milk and milk powder (83%),
while labour cost and manufacturing overheads accounted for
3% and 14% respectively in 2014.
Financial health. In 2014, capex was 65% higher y-o-y owing
to completion of processing plant capacity expansion, as well as
building of new dairy farms. Capex in 2015 would continue to
Gross margin expansion. Continued improvement in product
mix and a favourable raw material cost environment are the key remain high as Bright Dairy continues to expand its production
drivers to profitability. We expect overall gross margins to edge base and distribution network. After its recent new share
up modestly by 1.1ppt from 2014 to 2017F. Compared to 2010, placement which raised gross proceeds of Rmb9bn in exchange
just before Momchilovtsi was launched, liquid milk gross margin for Tnuva Foods (for no more than Rmb6.87bn) and upstream
assets from Parent Company, Bright Dairy should have sufficient
had expanded 7ppts up to FY14 on the back of higher margin
capital in the near term. If we exclude recent new share
product contribution.
placement and pending acquisitions, we estimate Bright’s net
gearing to be 35%.
Overall gross margin
Source: Company data
38.0%
Earnings risk. Food safety issue is a key concern to the dairy
sector, and Bright Dairy is subject to policy and regulatory
changes. With the inclusion of Israeli-based Tnuva Food,
currency risk will become a potential risk. Lastly, fluctuation in
raw material costs such as raw milk prices and milk powder
costs may have an impact on the company’s margins.
37.0%
36.0%
35.0%
34.0%
33.0%
32.0%
31.0%
30.0%
2013
Source: Company data
Page 29
2014
2015F
2016F
2017F
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Financial forecast
Valuation
1Q15 analysis. In 1Q15, revenue grew 8.1% while net profit
expanded 39.2% y-o-y to Rmb98m. This was on the back of
improvement in product mix as well as a favourable raw
material environment. Gross margins expanded 0.85ppt to
34.7%, a decent performance but much slower than Yili’s 1Q15
GP margin expansion of 3.4ppts. This is likely a reflection of
Bright’s higher-cost milk powder inventory which had yet to be
fully digested. In terms of seasonality, 1Q is typically a low
season for dairy product sales, while 2H normally reports much
stronger sales.
The stock is currently trading at 25.2x FY16F PE, representing a
premium over other downstream dairy players such as Mengniu
and Yili. This is likely due to Bright Dairy’s higher than industry
growth rate, and potential earnings re-rating from its recent
acquisitions.
We peg our TP at 27.5x FY16F PE, which is equivalent to 1.1x
PEG, but still below its historical 8-year average of 35.5x. This
translates into a fair value of Rmb19.7 per share.
We forecast UHT plain white milk to grow in the single-digits
over the next few years, given low barriers of entry and weaker
brand loyalty in the low-end price range. As for the highermargin products, we expect double-digit growth in topline,
bringing about stronger profitability expansion, thanks to
improving operating leverage. We forecast topline growth of
13%/13%/12% in FY15-17F, and earnings to grow at 25%
CAGR in 2014-17F.
Page 30
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Appendix: Overseas assets and partnerships
Synlait Dairy. Synlait Dairy is a New Zealand based raw milk
processor and manufactures milk powders, cream products and
infant formula and nutritional products. Synlait Dairy acts a third
party milk powder provider for customers mainly based in Asia,
the Middle East, Europe and Africa. In 2010, Bright Dairy
invested NZ$82m (Rmb382m) for a 51% stake. Through its IPO
in Jul-13, Bright Dairy subsequently sold down its stake to
39.12%. As of the last traded price, Bright Dairy’s stake is
worth NZ145.4m. (Rmb: 610m)
Synlait Dairy’s customers. Synlait Dairy’s infant formula
customer base includes Bright Dairy, which uses Synlait Dairy to
manufacture its imported infant formula brand “Pure
Canterbury”. In addition to Bright Dairy, Synlait Dairy has been
working with A2 Corporation to develop branded infant
formula.
Strategic cooperation with Pactum Dairy Group. In mid-2014,
Bight Dairy signed a strategic cooperation with Australia-based
Pactum Dairy Group to manufacture “U+ imported “a UHT milk
brand. Bright Dairy initially agreed to take up 25m litres of UHT
milk in the first year, which is less than <1% of FY14 sales.
Pactum Dairy Group is part of Freedom Foods Group (FNP: ASX).
Bright’s imported brands – Pure Canterbury, U+ import
Source: Company, DBS Vickers
Page 31
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
State-owned; beneficiary of reforms
Overseas ambitions. Bright Foods’ Vice-President, Ge Junji,
announced Bright’s intention to increase the proportion of its
overseas assets to 25% (2014:12%) over the next few years.
Bright Foods has been one of the most aggressive Chinese
players embarking on an M&A spree. There were a few
unsuccessful deals (United Biscuits, GNC). Bright Foods is mainly
focused on consumer brand names, with similar businesses
relating to its existing assets. In total, we estimate Bright Foods
has spent over Rmb3bn on purchasing overseas assets.
Possible spin-offs with recent overseas privatisations. Bright
Food has highlighted its intention to (1) spin-off its Weetabix
acquisition while retaining a controlling stake, similar to Synlait
Dairy, (2) combination of asset spin-off with existing domestic
private assets, and lastly (3) the injection of assets into existing
listed entities. For example, Bright Foods plans to inject DIVA, a
bordereau specialised French distributor, into Jinfeng Wine, to
broaden its existing wine operations.
Bright Foods: overseas acquisitions
D at e
Co mp an y
J ul-10
Sy nlait
N o w u n d er:
D es c rip t io n
Bright Dairy
(39%)
Produces infant formula products under Pure Canterbury brand.
The Company w as publicly listed in J ul-2013 on NZSE, of w hich
Bright Dairy parred dow n its stake to 39%.
Dry grocery
Bright F oods
Dry groceries, confectionery , biscuits, cakes, perishable, and
frozen foods and priv ate label
Cereal
Bright F oods
Whole-w heat grain breakfast cereal under Weetabix
A lcohol
Bright F oods
Export oriented w ine broker, mainly know n for Bordeaux
A ustralia
Dairy -related
Bright F oods
Premier dairy company w ith products such as y ogurt, cheese,
probiotic y ogurt
M ay -14 Tnuv a
Israel
Dairy -related
Bright F oods;
Largest food company in Israel specialising in milk and dairy
pending injection products, Tnuv a accounts for 70% of the dairy market in the
into BrightDairy sale of meat, egg and packaged food.
Oct-14
Italy
Cooking oil
Bright F oods
A ug-11 M anassen F oods
Co u n t ry
New Zealand Dairy -related
A ustralia
M ay -12 Weetabix
J un-12
Div a
J an-14
M undella F oods
Salov
Cat eg o ry
UK
F rance
Oliv e oil maker w hich produces F lippo Berio (leading brand in US
and UK).
Source: Company data, DBS Vickers
Page 32
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Key Management Team
K ey
T it le
O t h er d irec t o rsh ip s
Mr. Zhuang Guow ei
(庄 國 蔚 )
Chairman
Bright F oods Group Co. Ltd: party member and v ice president; F ormer Shanghai F arming
(Group) Co. Ltd: V ice President & F ormer Shanghai Haibo Co.
Mr. Shen Weiping
(沈 偉 平 )
Director
Shanghai Milk (Group)'s Director, General Manager; Shanghai A gri-business Inv estment
Company : General Manager
Mr. Dong Zongbo
(董 宗 泊 )
CF O
Serv ing since 2006, Mr. Dong used to serv e as a finance manager for its fresh product
business.
Mr. Hu Kaiming
(胡 凱 明 )
Superv isor of
Company
F ormer Shanghai Yimin F ood, Party Secretary and Deputy Minister
Mr. Zhang Daming
(張 大 鳴 )
Chairman of
Chairman of Superv isory Board, Bright F ood, V ice-Chairman of the Superv isory Board';
Superv isory Board Shanghai Haibo Co. Chairman
Mr. Pan F ei (潘 飛 )
INED
Mr. Zhang Guangsheng INED
(張 廣 生 )
V ice President & Professor of Shanghai Univ ersity of F inance and A ccounting
J ilin prov inicial gov ernment economic adv isor; honorary director of Shanghai Institute of
Economic Research; former Shanghai Pudong Dev elopment Bank Co. Chairman
Mr. Gu Xiaorong
(顧 肖 榮 )
Shanghai A cademy of Social Sciences research at the Institute of Law
INED
Source: Company data, DBS Vickers
Parent Company’s listed entities
Co mp an y
T ic k er
Cat eg o ry
Bright Dairy
600597
Dairy -related
51.25%
Dairy -related products w ith primary brands as Bright (光 明 ), and
Momchilov tsi (莫 斯 利 安 )
Shanghai Maling
A quarius
(上 海 梅 林 正 廣 和 )
600073
Processed
products
37.79%
Canned products including processed meat, seasoning, seafood, v egetable
as w ell as national brands under " 冠 生 園 "," 大 白 兔 "," 蘇 食 "," 梅 林 ", "
佛 手 "," 華 佗 "," 正 廣 和 ","SF "," 愛 森 ","96858"
34.90%
A lcohol related products; w ell-know n for its y ellow -w ine, of w hich
brands include y ellow w ine - Shikumen (石 庫 門 ), Hejiu (和 酒 ), red-w ine
Meishengshijia(美 聖 世 家 ), and rice-w heat alcohol J insenianhua(金 色 年
華 ) as w ell as cocktails
35.81%
Three major rev enue segments - Haibo Taxi, Haibo Logistics, and Haibo
Inv estments. Haibo Taxi is one of the four enterprises of Shanghai taxi
industry . A s for Haibo Logistics includes facilities such as transportation,
storage and integrated logistics. Shanghai Solid Stainless Steel Products is a
stainless steel producers of steel v accum flask products under "Solid"
w hich is exported to ov er 40 countries.
Shanghai J infeng
Wine
Shanghai Haibo
600616
600708
Source: Company data, DBS Vickers
Page 33
A lcohol
Logistics and
others
St ak e
D es c rip t io n
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Bright Dairy products
Bri ght Dai ry
Pure white milk
Milk UHT
(76% of Pastuerised
FY15F
s ales
including Fermented milk
yogurt )
Yogurt
U+, Bright Dairy, Comfort Night
Milk; High Calcium;
Excellent; Ubest; Bright Dairy; HighCalcium; Children;
Bright (Peanut; Red-bean; Red Date;
Chocolate); Morning Series
Children
DUDU
Yogurt
Plant-based; Red date; Chang-You;
Abioo; Bright Dairy; Rui-Shi
Low-temp
yogurt
Red date, HI-You, Bright Dairy
Children
flavoured &
Children Abioo; 1911
Milk
Infant formula
pow der
(c.18%
of FY15 Adult
l )
Ot hers
(c. 6% of Butter; cheese;
FY15
juice
s ales )
Pure Canterbury; You; Bright Dairy
Bright
Bright Juice; Little Bright
Source: Company data, DBS Vickers
Page 34
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Tnuva Food’s brand offerings
Yoplait Sunfrost Cottage and Soft Tirat Zvi Hard Cheese, Processed Cheeses Cheese and Butter Maadanot Hard Cheese and Fresh Mama Of Tnuva Milk Chocolate Milk Salted Cheese Chef Lavan Harduf Soy Products Eggs Adom Adom OIivia Source: Company data, DBS Vickers
Page 35
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Segmental Breakdown (RMB m)
FY Dec
Revenues (RMB m)
Dairy products
Other dairy related
products (milk powder & ice
cream)
Others
Total
Gross Profit (RMB m)
Dairy products
Other dairy related
products (milk powder & ice
cream)
Others
Total
Gross Profit Margins (%)
Dairy products
Other dairy related
products (milk powder & ice
cream)
Others
Total
2012A
2013A
2014A
2015F
2016F
2017F
9,888
11,620
15,090
17,501
20,182
22,931
3,164
3,792
3,983
4,182
4,392
4,611
579
13,630
767
16,179
1,156
20,230
1,330
23,013
1,463
26,036
1,609
29,151
4,280
4,983
6,425
7,403
8,577
9,791
444
570
493
481
483
507
40
4,765
24
5,576
50
6,968
53
7,937
59
9,119
64
10,363
43.3
42.9
42.6
42.3
42.5
42.7
14.0
15.0
12.4
11.5
11.0
11.0
6.9
35.0
3.1
34.5
4.3
34.4
4.0
34.5
4.0
35.0
4.0
35.5
Source: Company, DBS Vickers
Margins Trend
Income Statement (RMB m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Dividend Income
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
2012A
13,775
(9,010)
4,765
(4,409)
420
64
0
(65)
0
2013A
16,290
(10,714
5,576
(4,950)
679
82
0
(53)
0
2014A
20,385
(13,417
6,968
(6,167)
776
16
0
(78)
0
2015F
23,013
(15,174
7,840
(6,934)
1,003
20
0
(116)
0
2016F
26,036
(17,027
9,009
(7,798)
1,262
22
0
(152)
0
2017F
29,151
(18,911
10,240
(8,735)
1,563
24
0
(175)
0
0
419
(84)
(24)
0
311
568
0
708
(234)
(68)
0
406
735
0
714
(131)
(15)
0
568
893
0
907
(181)
(18)
0
708
1,132
0
1,132
(226)
(23)
0
883
1,410
0
1,412
(282)
(28)
0
1,102
1,734
16.8
74.2
69.8
30.9
18.3
29.5
61.8
30.4
25.1
21.5
14.3
39.9
12.9
26.7
29.3
24.6
13.1
24.6
25.8
24.8
12.0
22.9
23.8
24.7
34.6
3.0
2.3
9.6
3.7
6.3
80.0
6.5
34.2
4.2
2.5
9.8
3.9
7.1
73.9
12.8
34.2
3.8
2.8
12.9
4.6
8.6
63.2
9.9
34.1
4.4
3.1
15.2
5.1
8.9
60.0
8.7
34.6
4.8
3.4
17.8
5.6
9.7
60.0
8.3
35.1
5.4
3.8
20.5
6.3
10.8
60.0
8.9
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
2013A
2014A
Operating Margin %
2015F
2016F
2017F
Net Income Margin %
Source: Company, DBS Vickers
Page 36
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Margins Trend
Interim Income Statement (RMB m)
FY Dec
1H2012
2H2012
1H2013
2H2013
1H2014
2H2014
6,461
(4,805)
2,256
(3,780)
132
(35)
0
7,314
(4,784)
2,508
(4,750)
288
99
0
7,443
(5,930)
2,659
(3,938)
235
(16)
0
8,847
(6,481)
2,917
(4,838)
445
98
0
9,872
(6,481)
3,391
(6,480)
302
(4)
0
10,513
(6,936)
3,577
(6,680)
474
20
0
(45)
0
52
4
(4)
97
(19)
0
367
(88)
(20)
215
(33)
0
187
(63)
(8)
148
(21)
0
522
(170)
(61)
258
(16)
0
282
(58)
(31)
209
(62)
0
432
(73)
16
359
16.5
100.9
31.9
17.2
58.6
30.4
15.2
78.1
53.0
21.0
54.3
20.2
32.6
28.7
41.5
18.8
6.7
38.9
25.6
2.0
1.5
34.6
3.9
2.9
20.3
3.2
2.0
26.7
5.0
2.9
34.3
3.1
2.1
34.0
4.5
3.4
6%
5%
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Growth
Revenue Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Source: Company, DBS Vickers
Page 37
4%
3%
2%
1%
0%
2
1
H
2
1
H
3
1
H
1
2
Operating
Margin
% 1
3
1
H
4
1
H
2
1 %
Net Income
Margin
4
1
H
2
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Margins Trend
Quarterly Income Statement (RMB m)
FY Dec
1Q2014
2Q2014
3Q2014
4Q2014
1Q2015
4,618
(3,055)
1,563
(1,422)
141
11
0
5,254
(3,426)
1,828
(1,666)
162
26
0
5,443
(3,637)
1,806
(1,643)
163
19
0
5,070
(3,299)
1,771
(1,459)
312
(17)
0
4,991
(3,259)
1,732
(1,533)
198
(20)
0
(4)
0
139
(39)
(30)
70
133
(13)
0
159
(19)
(1)
139
133
(30)
0
151
(26)
72
197
132
(32)
0
265
(47)
(57)
162
283
(29)
0
173
(50)
(24)
98
192
35.1
42.8
30.6
40.8
28.1
23.3
10.3
64.5
8.1
39.2
33.8
3.0
1.5
34.8
3.1
2.6
33.2
3.0
3.6
34.9
6.1
3.2
34.7
4.0
2.0
7%
6%
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
EBITDA
Growth
Revenue Gth (%)
Net Profit Gth (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
5%
4%
3%
2%
1%
0%
3
1
0
2
Q
3
3
1
0
2
Q
4
4
1
0
2
Q
1
Operating Margin %
4
1
0
2
Q
2
4
1
0
2
Q
3
4
1
0
2
Q
4
5
1
0
2
Q
1
Net Income Margin %
Source: Company, DBS Vickers
Page 38
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Asset Breakdown
Balance Sheet (RMB m)
FY Dec
2012A
2013A
2014A
2015F
2016F
2017F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
3,391
0
986
2,351
1,016
1,310
386
4,044
0
1,113
2,619
1,501
1,386
905
5,166
0
1,299
2,002
2,031
1,695
691
6,612
0
1,334
2,040
2,297
1,914
691
7,686
0
1,375
2,063
2,577
2,165
691
8,720
0
1,422
2,109
2,862
2,424
691
Total Assets
9,440
11,568
12,883
14,889
16,558
18,228
ST Debt
Creditors
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
793
2,416
851
708
246
4,014
411
9,440
950
3,507
1,491
336
260
4,278
746
11,568
1,814
3,634
1,034
854
348
4,512
688
12,883
1,814
4,038
1,034
2,154
348
4,795
706
14,889
1,814
4,531
1,034
2,954
348
5,148
729
16,558
1,814
5,032
1,034
3,654
348
5,589
757
18,228
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
(555)
849
32.8
88.5
43.6
1.6
1.2
0.9
CASH
(0.2)
72.7
NA
(1,206)
1,333
30.2
101.4
43.1
1.6
1.1
0.7
CASH
(0.3)
92.9
NA
(252)
(666)
27.6
98.0
48.5
1.7
1.0
0.6
0.1
0.1
67.3
NA
(171)
(1,927)
28.6
93.1
52.5
1.7
1.0
0.6
0.4
0.4
44.1
NA
(133)
(2,704)
28.6
92.7
52.7
1.7
1.0
0.6
0.5
0.5
30.8
NA
(90)
(3,359)
28.7
93.1
53.0
1.7
1.0
0.6
0.5
0.6
27.2
NA
Source: Company, DBS Vickers
Page 39
Debtors 14.9%
Net Fixed
Assets 51.4%
Assocs'/JVs 0.0%
Inventory 17.9%
Bank, Cash
and Liquid
Assets 15.9%
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Capital Expenditure
Cash Flow Statement (RMB m)
FY Dec
2012A
2013A
2014A
2015F
2016F
2017F
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
(Pft)/ Loss on disposal of FAs
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (RMB)
Free CFPS (RMB)
419
412
(888)
0
0
(424)
1,723
1,242
(1,091)
0
0
0
182
(910)
(249)
(250)
1,392
0
893
0
1,226
1.36
0.12
708
352
(1,075)
0
0
(431)
1,751
1,305
(1,195)
0
0
0
154
(1,040)
(300)
(36)
336
(3)
(3)
0
262
1.42
0.09
714
524
(994)
0
0
909
(817)
336
(1,796)
0
0
0
79
(1,717)
(359)
1,167
81
(106)
783
0
(598)
(0.47)
(1.19)
907
305
(181)
0
0
(80)
(152)
799
(1,751)
0
0
0
116
(1,635)
(425)
1,300
0
0
875
0
39
0.71
(0.77)
1,132
395
(226)
0
0
(39)
(194)
1,068
(1,467)
0
0
0
152
(1,315)
(530)
800
0
0
270
0
23
0.90
(0.32)
1,412
457
(282)
0
0
(43)
(223)
1,321
(1,489)
0
0
0
175
(1,314)
(661)
700
0
(1)
38
1
45
1.11
(0.14)
RM
2,000.0
1,800.0
1,600.0
1,400.0
1,200.0
1,000.0
800.0
600.0
400.0
200.0
0.0
2013A
2014A
2015F
2016F
2017F
Capital Expenditure (-)
Source: Company, DBS Vickers
Page 40
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
This page has been left blank intentionally
Page 41
China / Hong Kong Company Guide
China Mengniu
Edition 1 Version 1 |Bloomberg: 2319 HK EQUITY
| Reuters: 2319.HK
Refer to important disclosures at the end of this report
DBS Group Research . Equity
24 July 2015
BUY
GETTING BIGGER AND BETTER
Last Traded Price: HK$38.35 (HSI : 25,399)
Price Target : HK$ 47.1 (23% upside) (Prev. HK$45.8)
Maintain BUY on solid performance. We maintain our Buy
rating on China Mengniu as we expect product mix upgrades
and margin expansion would continue drive decent earnings
growth in the next 1-2 years. We expect the company to
continue gaining market share, with earnings expected to grow
at 14.2% CAGR for FY14-16. Its JV with Danone, despite
limited scale but growing fast, could be a more significant driver
in the medium term considering the strong know-how of
Danone and Mengniu’s strength in branding and distribution.
Potential Catalyst: Stronger than expected margin enhancement
Where we differ: More conservative on earnings vs consensus
Analyst
Alice HUI CFA, +852 2971 1960
[email protected]
Alison Fok +852 2971 1938
[email protected]
Improving product mix to drive sales and margins. We expect
yogurt, representing 15% of FY14 sales, to remain a key
growth contributor with sales rising by 25% in FY15 (FY14:
37%), helped by star products including Champion, Yoyi C and
full-year contribution from Danone’s Bio+ (FY14: Rmb200m).
Coupled with solid momentum in other high-margin products
such as premium milk, we expect Mengniu’s double-digit
growth in top line to be sustainable, with room for margin
expansion given the enhancement in product mix and
favourable raw material costs.
Price Relative
HK$
Relative Index
46.3
203
41.3
183
163
36.3
143
31.3
123
26.3
103
21.3
83
16.3
Jul-11
Jul-12
China Mengniu (LHS)
Forecasts and Valuation
FY Dec (RMB m)
Turnover
EBITDA
Pre-tax Profit
Net Profit
EPS (RMB)
EPS (HK$)
EPS Gth (%)
Diluted EPS (HK$)
DPS (HK$)
BV Per Share (HK$)
PE (X)
P/Cash Flow (X)
P/Free CF (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (RMB)
Other Broker Recs:
Jul-13
63
Jul-15
Jul-14
Relative HSI INDEX (RHS)
2014A
50,049
4,241
3,150
2,351
1.22
1.52
35.1
1.52
0.36
13.93
25.2
19.2
398.5
15.9
0.9
2.8
0.2
12.8
2015F
55,784
4,372
3,469
2,694
1.38
1.72
12.9
1.72
0.39
15.10
22.3
13.2
29.4
15.3
1.0
2.5
0.1
11.9
2016F
61,750
4,944
4,004
3,066
1.57
1.96
13.8
1.96
0.44
16.67
19.6
14.2
35.3
13.1
1.1
2.3
0.0
12.3
2017F
67,723
5,694
4,658
3,526
1.80
2.25
15.0
2.25
0.51
18.48
17.0
13.2
29.4
10.8
1.3
2.1
CASH
12.8
Nil
1.43
B: 22
Nil
1.69
S: 1
New
2.03
H: 8
Source of all data: Company, DBSV, Thomson Reuters, HKEX
ASIAN INSIGHTS
www.dbsvickers.com
ed-JS / sa- CW
Competition in UHT milk remains tough. We expect the mass
UHT milk market to face tougher competition. But with its
strategy to place more promotional efforts on this category,
there could still be some growth with the cheaper raw material
costs (avg. raw milk prices and Fonterra milk powder prices have
fallen 15% and 40% yoy respectively) providing a cushion on
margins.
Valuation:
The stock is currently trading at 19.6x FY16F PE, below its
historical (24x) as well as sector average valuation (25.5x). Our
TP is now rolled over to HK$47.1(previously HK$45.8), based on
24x FY16F PE (prev. c.26x FY15 PE), pegged to its historical
average.
Key Risks to Our View:
Demand, cost, competition and food safety the key risks.
Slower than expected demand, raw material cost fluctuation,
rising SG&A on increased A&P efforts, surging competition
(both domestic and global players) and food safety concerns
would be key risks.
At A Glance
1,961
Issued Capital (m shrs)
75,216 / 9,705
Mkt. Cap (HK$m/US$m)
Major Shareholders
COFCO, Arla, Danone (%)
31.5
Commonwealth Bank of Australia
8.0
60.4
Free Float (%)
3m Avg. Daily Val. (US$m)
28.9
ICB Industry : Consumer Goods / Food Producers
VICKERS SECURITIES
Company Guide
China Mengniu
FY14 revenue breakdown%
Ice cream
5%
CRITICAL DATA POINTS TO WATCH
Yogurt
15%
Earnings Drivers:
Yogurt – leader in driving stronger product mix. Yogurt accounted
for 15% of FY14 sales. We expect sales growth to reach 25% in
FY15 (FY14: 37%), led by higher margin star products such as
Champion, Yoyi C, and full-year contribution from Danone’s Bio+
(FY14. RMB200m). Mengniu has launched smaller packaging
formats for Yoyi C with more varieties of flavours, while it
continues to extend the products’ shelf-life to improve profitability.
Recovery in infant formula sales. Despite the tough operating
environment in the infant formula market, we see potential
catalysts coming from (i) a likely recovery in Yashili’s topline
growth; (ii) injection of the remainder of existing infant formula
operations from Mengniu to Yashili; and (iii) potential investment
into Danone’s Dumex China, which is one of the fastest growing
imported brands. Mengniu became a controlling shareholder of
Yashili last year. In FY14, Yashili accounted for c.5% of its sales
and net profit. Following the acquisition, Yashili has been
undergoing restructuring and is refining its distribution network.
We expect impact from these efforts to start kicking in gradually.
Given the typically higher GP margin for infant formula, a recovery
in Yashili would enhance Mengniu’s margin in the medium term.
Seeking to improve distribution channels. Mengniu will continue
to streamline its distribution channels, shifting from distributorbased to direct selling. This will be implemented in 2015 in first
tier and key provincial cities, where the company aims to switch to
direct selling in modern channels instead of through distributors.
In addition, Mengniu will also proactively seek new channels such
as schools and catering. This should result in improved control of
its distribution network in the longer run, though in the near term,
the process would need to be carefully monitored to minimise any
possible negative impact during transition.
Other dairy
products
1%
UHT milk
47%
Milk
beverages
24%
Yogurt sales & % yoy
RMB m
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
70%
60%
50%
40%
30%
20%
10%
0%
2009
2010
2011
2012
Sales
2013
2014F
2015F
Growth (%)
Yashili net profit contribution as % of total sales
6.0
%
5.0
5.0
4.0
3.0
2.0
1.2
1.0
0.2
0.0
2H13
1H14
2H14
Overall profitability
RMB m
3,000
44%
2,000
30%
28%
2,500
15%
11%
1,500
1,000
-21%
500
0
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
2009 2010 2011 2012 2013 2014F 2015F
Net profit
ASIAN INSIGHTS
Page 43
Growth (%)
VICKERS SECURITIES
Company Guide
China Mengniu
Balance Sheet:
Healthy financial position. Mengniu is in a solid financial position
with net gearing of 24% as of end-FY14, after the injection of
Danone and Arla as key shareholders. Given robust operating
cash flow (est. >Rmb3bn p.a.), this should be more than
sufficient to cover its upcoming capex (est. Rmb2.5bn), with net
gearing expected to trend down to 3% by FY16.
Share Price Drivers:
Market share gains. We expect one of the key drivers of Mengniu
will be its ability to further expand its distribution network,
thereby improve its market share nationwide.
Stronger than expected margin expansion. Persistent soft raw
milk prices and milk powder prices could offer further room for
margin improvement.
Leverage & Asset Turnover (x)
1.5
0.70
1.5
0.60
1.4
0.50
1.4
0.40
1.3
0.30
1.3
0.20
1.2
0.10
1.2
0.00
1.1
2013A
2014A
2015F
Gross Debt to Equity (LHS)
2016F
2017F
Asset Turnover (RHS)
Capital Expenditure
RM
3,000.0
2,900.0
2,800.0
2,700.0
2,600.0
2,500.0
Key Risks:
Rising domestic and import competition. Competition may
continue to intensify, not only from domestic players but also
international brands. This may create more aggressive price
competition and hurt ASP and thus margins.
2,400.0
2,300.0
2013A
2014A
2015F
2016F
2017F
Capital Expenditure (-)
ROE (%)
12.0%
Food safety issues. Mengniu may be affected by any dairy-related
industry news concerning food safety issues.
Raw material price volatility. Mengniu’s profitability would be
affected by volatility in raw material costs, in particularly raw milk
and milk powder which are key materials.
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
COMPANY BACKGROUND
One of the key leading giants. Mengniu is one of the leading
dairy giants in China. China Mengniu, through its subsidiaries,
manufactures and distributes dairy related products (UHT milk,
yogurt, and milk beverages), ice cream, and other dairy products,
such as infant formula powder. The company markets its
products under its MENGNIU core brand.
2013A
2014A
2015F
2016F
Forward PE Band (x)
(x)
32.4
30.4
+2sd: 28.4x
28.4
26.4
+1sd: 25.4x
24.4
Avg: 22.5x
22.4
Key listed companies. China Mengniu has controlling stakes on
two listed companies - Yashili (51% stake) and China Modern
Dairy (25.4% stake) - which secures Mengniu’s upstream supply
chain as well as improving its infant formula capabilities. It also
holds minor equity stakes in other upstream players such as
Shengmu and YST Dairy. As for downstream operations,
Mengniu holds a 51% stake in Junlebao, a private company,
which is known for its affordable infant formula powder.
Partnerships with international players. Mengniu has formed
partnerships with its stakeholders such as Danone and Arla;
Danone holds a 20% stake in Mengniu’s cold-chain business that
includes yogurt offerings. In addition, Mengniu also has formed a
49%/51% JV with US-based Whitewave Foods, which has
launched a plant-based product online this year.
ASIAN INSIGHTS
2017F
20.4
‐1sd: 19.6x
18.4
‐2sd: 16.6x
16.4
14.4
Jul-11
Jul-12
Jul-13
Jul-14
PB Band (x)
4.2
(x)
3.7
+2sd: 3.65x
3.2
+1sd: 3.26x
Avg: 2.87x
2.7
‐1sd: 2.48x
2.2
1.7
Jul-11
‐2sd: 2.1x
Jul-12
Jul-13
Jul-14
Source: Company, DBS Vickers
VICKERS SECURITIES
Page 44
Company Guide
China Mengniu
Segmental Breakdown (RMB m)
FY Dec
Revenues (RMB m)
Liquid milk
Ice cream
Other dairy products
Infant formula
Total
2013A
2014A
2015F
2016F
2017F
37,903
3,023
253
2,177
43,357
43,036
2,716
336
3,961
50,049
48,218
2,743
504
4,320
55,784
53,613
2,771
655
4,711
61,750
59,023
2,798
786
5,115
67,723
2013A
43,357
(31,660)
11,697
(9,846)
1,852
0
154
199
0
0
2,205
(367)
(231)
0
1,631
3,186
2014A
50,049
(34,616)
15,434
(12,769)
2,665
0
278
208
0
0
3,150
(459)
(340)
0
2,351
4,241
2015F
55,784
(38,195)
17,589
(14,569)
3,020
0
239
210
0
0
3,469
(531)
(245)
0
2,694
4,372
2016F
61,750
(42,169)
19,581
(16,104)
3,476
0
308
220
0
0
4,004
(651)
(287)
0
3,066
4,944
2017F
67,723
(46,000)
21,723
(17,649)
4,074
0
354
230
0
0
4,658
(800)
(331)
0
3,526
5,694
20.2
27.3
23.9
29.7
15.4
33.1
43.9
44.1
11.5
3.1
13.3
14.6
10.7
13.1
15.1
13.8
9.7
15.2
17.2
15.0
27.0
4.3
3.8
11.7
5.3
6.8
22.5
NM
30.8
5.3
4.7
12.8
5.4
6.7
23.3
NM
31.5
5.4
4.8
11.9
5.5
6.6
22.5
NM
31.7
5.6
5.0
12.3
5.8
7.0
22.5
NM
32.1
6.0
5.2
12.8
6.1
7.4
22.5
NM
Source: Company, DBS Vickers
Income Statement (RMB m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Dividend Income
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Vickers
ASIAN INSIGHTS
Page 45
VICKERS SECURITIES
Company Guide
China Mengniu
Interim Income Statement (RMB m)
FY Dec
2H2012
1H2013
2H2013
1H2014
2H2014
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
17,837
(13,426)
4,411
(3,789)
622
0
74
86
0
782
(91)
(79)
612
20,668
(15,149)
5,519
(4,611)
908
0
30
99
0
1,036
(186)
(101)
749
22,689
(16,511)
6,178
(5,210)
968
0
124
100
0
1,193
(181)
(130)
881
25,836
(17,454)
8,382
(7,161)
1,221
0
183
78
0
1,481
(253)
(180)
1,049
24,213
(17,162)
7,052
(5,608)
1,444
0
95
130
0
1,669
(207)
(160)
1,302
(5.2)
(30.9)
(23.4)
13.3
4.1
16.3
27.2
55.5
43.9
25.0
34.5
39.9
6.7
49.1
47.7
24.7
3.5
3.4
26.7
4.4
3.6
27.2
4.3
3.9
32.4
4.7
4.1
29.1
6.0
5.4
FY Dec
2013A
2014A
2015F
2016F
2017F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
9,246
2,843
11,929
7,663
2,577
3,595
2,485
40,339
9,667
3,841
13,240
4,650
4,342
9,768
1,573
47,081
9,874
3,841
15,732
6,209
3,977
9,689
1,620
50,942
11,033
3,841
15,781
8,958
4,390
9,804
1,669
55,476
12,087
3,841
15,753
12,179
5,041
9,918
1,719
60,537
ST Debt
Creditors
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
8,554
9,116
393
3,336
929
15,361
2,650
40,339
4,479
9,546
326
5,464
2,773
21,489
3,003
47,081
1,974
10,465
397
7,969
3,255
23,635
3,248
50,942
1,974
11,553
517
7,969
3,833
26,095
3,535
55,476
1,974
12,603
667
7,969
4,527
28,931
3,867
60,537
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
(851)
(4,227)
18.5
92.4
23.9
1.4
0.9
0.6
0.2
0.3
24.1
3.0
5,811
(5,293)
48.7
102.2
37.9
1.1
1.4
1.0
0.2
0.2
29.5
3.4
4,425
(3,734)
63.7
98.5
40.9
1.1
1.7
1.2
0.1
0.2
25.3
3.4
3,793
(985)
57.6
98.0
37.2
1.2
1.8
1.3
0.0
0.0
25.3
3.4
3,409
2,236
53.1
98.5
38.5
1.2
1.9
1.4
CASH
CASH
25.3
3.4
Revenue Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Source: Company, DBS Vickers
Balance Sheet (RMB m)
Source: Company, DBS Vickers
ASIAN INSIGHTS
VICKERS SECURITIES
Page 46
Company Guide
China Mengniu
Cash Flow Statement (RMB m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
(Pft)/ Loss on disposal of FAs
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (RMB)
Free CFPS (RMB)
2013A
2014A
2015F
2016F
2017F
2,229
1,218
(281)
0
0
517
(399)
3,284
(2,867)
0
0
0
(12,402)
(15,269)
(290)
10,780
835
1,006
12,331
0
346
1.53
0.23
3,150
1,321
(572)
0
0
(478)
(341)
3,080
(2,931)
0
0
0
(3,484)
(6,415)
(391)
(1,460)
3,752
3,910
3,619
0
283
1.85
0.08
3,469
1,187
(459)
0
0
1,315
(951)
4,561
(2,519)
0
0
0
(1,122)
(3,641)
(548)
0
0
1,188
640
0
1,559
1.66
1.04
4,004
1,236
(531)
0
0
512
(1,000)
4,222
(2,519)
0
0
0
1,409
(1,111)
(606)
0
0
244
(362)
0
2,749
1.90
0.87
4,658
1,343
(651)
0
0
234
(1,020)
4,565
(2,519)
0
0
0
1,592
(927)
(690)
0
0
273
(417)
0
3,221
2.22
1.05
Source: Company, DBS Vickers
Target Price & Ratings History
S.No. Dat e
6
5
1:
2:
3:
4:
5:
6:
28-Aug-14
31-Oct-14
5-Dec-14
9-J an-15
27-Mar-15
4-May -15
Closing
Pric e
HK$38.00
HK$34.25
HK$29.75
HK$33.30
HK$38.70
HK$39.25
T arget
Pric e
HK$38.30
HK$37.10
HK$32.00
HK$32.80
HK$41.30
HK$45.8
Rat ing
Hold
Hold
Hold
Hold
Hold
Buy
Jul-15
3
May-15
4
Feb-15
Oct-14
2
Dec-14
1
Jul-14
HK$
47.0
45.0
43.0
41.0
39.0
37.0
35.0
33.0
31.0
29.0
27.0
Source: DBS Vickers
ASIAN INSIGHTS
Page 47
VICKERS SECURITIES
China / Hong Kong Company Guide
China Modern Dairy
Edition 1 Version 1 |Bloomberg: 1117 HK Equity
| Reuters: 1117.HK
Refer to important disclosures at the end of this report
DBS Group Research . Equity
24 July 2015
BUY
STABLE PROGRESS
Last Traded Price: HK$2.53 (HSI : 25,399)
Price Target : 12-Month HK$ 3.35 (32% upside) (Prev HK$3.45)
Potential Catalyst: Earlier-than-expected rebound in dairy prices
Where we differ: Lower dairy price assumptions for FY15-16
Analyst
Alice HUI CFA, +852 2971 1960
[email protected]
Alison Fok +852 2971 1938
[email protected]
Recent acquisition strengthens leading position. In Jul’15,
CMD announced the placement of 477m new shares (9.9% of
total) to KKR and CDH with a 3-year lock-up period, in
exchange for the remaining 82% stake in its two JV farms
which holds 16,268 cows. Based on the 5M15 net profit of
Rmb44.6m, we estimate the potential earnings enhancement to
be 3-5% in FY15/16.
Price Relative
HK$
Relative Index
212
4.4
192
3.9
172
3.4
152
2.9
132
2.4
112
1.9
92
1.4
Jul-11
Jul-12
Jul-13
China Modern Dairy (LHS)
Forecasts and Valuation
FY Dec (RMB m)
Turnover
EBITDA
Pre-tax Profit
Core Net Profit
EPS (RMB)
EPS (HK$)
EPS Gth (%)
Diluted EPS (HK$)
DPS (HK$)
BV Per Share (HK$)
PE (X)
P/Cash Flow (X)
P/Free CF (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (RMB)
Other Broker Recs:
2014A
5,027
1,239
770
1,064
0.22
0.28
89.1
0.19
0.01
1.68
9.2
6.2
nm
11.7
0.5
1.5
0.7
17.4
Jul-14
72
Jul-15
Relative HSI INDEX (RHS)
2015F
5,467
1,417
928
885
0.18
0.23
(16.8)
0.23
0.00
3.88
11.0
6.5
nm
10.5
0.0
0.7
0.3
8.2
2016F
6,861
1,659
1,126
1,081
0.22
0.28
22.1
0.28
0.01
4.18
9.1
5.8
143.2
9.0
0.5
0.6
0.3
6.9
2017F
7,558
1,876
1,332
1,279
0.26
0.33
18.3
0.33
0.01
4.52
7.7
5.3
40.1
8.0
0.5
0.6
0.3
7.6
(1)
(6)
0.20
S: 5
NEW
0.25
H: 3
B: 14
Source of all data: Company, DBSV, Thomson Reuters, HKEX
ASIAN INSIGHTS
www.dbsvickers.com
ed-TH/ sa- AL
Maintain BUY on undemanding valuations. We maintain
our BUY rating on China Modern Dairy (CMD) as we expect raw
milk prices to post a mild rebound in 2016. We believe the
weaker earnings in FY15, a 17% decline under our estimates,
should have been largely priced in at the current valuation with
possible resumption of earnings growth in FY16. In the
medium term, we believe leading upstream players like CMD
should continue to benefit from rising demand from
downstream as well as market consolidation.
Downstream operations still sound. Downstream sales is
sound as CMD’s UHT milk sales remained relatively healthy
under a highly competitive landscape. We expect CMD to meet
its sales target of Rmb1.5bn for its branded business in FY15.
The company's low-temperature products such as yogurt have
hit the shelves in Beijing, which could become a new driver in
the longer run.
Valuation:
We lower our EPS estimates by 5-10% for FY15-16 and
introduce FY17 earnings largely on share placement adjustment.
CMD is now trading at 9.1x FY16 PE, which is lower than its
1SD below its 3-year historical average of 13x. Maintain our BUY
rating with a new TP of HK$3.35 (Prev. HK$3.45).
Risks:
Raw milk price volatility. CMD’s earnings are highly affected by
raw milk price fluctuations, both domestic and international.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (HK$m/US$m)
Major Shareholders
China Mengniu Dairy Company Limited (%)
KKR & CDH (%)
Free Float (%)
3m Avg. Daily Val. (US$m)
ICB Industry : Consumer Goods / Beverages
5,305
13,411 / 1,730
25.4
9.9
21.9
4.6
VICKERS SECURITIES
Company Guide
China Modern Dairy
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Raw milk price (CMD)
RMB/kg
5.2
5.0
Production volume to drive upstream sales growth. We
expect sales volume, driven by improving milk yields and organic
herd size growth, to be the key drivers to upstream earnings.
Demand will be mostly absorbed by Mengniu, with a 10-year
offtake agreement until 2018. We maintain our view that largescale dairy farms such as CMD will be the key beneficiaries of the
market consolidation in the upstream dairy sector, as large-scale
players should have stronger cost competitiveness vs smaller
players. In the longer run, the increasing popularity of pasteurised
dairy products would further drive the demand for locally
produced quality milk. In terms of herd size, we expect the
company to grow at 9% organically. Inclusive of its two JVs, we
expect herd size to grow 17% this year.
4.8
4.6
4.4
4.2
4.0
2013
2016F
2017F
9.00
9.08
8.99
8.90
8.80
8.50
8.40
8.20
2013
2014
2015F
2016F
Sales volume ('000 tonnes)
'000 tonne
2,000
40%
1,500
30%
1,000
20%
500
10%
0
0%
2013
2014
2015F
2016F
Sales volume
2017F
% yoy
Raw milk price
RMB/kg
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
Jun/11
Sep/11
Dec/11
Mar/12
Jun/12
Sep/12
Dec/12
Mar/13
Jun/13
Sep/13
Dec/13
Mar/14
Jun/14
Sep/14
Dec/14
Mar/15
Jun/15
Point of sales expansion key to downstream growth.
Downstream sales will be primarily driven by distribution network
expansion to improve CMD’s visibility in the market. CMD’s liquid
milk products are currently sold in 28 provinces, with decent sales
coverage at modern trade channels such as large supermarkets
including Carrefour, Walmart, Meetall, Shiji Hualian, C.P Lotus,
Yonghui, Auchan, etc. As of Dec’14, CMD had expanded its
distribution partners to 463 (FY13: 210), with POS increased to
260k, up c.148% y-o-y (versus downstream sales growth of
159%). We expect downstream sales contribution to grow to
16% of sales (FY14: 9%) to reach 42% in CAGR for FY14-16F.
2015F
RMB/tonne
9.20
8.60
Milk yield to grow. With the inclusion of the two JVs, we expect
milk yield to be softer this year on average. We estimate milk
yield to grow by 1% to 9 tonnes per annum this year (FY14:
+7% y-o-y). This should improve as the herd matures.
2014
Milk yield (tonne/annum)
WMP
US$/ton
ASIAN INSIGHTS
Page 49
Jun/15
Feb/15
Oct/14
Jun/14
Feb/14
Oct/13
Jun/13
Feb/13
Oct/12
Jun/12
Feb/12
Oct/11
Jun/11
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
VICKERS SECURITIES
Company Guide
China Modern Dairy
Leverage & Asset Turnover (x)
Balance Sheet:
Heavy capex input. Owing to heavy capex commitment to build
dairy farms, CMD’s net gearing was at a relatively high level of
67%. However, CMD should see improvement, having recently
done a new share placement as well as having less capex
commitment with a more mature herd size to grow organically.
0.4
0.90
0.4
0.80
0.4
0.70
0.3
0.60
0.3
0.50
0.3
0.40
0.3
0.30
0.3
0.20
0.2
Share Price Drivers:
0.10
0.2
Rebound on raw milk prices. A rebound in raw milk prices will
lift upstream sales, as well as margins. As the largest upstream
player in China, we expect CMD to be one of the key
beneficiaries should this happen. While we still expect volume to
grow 15% in FY15, the decline in raw milk prices (down 12% yo-y to Rmb4.4/kg in FY15 under our assumptions, vs 4% q-o-q)
would partly offset the volume growth. Meanwhile, we expect
rd
cost of sales (of which around 2/3 comprise of feed costs) to
post a slight decline as soft commodity and alfalfa prices
remained largely on the stable/downward trend y-o-y. Under this
backdrop, a potential recovery in raw milk prices from the current
level (a multi-year trough for international prices) should help
margins going forward.
0.00
Stronger growth at downstream operations. CMD is
expanding its product range progressively to lower its reliance on
upstream earnings. This year, CMD is entering into lowtemperature dairy products initially in Beijing. If well-received,
CMD will begin expanding to other regions which should further
enhance its product offerings..
16.0%
0.2
2013A
2014A
2015F
Gross Debt to Equity (LHS)
2016F
2017F
Asset Turnover (RHS)
Capital Expenditure
RM
2,500.0
2,000.0
1,500.0
1,000.0
500.0
0.0
2013A
2014A
2015F
2016F
2017F
Capital Expenditure (-)
ROE (%)
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
COMPANY BACKGROUND
Largest upstream dairy player. Established in 2005 in Maanshan,
Anhui, China Modern Dairy is the largest upstream dairy
company in terms of herd size as well as the largest raw milk
producer in China. As of FY14, CMD had a total of 201k dairy
cows at 25 operating farms across China, with average milk yield
at 8.9 ton/annum.
A pioneer in large-scale dairy farming. CMD is among the first to
adopt a free-stall dairy farming business model in China to ensure
higher yields and cost efficiency compared with small-scale
backyard farmers. CMD previously relied on imported heifers
from Australia to ensure higher productivity as well as faster herd
size growth; this has since been halted as CMD has reached a
sustainable herd size.
Expand operations downstream. CMD expanded its operations
downstream under the brand Modern Farming, primarily sold in
Shanghai region. In FY15, CMD will expand its product offerings
to cover low-temperature dairy products.
0.0%
2013A
2014A
2015F
2016F
2017F
Forward PE Band (x)
35.7
(x)
30.7
25.7
+2sd: 25x
20.7
+1sd: 20.4x
15.7
Avg: 15.7x
10.7
‐1sd: 11x
5.7
Jul-11
‐2sd: 6.3x
Jul-12
Jul-13
Jul-14
PB Band (x)
(x)
3.2
2.7
+2sd: 2.65x
2.2
+1sd: 2.21x
1.7
Avg: 1.76x
‐1sd: 1.32x
1.2
‐2sd: 0.87x
0.7
Jan-12
Jan-13
Jan-14
Jan-15
Source: Company, DBS Vickers
ASIAN INSIGHTS
VICKERS SECURITIES
Page 50
Company Guide
China Modern Dairy
Segmental Breakdown (RMB m)
FY Dec
Revenues (RMB m)
Upstream dairy
UHT Milk
Total
2013A
2014A
2015F
2016F
2017F
2,968
321
3,289
4,194
833
5,027
4,017
1,450
5,467
5,161
1,700
6,861
5,658
1,900
7,558
2013A
3,289
(2,032)
1,257
(410)
847
55
0
(179)
0
0
518
(11)
26
0
560
865
2014A
5,027
(3,161)
1,865
(870)
996
18
0
(244)
0
0
770
(7)
28
0
1,064
1,239
2015F
5,467
(3,837)
1,629
(494)
1,136
14
0
(222)
0
0
928
(37)
5
0
885
1,417
2016F
6,861
(4,909)
1,952
(599)
1,353
19
0
(246)
0
0
1,126
(45)
0
0
1,081
1,659
2017F
7,558
(5,345)
2,213
(660)
1,554
16
0
(238)
0
0
1,332
(53)
0
0
1,279
1,876
61.2
42.5
64.7
78.9
52.8
43.2
17.5
90.0
8.8
14.3
14.1
(16.8)
25.5
17.1
19.2
22.1
10.2
13.1
14.8
18.3
38.2
25.7
17.0
10.2
4.9
8.4
0.0
4.7
37.1
19.8
21.2
17.4
8.0
8.3
6.6
4.1
29.8
20.8
16.2
8.2
4.6
6.2
0.0
5.1
28.5
19.7
15.8
6.9
4.3
5.7
5.0
5.5
29.3
20.6
16.9
7.6
4.8
6.2
5.0
6.5
Source: Company, DBS Vickers
Income Statement (RMB m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Dividend Income
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Vickers
ASIAN INSIGHTS
Page 51
VICKERS SECURITIES
Company Guide
China Modern Dairy
Interim Income Statement (RMB m)
FY Dec
2H2012
1H2013
2H2013
1H2014
2H2014
1,093
(756)
336
(93)
243
49
3
(55)
3
182
(3)
8
143
1,388
(900)
489
(171)
318
47
1
(74)
4
179
(5)
10
185
1,901
(1,133)
769
(240)
529
8
(1)
(105)
5
339
(6)
16
375
2,585
(1,579)
1,005
(343)
662
9
5
(124)
6
552
(7)
22
608
2,442
(1,582)
860
(527)
333
10
(5)
(120)
7
218
(1)
5
456
N/A
N/A
N/A
47.4
19.8
8.3
74.0
117.5
163.4
86.2
108.3
228.9
28.5
(37.0)
21.6
30.8
22.3
13.0
35.2
22.9
13.3
40.4
27.8
19.7
38.9
25.6
23.5
35.2
13.6
18.7
FY Dec
2013A
2014A
2015F
2016F
2017F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
4,099
59
6,299
800
691
545
2
12,494
4,523
114
6,935
1,170
641
827
2
14,211
4,855
7,750
7,947
1,885
778
899
2
24,116
5,168
7,750
8,959
1,721
995
1,128
2
25,723
5,462
7,750
9,972
1,747
1,084
1,242
2
27,258
ST Debt
Creditors
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
2,989
1,386
108
1,960
190
5,743
118
12,494
2,958
1,403
108
2,829
350
6,510
146
14,211
2,958
1,693
108
3,829
350
15,032
146
24,116
2,958
2,165
108
3,829
350
16,167
146
25,723
2,958
2,358
108
3,829
350
17,509
146
27,258
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
(257)
(4,149)
45.9
273.1
110.8
0.3
0.5
0.3
0.7
0.7
19.2
1.5
52
(4,618)
49.8
173.4
82.8
0.4
0.6
0.5
0.7
0.7
36.9
1.7
(122)
(4,903)
57.6
158.3
72.5
0.3
0.7
0.6
0.3
0.3
23.8
1.6
(148)
(5,067)
53.9
152.3
70.0
0.3
0.7
0.5
0.3
0.3
23.8
1.7
(138)
(5,041)
57.2
163.8
75.3
0.3
0.8
0.6
0.3
0.3
23.8
1.7
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Growth
Revenue Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Source: Company, DBS Vickers
Balance Sheet (RMB m)
Source: Company, DBS Vickers
ASIAN INSIGHTS
VICKERS SECURITIES
Page 52
Company Guide
China Modern Dairy
Cash Flow Statement (RMB m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
(Pft)/ Loss on disposal of FAs
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (RMB)
Free CFPS (RMB)
2013A
2014A
2015F
2016F
2017F
518
169
(1)
1
0
(387)
(83)
216
(952)
181
(33)
0
16
(788)
(1)
170
6
388
563
0
(9)
0.13
(0.15)
770
226
(14)
0
0
(187)
787
1,581
(2,136)
281
(56)
0
16
(1,895)
0
921
0
(420)
502
0
188
0.37
(0.12)
928
267
(37)
0
0
80
266
1,504
(1,612)
98
(7,636)
0
44
(9,106)
7,588
1,000
0
(271)
8,317
0
715
0.29
(0.02)
1,126
287
(45)
0
0
26
286
1,681
(1,612)
14
0
0
40
(1,558)
0
0
0
(286)
(286)
0
(164)
0.34
0.01
1,332
306
(53)
0
0
(11)
282
1,856
(1,612)
74
0
0
44
(1,494)
(54)
0
0
(283)
(337)
1
26
0.39
0.05
Source: Company, DBS Vickers
Target Price & Ratings History
S.No. Dat e
HK$
5.0
1 2
3
4.5
5
4
4.0
1:
2:
3:
4:
5:
6:
6
3.5
3.0
13-Aug-14
26-Aug-14
3-Oct-14
5-Dec-14
25-Mar-15
17-Apr-15
Closing
Pric e
HK$3.56
HK$3.47
HK$3.35
HK$2.25
HK$2.46
HK$2.99
T arget
Pric e
HK$4.26
HK$4.41
HK$4.26
HK$3.00
HK$3.00
HK$3.45
Rat ing
Buy
Buy
Buy
Buy
Buy
Buy
2.5
2.0
Jul-15
May-15
Feb-15
Dec-14
Oct-14
1.0
Jul-14
1.5
Source: DBS Vickers
ASIAN INSIGHTS
Page 53
VICKERS SECURITIES
China Dairy Sector
Yashili International Holdings
Refer to important disclosures at the end of this report
Bloomberg: 1230 HK EQUITY | Reuters: 1230.HK
NOT RATED
On the shoulders of twin giants
Last Traded Price: HK$2.27 (HSI : 25,399)
Potential Catalyst: Recovery in topline growth
Analyst
Alice HUI CFA, +852 2971 1960
[email protected]
Alison Fok +852 2971 1938
[email protected]
Price Relative
HK$
Relative Index
5.9
315
4.9
265
3.9
215
2.9
165
1.9
0.9
Jul-11
115
Jul-12
Yashili Int’l (LHS)
Forecasts and Valuation
FY Dec (RMB m)
Turnover
EBITDA
Pre-tax Profit
Net Profit
EPS (RMB)
EPS (HK$)
EPS Gth (%)
DPS (HK$)
BV Per Share (HK$)
PE (X)
P/Cash Flow (X)
P/Free CF (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Jul-13
65
Jul-15
Jul-14
Relative HSI INDEX (RHS)
2011A
2,958
383
375
306
0.09
0.11
(47.6)
0.07
1.35
20.9
13.9
18.2
9.5
3.1
1.7
CASH
8.1
2012A
3,655
636
646
468
0.13
0.17
52.6
0.50
1.45
13.7
8.3
11.4
7.0
21.9
1.6
CASH
11.9
2013A
3,890
565
577
438
0.12
0.15
(7.3)
0.05
1.09
14.7
45.8
nm
9.9
2.0
2.1
CASH
12.2
2014A
2,816
348
310
249
0.07
0.09
(43.3)
0.03
1.11
26.0
24.5
nm
14.8
1.2
2.0
CASH
7.9
ICB Industry: Consumer Goods
ICB Sector: Food Producers
Principal Business: One of the top infant formula companies in
China
Source of all data: Company, DBSV, Thomson Reuters, HKEX

A leading domestic infant formula player in China

FY15 to be a year of transition on ongoing restructuring

Premium valuation justified, given potential synergies with
Mengniu and Danone
A leading domestic infant formula player. Headquartered in
Guangdong, Yashili is one of the leading domestic infant formula
manufacturers. The company manufactures and distributes products
under its own brands, Yashily and Scient, commanding a market share
of 4.5% in FY14. Yashili also manufactures and distributes nutritional
food such as soymilk powder and cereals.
Consolidating market share with Danone’s Dumex. With Mengniu
and Danone emerging as Yashili’s controlling and second largest
shareholder respectively, Based on a recent MOU between Mengniu,
Yashili and Danone, Danone intends to sell all of its interest in Dumex
China into Yashili, which could propel Mengniu-Yashili’s position to the
top tier infant formula players. Yashili is also undergoing restructuring
with changes in its marketing strategy (more active face-to-face events,
nursing promotions, and loyalty membership scheme), upgrading of
technology and infrastructure, and improvements in its distribution
channel, including leveraging on Danone’s existing online resources.
We expect Mengniu to inject its remaining infant formula operations
into Yashili, turning Yashili into Mengniu’s platform for infant formula.
FY15 a year of transition. While we believe Yashili’s 1H15
performance should likely remain soft, as the company is still in an
adjustment period amid a challenging market environment, its effort to
expand its penetration in the baby store and online channels as well as
new product launches could start to show some impact from 2H15
onwards. Management had earlier guided for positive top line growth
in FY15. Trading at 19x FY16 PE (based on consensus), Yashili's
valuation is at a premium to Biostime, a reflection of the company’s
distortion in earnings from the restructuring, as well as potential strong
synergies with Mengniu and Danone. With the backing of these two
dairy giants, Yashili will be a strong contender in the domestic infant
formula market in the long run. Key risks include rising domestic and
foreign competition through e-commerce, as well as food safety issues.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (HK$m/US$m)
Major Shareholders
China Mengniu (%)
Danone (%)
Free Float (%)
3m Avg. Daily Val. (US$m)
4,746
10,772 / 1,390
51.0
25.0
24.0
0.9
Page 4
www.dbsvickers.com
ed- JS / sa- AL
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
Yashili International Holdings
Company background
Growth drivers
One of the top domestic players in China. Yashili is engaged
in the production and sales of paediatric milk formula
products and nutrition food. It held a market share of 4.5% in
China’s infant formula market in 2014. Headquartered in
Guangdong province, Yashili operates plants in Guangdong,
Shanxi and Heilongjiang, with a new plant in New Zealand
expected to commence operations in 2015.
Recovery in topline growth. Since Mengniu became Yashili’s
controlling shareholder, the Group has invested in information
platforms to improve its communication access with
consumers. As at FY14, the Group had 27,000 membership
stores with 1.1m members. Yashili will place more effort on
communicating and understanding consumers’ needs through
face-to-face marketing events, increasing promotional events,
upgrading technology and infrastructure, as well as leveraging
on shareholders’ strength in sales and distribution.
In Nov-13, Mengniu made a general offer to become Yashili’s
controlling shareholder at HK$3.5/share. Danone
subsequently joined as the second largest shareholder in Feb15 through a new share placement at HK$3.7/share. Currently,
Mengniu and Danone have 51% and 25% stakes respectively.
Yashili has an extensive range of infant formula brands, with
its two core brands, Yashily and Scient, targeting mid- to
high-end consumers. Yashily Super α-Golden series, the
Ambery Golden series and the Arla Merla series (cooperation
with Arla foods) target high-end consumers, while Yashily
Newwitt series and Scient’s Ordinary Pack Series focus on midend consumers. Lastly, Yashily New Formula focuses on lowto mid-end consumers. The Group also sells nutrition food,
such as adult milk powder and nutritious paediatric rice cereal.
FY14 sales breakdown
Yashily
Nutritions
19%
Scient
Formula
16%
Yashily
Formula
65%
Leveraging on key shareholders’ expertise. Based on the MOU
which has been entered between Mengniu, Yashili and
Danone t o inject Danone’s Dumex China operations into
Yashili, Danone intends to sell all its interest in Dumex China
to Yashili, of which the proceeds will be used to subscribe for
Mengniu’s shares through COFCO Dairy Investment (CDI).
Combining Danone’s market share of 2.8% based on
Euromonitor, Mengniu-Yashili’s infant formula market share
will propel to second position with 7%, after Nestle. While no
financial details are released at this stage, this clearly
strengthens Yashili’s position in the infant formula market.
Synergies include leveraging on Danone’s sales and
distribution network as well as product technology to further
improve on its existing product offerings.
E-commerce presence to grow. E-commerce is the fastestgrowing sales channel for infant formula, in which
international brands have dominant presence due to their
stronger brand reputation. This trend should likely continue.
Despite this, Yashili should still be able to benefit, given
opportunities to leverage on Danone’s existing online platform,
as well as potential for its imported brands such as Arla Merla.
Yashili will also have dedicated products (Le Pei Jian” [樂培健])
to target its maternity channel.
Source: Company data, DBS Vickers
Page 55
China Dairy Sector
Yashili International Holdings
Yashili’s sales in infant formula (FY14)
100%
90%
80%
70%
53%
50%
37%
44%
10%
7%
Yashily
Scient
60%
50%
40%
30%
20%
10%
0%
1st tier
2nd tier
Source: Company data, DBS Vickers
Page 56
3rd and lower
China Dairy Sector
Yashili International Holdings
Income Statement (RMB m)
FY Dec
Turnover
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Dividend Income
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
2011A
2,958
(1,420)
1,538
(1,234)
304
0
0
71
0
0
375
(67)
(2)
0
306
2012A
3,655
(1,693)
1,962
(1,407)
554
0
0
92
0
0
646
(176)
(2)
0
468
2013A
3,890
(1,810)
2,080
(1,601)
479
0
0
97
0
0
577
(137)
(2)
0
438
2014A
2,816
(1,371)
1,445
(1,191)
254
0
0
56
0
0
310
(61)
0
0
249
EBITDA
Sales Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Effective Tax Rate (%)
383
0.1
(42.1)
(48.1)
(39.0)
17.8
636
23.6
66.0
82.2
53.0
27.2
565
6.4
(11.2)
(13.5)
(6.6)
23.8
348
(27.6)
(38.4)
(47.0)
(43.1)
19.7
Cash Flow Statement (RMB m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
(Pft)/ Loss on disposal of FAs
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
2011A
375
79
(82)
0
0
123
(37)
458
(107)
(340)
0
0
217
(229)
(235)
(127)
(16)
(26)
(404)
(45)
(220)
2012A
646
82
(127)
0
0
242
(72)
772
(208)
(1,283)
0
0
346
(1,145)
(200)
300
0
(230)
(130)
(78)
(581)
2013A
577
86
(196)
0
0
(257)
(69)
141
(255)
(222)
0
0
309
(168)
(1,408)
(15)
31
(53)
(1,445)
10
(1,462)
2014A
310
94
(78)
0
0
75
(137)
264
(704)
(832)
488
0
(4)
(1,052)
(131)
559
0
(5)
423
(7)
(372)
Interim Income Statement (RMB m)
FY Dec
1H2013
Turnover
2,153
Cost of Goods Sold
(961)
Gross Profit
1,192
Other Oper. (Exp)/Inc
(819)
Operating Profit
373
Other Non Opg (Exp)/Inc
0
Associates & JV Inc
0
Net Interest (Exp)/Inc
38
Exceptional Gain/(Loss)
0
Pre-tax Profit
410
Tax
(115)
Minority Interest
(2)
Net Profit
294
2H2013
1,737
(849)
888
(779)
109
0
0
57
0
166
(22)
0
144
1H2014
1,546
(726)
820
(607)
212
0
0
26
0
239
(29)
0
209
2H2014
1,271
(646)
625
(583)
43
0
0
28
0
71
(32)
0
39
(11.6)
(63.7)
(42.3)
51.1
6.3
8.3
(28.2)
(43.0)
(28.7)
53.0
13.7
13.5
(26.8)
(61.0)
(72.6)
49.2
3.3
3.1
Sales Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
27.5
44.0
34.1
55.4
17.3
13.6
Balance Sheet (RMB m)
FY Dec
Net Fixed Assets
Invts in Assocs & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
2011A
730
76
234
2,762
578
52
212
4,644
2012A
744
418
407
2,273
653
27
1,048
5,570
2013A
803
985
342
1,056
886
32
413
4,517
2014A
613
939
196
2,090
718
43
330
4,929
ST Debt
Creditors
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
31
720
55
0
33
3,803
1
4,644
331
1,029
91
0
37
4,079
3
5,570
154
346
834
47
25
3,110
0
4,517
141
234
735
621
23
3,174
0
4,929
Non-Cash Wkg. Cap
Net Cash/(Debt)
68
2,730
608
1,942
150
854
122
1,327
2011A
52.0
10.3
10.4
8.1
6.7
6.4
65.3
NM
0.6
15.1
66.8
124.5
4.5
3.8
CASH
339.7
N/A
0.97
0.10
0.10
2012A
53.7
15.2
12.8
11.9
9.2
9.7
298.9
NM
0.7
3.9
75.3
132.6
2.8
2.3
CASH
62.9
N/A
0.69
0.15
0.16
2013A
53.5
12.3
11.2
12.2
8.7
9.4
30.0
NM
0.8
2.8
76.4
155.2
1.8
1.1
CASH
126.6
N/A
0.30
0.11
(0.03)
2014A
51.3
9.0
8.8
7.9
5.3
5.6
30.0
NM
0.6
4.9
77.3
213.5
2.9
2.2
CASH
92.3
N/A
0.47
0.05
(0.12)
2013A
2014A
2,661
661
546
23
1,833
438
534
12
3,890
2,816
Rates & Ratio
FY Dec
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Asset Turnover (x)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Capex to Debt (%)
Z-Score (X)
N.Cash/(Debt)PS (RMB)
Opg CFPS (RMB)
Free CFPS (RMB)
Segmental Breakdown (RMB m) / Key Assumptions
FY Dec
2011A
2012A
Revenues (RMB m)
Yashily Formula
1,826
2,478
Scient Formula
609
653
Yashili Nutritions
473
489
Other
50
34
Total
2,958
3,655
Source: Company, DBS Vickers
Page 57
China Dairy Sector
Inner Mongolia Yili Industrial-A
Refer to important disclosures at the end of this report
Bloomberg: 600887 CH Equity | Reuters: 600887.SS
NOT RATED
Rising dominance
Last Traded Price: RMB18.63 (CSI300 Index : 4,251)
Potential Catalyst: Stronger contribution from high margin products
Analyst
Alice HUI CFA, +852 2971 1960
[email protected]
Alison Fok +852 2971 1938
[email protected]
Price Relative
RMB
Relative Index
45.4
388
40.4
35.4
338
30.4
288
25.4
238
20.4
188
15.4
138
10.4
5.4
Jul-11
Jul-12
Jul-13
Jul-14
88
Jul-15
Inner Mongolia Yili Industrial-A (LHS)
Relative SHSZ300 Index (RHS)
Forecasts and Valuation
FY Dec (RMB m)
Turnover
EBITDA
Pre-tax Profit
Net Profit
EPS (RMB)
EPS Gth (%)
Diluted EPS (RMB)
DPS (RMB)
BV Per Share (RMB)
PE (X)
P/Cash Flow (X)
P/Free CF (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
2011A
37,451
2,160
2,136
1,809
1.13
16.4
1.13
0.25
3.77
16.5
8.1
nm
13.5
1.3
4.9
CASH
35.3
2012A
41,991
2,274
2,087
1,717
1.07
(5.1)
1.07
0.33
4.59
17.3
12.4
nm
13.4
1.8
4.1
0.1
25.7
2013A
47,779
3,324
3,060
3,187
1.56
45.2
1.56
0.80
7.89
11.9
7.0
17.0
10.3
4.3
2.4
CASH
27.2
ICB Industry: Consumer Goods
ICB Sector: Food Producers
Principal Business: Leading dairy player in China
Source of all data: Company, DBSV, Thomson Reuters, HKEX
2014A
54,436
5,265
4,786
4,144
1.35
(13.3)
1.35
0.80
6.08
13.8
23.4
nm
9.8
4.3
3.1
CASH
23.8

Expect continual market share gains to further boost Yili’s
leading position

Strong portfolio of higher-margin brands to take advantage of
growing health awareness among consumers
 Valuation undemanding against peers
Leader of the herd. Established in 1993 and listed on SSE in 1996,
Inner-Mongolia Yili is the leading dairy player in China, who enjoys
highest profit and margins among its peers. Yili has an extensive
product offering including mainly liquid dairy products (UHT dairy
products, yogurt, dairy-related and plant-based beverages), milk
powder, and low-temperature dairy products. Its strong product
capability and effective marketing campaign should enable the
company to gain further market share despite its substantial size.
Improving product mix, effective marketing and deepening
penetration to drive growth. In FY15, higher margin products
such as Satine (UHT drink), QQ Star (kid’s beverage), Ambrosial
(UHT yogurt) and Chang Qing (probiotic drinks) will be key
profitability drivers. Impact from lower raw material costs remain
favourable, as seen in 1Q15’s net margin expansion of 0.7ppt, but
this would be partly offset by higher operating expenses on
increasing marketing efforts. Yili is active in mass market
advertising including sponsorships for popular TV shows such as
“Running Man” (奔跑吧兄弟) and ”Where did my father go?” (爸
爸去哪儿?) etc.
Undemanding valuation. Yili has formed strategic alliances with
international players overseas including Sterilgarda Alimenti SpA
(Italy’s largest dairy producer) and Dairy Farmers of America (DFA;
US’ largest dairy farm coop) to secure its upstream sourcing
capabilities. It has also set up plants in Kansas and in New Zealand
to leverage on local upstream supply. Based on the company’s
guidance of 12% and 15% growth on FY15 sales and profit
respectively, a target likely to be exceeded. The counter is trading
at 17.7x FY16F PE (based on consensus estimates), undemanding
vs sector peers, considering its consistent topline and profitability
outperformance, as well as superior ROE generation.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (RMBm/US$m)
Major Shareholders
Hohhot Investment Co Ltd
(%) China Asset Management
Gang Pan
Free Float (%)
3m Avg. Daily Val. (US$m)
6,129
114,178 / 18,383
9.3
3.9
3.9
82.9
530.9
Page 58
www.dbsvickers.com
ed- JS / sa- AL
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
Inner Mongolia Yili Industrial-A
through TV, radio, promoters, celebrities and large exhibitions
(Olympic, World Expo)
Growth drivers
Star products to drive profitability. Yili derives 78% of its sales
from liquid milk (UHT milk, yogurt & milk beverages), while
milk powder and ice-cream account for 11% and 8%
respectively. In FY14, Yili’s liquid milk posted over 14%
growth y-o-y, helped by ASP hike in 2H14, as well as success
in its star products such as Satine, Ambrosial and Chang Qing,
leading to an improvement in product mix towards the
higher-margin products. Milk powder sales also grew 9.1%
mainly from product mix upgrade from Pro-Kido brand and
imported milk powder brand, Tofer. Going forward, star
products, which command higher margins than its original
brands, will continue to be the key driver for profitability.
%
40
35
30
25
20
15
10
5
0
FY14 sales mix
Milk
powder &
dairy
related
Ice-cream 11%
8%
SG&A expenses comparison
2009
Mixed feeds
1%
Liquid milk
78%
Source: Company data, DBS Vickers
Strong gross margin. By product, GP margin for milk powder
was the highest at 45.6% in FY14, which is better than
domestic peers. Liquid milk and ice-cream posted GP margins
of 30.8% and 35.1% respectively. In FY14, Yili’s overall GP
margin was around 1.2ppt higher than closest peer Mengniu,
partly a reflection of its product mix which has a larger
proportion of sales from higher-margin categories such as
milk powder.
2010
2011
Mengniu
2012
Bright
2013
2014
Yili
Source: Company data, DBS Vickers
Moving onto a global platform. In the past 1-2 years, Yili has
been actively securing upstream milk powder sources globally
to ensure an integrated dairy supply chain. In FY14, Yili
initiated a partnership with DFA for upstream dairy sourcing
as well as building an infant formula processing plant in
Kansas. It has so far committed US$30m (Rmb186m) for a
30% stake in the plant. In Nov-14, Yili announced that it is
investing in a diversified dairy base in New Zealand for
Rmb2bn, its second investment there following its Rmb1bn
infant formula processing plant investment in 2012. In 2012,
Yili purchased Oceania Dairy to build a milk processing plant
in New Zealand.
Further M&As under discussion. In May-15, Yili sold Shihezi
Company to Western Xinjiang Animal Husbandry Co. for
Rmb90.5m. The subsidiary is mainly used as an infant powder
production base, with revenue and net profit of Rmb230m
and Rmb0.8m. Recently, Yili started discussions with Guizhou
Triple Dairy (三联乳业), Guizhou’s largest dairy processor. In
FY14, Triple Dairy recorded sales of Rmb531m, and net profit
of Rmb10.2m.
Strong advertising to generate positive brand equity. Yili has
been driving down its SG&A expenses, which has fallen by
3.8ppts since FY10. Yili holds strong promotional campaigns
Page 59
China Dairy Sector
Inner Mongolia Yili Industrial-A
Income Statement (RMB m)
FY Dec
Turnover
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Dividend Income
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
2011A
37,451
(26,719)
10,733
(9,036)
1,697
390
0
49
0
0
2,136
(304)
(23)
0
1,809
2012A
41,991
(29,754)
12,236
(10,571)
1,665
471
0
(49)
0
0
2,087
(351)
(19)
0
1,717
2013A
47,779
(34,317)
13,462
(10,836)
2,626
401
0
33
0
0
3,060
141
(14)
0
3,187
2014A
54,436
(36,585)
17,851
(13,306)
4,545
396
0
(155)
0
0
4,786
(619)
(22)
0
4,144
EBITDA
Sales Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Effective Tax Rate (%)
2,160
26.2
113.3
190.1
132.8
14.2
2,274
12.1
5.2
(1.9)
(5.1)
16.8
3,324
13.8
46.2
57.7
85.6
N/A
5,265
13.9
58.4
73.1
30.0
12.9
Cash Flow Statement (RMB m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
(Pft)/ Loss on disposal of FAs
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
2011A
2,136
731
(100)
0
0
1,321
(418)
3,670
(3,789)
260
0
0
52
(3,476)
(88)
194
1
(238)
(131)
(1)
63
2012A
2,087
915
0
0
0
(350)
(243)
2,409
(3,102)
25
0
0
20
(3,057)
(530)
(411)
0
37
(905)
0
(1,553)
2013A
3,060
1,143
(458)
0
0
1,539
190
5,475
(3,241)
(178)
0
0
(2,841)
(6,260)
(606)
1,496
6,118
242
7,251
(5)
6,460
2014A
4,786
1,479
139
0
0
(3,714)
(253)
2,436
(3,946)
33
0
0
2,915
(999)
(1,807)
4,690
0
0
2,883
0
4,320
Interim Income Statement (RMB m)
FY Dec
1H2013
Turnover
24,021
Cost of Goods Sold
(16,761)
Gross Profit
7,260
Other Oper. (Exp)/Inc
(5,955)
Operating Profit
1,306
Other Non Opg (Exp)/Inc
182
Associates & JV Inc
0
Net Interest (Exp)/Inc
7
Exceptional Gain/(Loss)
0
Pre-tax Profit
1,495
Tax
251
Minority Interest
(8)
Net Profit
1,738
2H2013
23,758
(17,556)
6,202
(4,882)
1,320
219
0
26
0
1,565
(110)
(6)
1,449
1H2014
27,471
(18,379)
9,092
(6,640)
2,451
181
0
52
0
2,684
(378)
(13)
2,293
2H2014
26,966
(18,206)
8,759
(6,666)
2,093
215
0
(207)
0
2,101
(241)
(9)
1,851
14.2
37.1
51.6
26.1
5.6
6.1
14.4
87.8
31.9
33.1
8.9
8.3
13.5
58.5
27.7
32.5
7.8
6.9
Sales Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Source: Company, DBS Vickers
Page 60
13.4
86.0
128.2
30.2
5.4
7.2
Balance Sheet (RMB m)
FY Dec
Net Fixed Assets
Invts in Assocs & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
2011A
8,662
0
2,540
3,921
3,310
1,116
381
19,930
2012A
10,419
0
3,190
2,004
2,995
937
271
19,815
2013A
11,897
0
4,513
8,173
3,683
670
3,941
32,877
2014A
14,083
0
4,410
14,273
5,008
903
817
39,494
ST Debt
Creditors
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
2,985
7,431
2,449
7
751
6,024
282
19,930
2,578
6,960
1,940
5
808
7,335
190
19,815
4,086
8,539
2,892
0
1,047
16,125
188
32,877
8,072
7,444
3,241
704
1,212
18,634
188
39,494
Non-Cash Wkg. Cap
Net Cash/(Debt)
(5,074)
929
(4,697)
(578)
(3,137)
4,087
(3,956)
5,497
Rates & Ratio
FY Dec
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Asset Turnover (x)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Capex to Debt (%)
Z-Score (X)
N.Cash/(Debt)PS (RMB)
Opg CFPS (RMB)
Free CFPS (RMB)
2011A
28.7
4.5
4.8
35.3
10.3
16.3
22.1
NM
2.1
12.7
90.8
41.0
0.7
0.4
CASH
126.6
N/A
0.58
1.47
(0.07)
2012A
29.1
4.0
4.1
25.7
8.6
13.2
30.5
33.9
2.1
8.9
90.1
39.5
0.5
0.3
0.1
120.1
N/A
(0.36)
1.73
(0.43)
2013A
28.2
5.5
6.7
27.2
12.1
16.2
51.3
NM
1.8
6.1
84.1
36.2
1.1
0.6
CASH
79.3
N/A
2.00
1.93
1.09
2014A
32.8
8.3
7.6
23.8
11.5
15.7
59.2
29.3
1.5
5.3
81.3
44.2
1.1
0.8
CASH
45.0
N/A
1.79
2.01
(0.49)
Segmental Breakdown (RMB m)
FY Dec
Revenues (RMB m)
Liquid milk
Ice-cream
Milk powder & dairy related
Others
2011A
2012A
2013A
2014A
26,933
4,222
5,642
469
32,271
4,294
4,484
687
37,116
4,243
5,512
583
42,406
4,284
6,013
1,733
Total
37,266
41,736
47,454
54,436
China Dairy Sector
Inner Mongolia Yili Industrial-A
This page has been left blank intentionally
Page 61
China Dairy Sector
Biostime International Holdings
Refer to important disclosures at the end of this report
Bloomberg: 1112 HK Equity | Reuters: 1112.HK
NOT RATED
Baby hiccups ahead
Last Traded Price: HK$21.60 (HSI : 25,399)
Potential Catalyst: Spin-off of e-commerce platform
Analyst
Alice HUI CFA, +852 2971 1960
[email protected]
Alison Fok +852 2971 1938
[email protected]
HK$
Relative Index
472
69.2
422
59.2
372
49.2
322
272
39.2
222
29.2
172
19.2
122
Jul-12
Jul-13
Jul-14
72
Jul-15
Biostime International Holdings (LHS)
Relative HSI INDEX (RHS)
Forecasts and Valuation
FY Dec (RMB m)
Turnover
EBITDA
Pre-tax Profit
Net Profit
EPS (RMB)
EPS (HK$)
EPS Gth (%)
Diluted EPS (HK$)
DPS (HK$)
BV Per Share (HK$)
PE (X)
Core PE (X)
P/Cash Flow (X)
P/Free CF (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
A major domestic infant formula player in China focusing on
the premium market

Despite benefits from lower raw material costs and
favourable forex, near-term sales growth could be affected
by clearance of old stocks
1H15 profit warning; in the medium term, the highly
competitive landscape would put pressure on ASP with
downward margin risk
Focused on the premium market. Established in 2003,
Biostime is a major domestic infant formula player in China with
a 7.6% market share in FY14. Focusing on the premium market,
the company markets its products under two key brands Biostime and Adimil. Apart from infant formula, Biostime is also
involved in other products including probiotic supplements,
dried baby food and baby care products. With baby specialty
stores being its key channel, the company generated the
majority of its sales (77% in FY14) from its members of
MaMa100, its loyalty membership program.
Clearing old inventory to pave way for launch of new
packaging. Since late 2014, Biostime has been clearing its old
infant formula inventory to pave way for the launch of
upgraded products (with new packaging) in end-June. While
there have been some market share gains, partly helped by
aggressive promotions (buy-1-get-1-free), 4M15 infant formula
sales posted a slight decline. With ASP expected to remain
largely unchanged, there should be some margin benefits in
FY15 from lower raw material costs, partly offset by higher
marketing expenses associated with the upgraded product
launches. On the distribution front, Biostime is working to
expand its MaMa100 platform to cross-sell third-party products
and offer assistance to parties seeking to enter its offline
distribution channels, with plans to list its e-commerce platform
in the A-share market in the future.
Challenging competition landscape with rising margin
risk. Biostime issued a profit warning expecting 1H15 sales and
profit to decline by 11% and 36% respectively on the back of
heavy promotional activities. In the medium term, pricing risk is
high given rising competition and distribution channel changes,
with premium brands like Biostime likely to face most pricing
pressure. Hence, despite its current valuation, at 11.3x FY16 PE
based on consensus estimates, the share price is already below
both its historical and peers’ average, there are no near-term rerating catalysts in sight.

Price Relative
9.2
Jul-11

2011A
2,189
710
714
527
0.86
1.08
48.7
1.08
0.95
4.10
20.0
19.8
20.2
21.8
12.1
4.4
5.3
CASH
29.0
2012A
3,382
1,032
1,051
743
1.22
1.52
40.7
1.52
1.35
4.84
14.2
13.9
10.9
11.4
8.7
6.2
4.5
CASH
34.6
2013A
4,561
1,116
1,162
821
1.60
2.00
32.0
2.00
1.51
5.21
10.8
12.7
15.8
19.9
8.5
7.0
4.1
CASH
33.9
2014A
4,732
1,154
1,121
810
1.31
1.63
(18.4)
1.63
0.84
6.00
13.2
13.0
10.8
12.5
8.3
3.9
3.6
CASH
29.8
ICB Industry: Consumer Goods
ICB Sector: Food Producers
Principal Business: One of the top infant formula companies in
China with products marketed under Biostime and Adimil
brands
Source of all data: Company, DBSV, Thomson Reuters, HKEX
At A Glance
Issued Capital (m shrs)
Mkt. Cap (HK$m/US$m)
Major Shareholders
Biostime Pharmaceuticals (China) Limited (%)
Free Float (%)
3m Avg. Daily Val. (US$m)
609
13,161 / 1,698
Page 62
www.dbsvickers.com
ed-TH / sa- AL
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV
73.9
26.1
7.0
China Dairy Sector
Biostime International Holdings
Segmental Profit Breakdown FY14
Growth prospects
Core brand re-launch in July. Biostime will be launching a
product upgrade on its core brand Biostime in July, covering
product series including Supreme, Supreme Care, Golden
Care, and the Premium series. To pave way for this, Biostime
has been undergoing more aggressive price promotions to
clear its older stocks (with old packaging) since end-14. While
we do not expect any ASP changes from the upgrade, sales
volume could see some improvement thereafter. To
encourage distributors to restock, Biostime will bear some of
the A&P costs, such as promoters in supermarkets.
By product, 84% of FY14 sales were derived from infant
formula powder. Out of this, Biostime (supreme) accounted
for 69%, while Adimil (premium), launched in Sept-13, made
up the remaining 31% of infant formula sales.
Revenue Breakdown FY14
Dried baby
food
3%
Baby care
products
4%
Probiotic
supplements
9%
Adimil
15%
Biostime
69%
Source: Company data, DBS Vickers
Baby care
products
3%
Probiotic
supplements
10%
Dried baby
food
3%
Infant
formula
84%
Source: Company data, DBS Vickers
Deepening penetration into lower-tier cities. To cater to a
larger range of audience, Biostime plans to deepen
penetration of its Adimil brand into lower-tier cities. The
company targets to increase its number of baby-specialty
stores to 30,000 outlets, and VIP Pharmacies to 6,000 outlets
(FY14: 2,824).
Biostime currently derives 66% of sales from VIP Baby
Specialty Stores, 26% from supermarkets and the remainder
from VIP pharmacies from its offline channels. As of FY14,
Biostime had 24,615 VIP baby specialty stores and 2,824 VIP
pharmacies.
Potential spin-off of e-commerce platform onto A-share
market. MaMa100 initiated a multi-platform online strategy –
B2C through third-party e-commerce platforms, C2C (online
member stores such as TaoBao), and lastly O2O through
MaMa100 proprietary platforms (MaMa and WeChat).
Catering primarily for its strong member base of 1.96m users
in Mama100, Biostime plans to begin cross selling
competitors brands as well. The management plans to invite
strategic shareholders and key employees to enter in order to
cultivate MaMa100 as a leading vertical O2O e-commerce
platform for parents and babies. Without any numbers and
with MaMa100 being fully owned by controlling shareholders,
it is difficult to estimate MaMa100’s value and impact on
Biostime at this stage.
Page 63
China Dairy Sector
Biostime International Holdings
Income Statement (RMB m)
FY Dec
Turnover
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Dividend Income
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
EBITDA
Sales Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Effective Tax Rate (%)
2011A
2,189
(733)
1,456
(742)
714
(13)
0
17
0
0
714
(187)
0
0
527
2012A
3,382
(1,153)
2,229
(1,176)
1,053
(23)
0
41
0
0
1,051
(307)
0
0
743
2013A
4,561
(1,586)
2,975
(1,802)
1,173
(27)
0
72
0
0
1,162
(341)
0
0
821
2014A
4,732
(1,805)
2,927
(1,720)
1,207
(51)
1
18
0
0
1,121
(312)
0
0
810
710
77.5
109.4
113.7
98.5
26.1
1,032
54.5
45.4
47.5
40.9
29.3
1,116
34.9
8.2
11.4
10.4
29.4
1,154
3.7
3.3
3.0
(1.3)
27.8
2012A
1,051
23
(245)
0
0
115
4
947
(39)
0
0
0
(1,811)
(1,850)
(404)
271
(57)
(7)
(197)
5
(1,095)
2013A
1,162
27
(347)
0
0
(167)
(14)
660
(136)
0
0
0
55
(81)
(622)
480
(64)
(8)
(214)
(1)
365
2014A
1,121
51
(338)
0
0
151
(12)
972
(135)
0
0
0
(326)
(460)
(493)
(751)
9
2,407
1,173
(1)
1,684
2H2013
2,500
(894)
1,606
(971)
675
(14)
0
33
0
668
(145)
0
540
1H2014
2,189
(843)
1,346
(917)
474
(25)
0
5
0
433
(121)
0
312
2H2014
2,543
(961)
1,581
(922)
659
(26)
0
13
0
688
(190)
0
498
23.8
(0.7)
15.2
64.2
27.0
21.6
6.2
(4.8)
(29.5)
61.5
21.6
14.3
1.7
(2.4)
(7.9)
62.2
25.9
19.6
Cash Flow Statement (RMB m)
FY Dec
2011A
Pre-Tax Profit
714
Dep. & Amort.
13
Tax Paid
(123)
Assoc. & JV Inc/(loss)
0
(Pft)/ Loss on disposal of FAs
0
Chg in Wkg.Cap.
(77)
Other Operating CF
(10)
Net Operating CF
516
Capital Exp.(net)
(39)
Other Invts.(net)
0
Invts in Assoc. & JV
0
Div from Assoc & JV
0
Other Investing CF
(490)
Net Investing CF
(529)
Div Paid
(180)
Chg in Gross Debt
0
Capital Issues
12
Other Financing CF
56
Net Financing CF
(113)
Currency Adjustments
(56)
Chg in Cash
(182)
Interim Income Statement (RMB m)
FY Dec
1H2013
Turnover
2,061
Cost of Goods Sold
(692)
Gross Profit
1,370
Other Oper. (Exp)/Inc
(915)
Operating Profit
498
Other Non Opg (Exp)/Inc
(13)
Associates & JV Inc
0
Net Interest (Exp)/Inc
39
Exceptional Gain/(Loss)
(163)
Pre-tax Profit
494
Tax
(196)
Minority Interest
0
Net Profit
443
Sales Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Source: Company, DBS Vickers
Page 64
51.3
33.4
61.8
66.4
24.1
21.5
Balance Sheet (RMB m)
FY Dec
Net Fixed Assets
Invts in Assocs & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
2011A
59
0
228
1,814
297
39
0
2,438
2012A
77
0
1,165
1,682
523
86
0
3,533
2013A
322
0
1,432
1,690
972
127
78
4,620
2014A
478
0
1,817
3,387
797
150
3
6,631
ST Debt
Creditors
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
0
332
83
0
45
1,978
0
2,438
271
707
156
0
77
2,323
0
3,533
751
1,081
213
0
60
2,516
0
4,620
0
1,032
236
2,411
36
2,917
0
6,631
Non-Cash Wkg. Cap
Net Cash/(Debt)
(79)
1,814
(253)
1,411
(118)
939
(319)
976
2011A
66.5
32.6
24.1
29.0
24.3
28.6
70.6
NM
NM
15.1
66.8
124.5
5.2
4.5
CASH
N/A
N/A
3.76
0.99
0.79
2012A
65.9
31.1
22.0
34.6
24.9
31.7
70.9
NM
1.1
3.9
75.3
132.6
2.0
1.6
CASH
14.5
N/A
2.94
1.39
1.52
2013A
65.2
25.7
18.0
33.9
20.1
27.6
70.4
NM
1.1
3.2
86.4
155.2
1.4
0.9
CASH
18.1
N/A
1.95
1.37
0.87
2014A
61.9
25.5
17.1
29.8
14.4
20.1
39.7
NM
0.8
4.3
94.8
169.0
3.4
2.8
CASH
5.6
N/A
2.01
1.35
1.38
2013A
2014A
458
3,752
199
152
0
4,561
425
3,982
151
173
0
4,732
360
2,422
111
82
304
2,467
74
82
Rates & Ratio
FY Dec
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Asset Turnover (x)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Capex to Debt (%)
Z-Score (X)
N.Cash/(Debt)PS (RMB)
Opg CFPS (RMB)
Free CFPS (RMB)
Segmental Breakdown (RMB m) / Key Assumptions
FY Dec
2011A
2012A
Revenues (RMB m)
Probiotic supplements
332
379
Infant formulas
1,685
2,715
Dried baby food
97
135
Baby care products
48
106
Others
27
47
Total
2,189
3,382
Gross profit (RMB m)
Probiotic supplements
258
295
Infant formulas
1,104
1,769
Dried baby food
56
77
Baby care products
19
58
Total
Gross profit Margins (%)
Probiotic supplements
Infant formulas
Dried baby food
Baby care products
Total
1,456
2,229
2,975
2,927
77.8
65.5
57.3
40.2
77.7
65.1
56.9
54.9
78.6
64.5
55.6
54.2
71.4
62.0
49.1
47.2
66.5
65.9
65.2
61.9
China Dairy Sector
Biostime International Holdings
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Page 65
China Dairy Sector
China Huishan Dairy Holdings
Refer to important disclosures at the end of this report
Bloomberg: 6863 HK Equity | Reuters: 6863.HK
Still some way to go
NOT RATED
Last Traded Price: HK$2.17 (HSI : 25,399)

Vertically integrated dairy player in North East China
Potential Catalyst: Successful expansion into East China, faster than
expected progress in Friesland partnership
Analyst
Alice HUI CFA, +852 2971 1960
[email protected]

Focus on downstream business through expansion into
new regions
Alison Fok +852 2971 1938
[email protected]
Price Relative
HK$
Relative Index
219
199
3.1
179
159
2.6
139
119
2.1
99
79
1.6
59
1.1
Sep-13
39
Feb-14
Jul-14
China Huishan Dairy Holdings (LHS)
Forecasts and Valuation
FY Mar (RMB m)
Turnover
EBITDA
Pre-tax Profit
Net Profit
EPS (RMB)
EPS (HK$)
EPS Gth (%)
Diluted EPS (HK$)
DPS (HK$)
BV Per Share (HK$)
PE (X)
Core PE (X)
P/Cash Flow (X)
P/Free CF (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
2012A
1,333
537
397
386
0.03
0.04
N/A
0.04
0.00
0.10
52.1
52.1
26.7
nm
39.6
0.0
22.8
1.3
60.8
Dec-14
May-15
Relative HSI INDEX (RHS)
2013A
2,552
1,291
1,081
1,014
0.09
0.11
162.7
0.11
0.00
0.64
19.8
19.8
13.9
21.1
16.7
0.0
3.4
0.3
30.0
2014A
3,530
1,664
1,294
1,249
0.10
0.12
9.7
0.12
0.03
1.27
18.1
18.1
21.8
nm
13.7
1.4
1.7
0.0
13.1
2015A
3,923
1,512
967
908
0.06
0.08
(34.4)
0.08
0.02
1.19
27.5
27.5
177.6
nm
19.1
0.9
1.8
0.3
6.8
ICB Industry: Consumer Goods
ICB Sector: Food Producers
Principal Business: Integrated dairy player primarily in Northeast
China
Source of all data: Company, DBSV, Thomson Reuters, HKEX
Share price is well supported by controlling shareholders’
open market purchases
Grass to glass business model. A vertically integrated dairy
player, Huishan is one of China’s leading alfalfa producers
and the second largest upstream player in terms of herd size.
Based in Liaoning, Huishan is also involved in the
manufacture and sales of dairy products under its own
Huishan brand. In late 2014, the company formed a 50-50 JV
with FrieslandCampina to introduce one of
FrieslandCampina’s existing brands (excluding Friso) into
China. There is also a commitment from FrieslandCampina to
purchase US$30m worth of shares in the open market after
completion of the JV deal.

Focus on downstream operations. Excluding biological asset
and other fair value gains, Huishan FYMar15 net profit
declined 27% yoy, mainly hampered by the decline in raw
milk price, a delay in the ramp up of liquid milk capacity, as
well as an increase in A&P costs to expand outside of NE
China. We expect Huishan will continue to focus on
downstream sales with the expansion of its low-temperature
yogurt and pasteurised milk products into new regions. This
will be aided by its new factory located in Jiangsu. We also
expect its partnership with FrieslandCampina to be a potential
driver in the longer run.
Supporting share price via various methods. We expect
FYMar16 capex to remain high at approximately Rmb2bn,
owing to commitment on construction of dairy farms, hence
making it difficult to generate positive free cash flow in the
near term. However, Huishan continues to pay dividends with
FYMar15 final dividend at Rmb0.0153/share (FYMar14:
Rmb0.0216), implying a dividend payout of 28.3% (FYMar14:
22.4%). Since June, Huishan’s Chairman purchased c.427m
shares in the open market, in addition to Huishan’s own
share buyback of 365m since Aug-14 (implying c.2.6% of
share capital prior to share repurchase.)
At A Glance
Issued Capital (m shrs)
Mkt. Cap (HK$m/US$m)
Major Shareholders
Champ Harvest Limited (%)
Norges Bank
Free Float (%)
3m Avg. Daily Val. (US$m)
14,320
31,075 / 4,009
64.2
5.9
29.8
23.8
Page 66
www.dbsvickers.com
ed- JS / sa- AL
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
China Huishan Dairy Holdings
Growth drivers
Growing its own feed. One of the key attractions of Huishan
Dairy is its feedstock plantation. Huishan currently leases
480,000mu of land, of which 140,000mu is for alfalfa
plantation. The remainder leased land will be used to develop
oat and corn silage. This will continue to keep its cost of
breeding cows lower than the sector average. For example,
Huishan’s feed cost per tonne is c.30% below market leader
CMD.
Improvement in sales volume and milk yields partly offset by
raw milk price decline. As of end Mar-15, Huishan Dairy has a
herd size of 180,331 cows, of which 74,389 are milkable
cows. In total, Huishan has 69 dairy farms in Liaoning Province,
and management expects the herd to grow organically by
10%. The company will halt importing dairy cows this year.
While there was a slight improvement in milk yields to
9.1tonnes/annum (FYMar14: 9tonnes/annum), raw milk prices
declined by 6% y-o-y to Rmb4.87/kg. We expect the impact
from raw milk price decline to be partly offset by sales volume
growth in FYMar16.
Downstream sales volume
Tonnes
160,000
141,374
140,000
123,707
120,000
100,000
80,000
91,244
75,257
66,654
77,097
thereafter moving into East China as the premium UHT
product market is highly penetrated by dairy giants such as
Mengniu and Yili. As of Mar-15, Huishan has 373 distributors,
and 408 direct sales stores in malls and supermarkets. While
topline is likely to grow strongly, we expect profitability could
be partly offset by A&P costs at the initial stages of expansion.
In Nov-14, Huishan and Alpha Spring (Nantong Zongyi
Investment Co) agreed to invest up to Rmb650m together in a
JV to further replicate its dairy farm operations in East China
(Shanghai, Jiangsu, Zhejiang, Shandong, Anhui). Nantong
Zongyi Investment is a listed company which specialises in
software and solar cell production in Jiangsu province.
Expanding into milk powder operations. As of Mar-15,
Huishan has three milk powder production facilities
manufacturing infant formula products under its own brand
Gold Queen and Huishan Red. Its other product offerings
include whole milk powder, D90 whey powder, and non-dairy
creamer.
In Oct-14, Huishan formed a JV with FrieslandCampina to
produce and work together to start a new IMF brand with
FrieslandCampina. Huishan received an Rmb700m investment
from FrieslandCampina in a 50/50 JV inclusive of its Shenyang
plant. In addition, FrieslandCampina will acquire USD30m
worth of shares in the open market within six month of the
completion of the JV. Essentially, this JV will be able (1) to
build on existing partnership in the production of non-dairy
creamers, (2) secure more demand for Huishan’s raw milk,
and lastly (3) to utilise FreislandCampina’s existing sales and
distribution network.
Huishan infant formula
60,000
40,000
20,000
3,129 2,404
0
Fresh milk
UHT
FY15 Volume tonnes
Yogurt
Milk
beverage
FY14 Volume tonnes
Source: Company data, DBS Vickers
Top driving force: low-temperature products. Huishan is
ranked first in market share in NE China in pasteurised milk
(44.3%) and yogurt (28.7%), with an overall market share of
20.9% in liquid milk market, according to Frost and Sullivan.
Going forward, Huishan aims to target low-temperature
product sales (pasteurised milk and yogurt) in NE China,
Source: Company data, DBS Vickers
Page 67
China Dairy Sector
China Huishan Dairy Holdings
Income Statement (RMB m)
FY Mar
Turnover
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Dividend Income
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
2012A
1,333
(783)
550
(5)
500
5
0
(103)
0
0
397
(11)
0
0
386
2013A
2,552
(1,174)
1,378
(64)
1,223
42
0
(142)
0
0
1,081
(67)
0
0
1,014
2014A
3,530
(1,326)
2,205
(335)
1,500
9
0
(206)
0
0
1,294
(45)
0
0
1,249
2015A
3,923
(1,663)
2,261
(561)
1,289
34
0
(323)
0
0
967
(60)
(1)
0
908
EBITDA
Sales Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Effective Tax Rate (%)
537
256.3
373.8
459.2
N/A
2.7
1,291
91.5
140.6
144.5
162.7
6.2
1,664
38.3
28.8
22.7
23.2
3.5
1,512
11.1
(9.1)
(14.0)
(27.4)
6.2
Cash Flow Statement (RMB m)
FY Mar
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
(Pft)/ Loss on disposal of FAs
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
2012A
460
37
(9)
0
0
230
34
752
(841)
(84)
0
0
(759)
(1,685)
0
149
0
1,276
1,425
(13)
479
2013A
1,012
69
(54)
0
0
228
187
1,442
(488)
(50)
0
0
(829)
(1,367)
0
386
0
(124)
262
(12)
325
2014A
1,294
164
(70)
0
0
(537)
185
1,036
(1,671)
(2,600)
0
0
(1,652)
(5,923)
0
3,315
5,976
(195)
9,096
(44)
4,166
2015A
967
222
(45)
0
0
(2,415)
1,412
141
(4,279)
0
0
0
0
(4,279)
0
1,687
0
0
1,687
0
(2,452)
Interim Income Statement (RMB m)
FY Mar
1H2014
Turnover
1,534
Cost of Goods Sold
(644)
Gross Profit
890
Other Oper. (Exp)/Inc
(301)
Operating Profit
590
Other Non Opg (Exp)/Inc
4
Associates & JV Inc
0
Net Interest (Exp)/Inc
(107)
Exceptional Gain/(Loss)
0
Pre-tax Profit
482
Tax
(16)
Minority Interest
0
Net Profit
467
2H2014
1,997
(682)
1,314
(404)
911
6
0
(98)
0
812
(29)
0
783
1H2015
1,995
(857)
1,138
(467)
671
21
0
(156)
0
516
(32)
0
484
2H2015
1,929
(806)
1,123
(518)
618
13
0
(167)
0
451
(28)
(1)
424
N/A
N/A
N/A
65.8
45.6
39.2
30.0
13.9
3.6
57.1
33.7
24.2
(3.4)
(32.1)
(45.8)
58.2
32.0
22.0
Sales Gth (%)
Opg Profit Gth (%)
Net Profit Gth (%)
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Source: Company, DBS Vickers
Page 68
N/A
N/A
N/A
58.0
38.4
30.4
Balance Sheet (RMB m)
FY Mar
Net Fixed Assets
Invts in Assocs & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
2012A
2,840
0
2,695
1,094
413
148
0
7,190
2013A
3,637
0
4,733
1,522
447
173
0
10,511
2014A
4,317
0
9,420
6,147
915
220
0
21,020
2015A
6,356
0
10,171
4,149
1,582
271
1,805
24,334
ST Debt
Creditors
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
362
524
3,280
1,917
224
882
0
7,190
909
910
473
2,103
233
5,883
0
10,511
1,641
738
540
4,679
227
13,195
0
21,020
2,867
1,401
986
5,140
255
13,686
(1)
24,334
Non-Cash Wkg. Cap
Net Cash/(Debt)
(3,244)
(1,185)
(764)
(1,489)
(142)
(174)
1,271
(3,858)
Rates & Ratio
FY Mar
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Asset Turnover (x)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Capex to Debt (%)
Z-Score (X)
N.Cash/(Debt)PS (RMB)
Opg CFPS (RMB)
Free CFPS (RMB)
2012A
41.2
37.5
29.0
60.8
6.1
15.9
0.0
4.8
0.2
39.2
242.9
150.5
0.4
0.3
1.3
36.9
N/A
(0.13)
0.05
(0.01)
2013A
54.0
47.9
39.7
30.0
11.5
18.3
0.0
8.6
0.3
22.9
236.8
141.9
0.9
0.7
0.3
16.2
N/A
(0.16)
0.11
0.08
2014A
62.4
42.5
35.4
13.1
7.9
10.0
24.9
7.3
0.2
20.3
258.8
213.9
2.5
2.2
0.0
26.4
N/A
(0.02)
0.12
(0.05)
2015A
57.6
32.9
23.1
6.8
4.0
5.8
24.1
4.0
0.2
22.9
270.9
316.4
1.5
0.8
0.3
53.4
N/A
(0.34)
0.18
(0.29)
2012A
2013A
2014A
2015A
672
564
0
97
681
1,707
88
77
989
2,288
254
0
1,028
2,422
473
0
1,333
2,552
3,530
3,923
326
217
0
7
399
922
53
3
614
1,499
92
0
614
1,499
92
0
Segmental Breakdown (RMB m)
FY Mar
Revenues (RMB m)
Raw milk
Liquid milk
Milk powder
Grain products
Total
Gross profit (RMB m)
Raw milk
Liquid milk
Milk powder
Grain products
Total
Gross profit Margins (%)
Raw milk
Liquid milk
Milk powder
Grain products
550
1,378
2,205
2,205
48.5
38.4
N/A
7.2
58.7
54.0
60.6
4.2
62.0
65.5
36.2
N/A
59.7
61.9
19.4
N/A
Total
41.2
54.0
62.4
56.2
China Dairy Sector
China Huishan Dairy Holdings
This page has been left blank intentionally
Page 69
Industry Focus
China Dairy Sector
Appendix
M&A relating to F&B sector
D at e
A c q u irer
T arg et
Cat .
T y pe
Co u n t ry o f
T arg et
J ul-15
China M odern Dairy
2 J V farms
Dairy
M &A
China
J un-15
A lfa
Campofrio
Pork
M &A
EU
J un-15
F osun
KTG
A griculture
M &A
EU
A pr-15
CRH
CRE
Beer
M &A
China
A pr-15
Coke
China Culiangw ang
Bev erages
Bev erages
M &A
China
J an-15
Consortium of Taiw anese inv estments
A usnutria Dairy
Dairy
M &A
China
Nov -14
Yili
Dairy F arm of
A merica
Dairy
Strategic
USA
Nov -14
Danone
Yashili
Dairy
New share
China
Nov -14
New Hope Group
F reedom F oods
Dairy
Strategic
A ustralia
Oct-14
Bright F ood
Salov
Oliv e oil
M &A
Italy
Sep-14
Roy al F rieslandCampina
Huishan Dairy
Dairy
Strategic
China
Sep-14
F onterra
Beingmate
Dairy
M &A
China
Sep-14
Chongqing General Trading Group
Bega
Dairy
JV
A ustralia
J ul-14
Yunfeng Capital
Yili Industrial Group
Dairy
JV
China
J un-14
KKR
COF CO-M eat
Pork
Inv estment
CHina
Mixed
M &A
Israel
A griculture
M &A
Global
Dairy
New share
China
A griculture
M &A
Global
M ay -14 Bright F ood
Tnuv a
A pr-14
COF CO
Noble-A gri
F eb-14
Danone
Mengniu
F eb-14
COF CO
Nidera
J an-14
Bright F ood
Mundella F oods
Dairy
M &A
A ustralia
J an-14
M engniu
Whitew av e F oods
Mixed
JV
USA
Source: Company data, DBS Vickers
Page 70
Industry Focus
China Dairy Sector
Infant formula description
Company
Code
Origin
Mark et
share (2014)
Domest ic
Y ashili
(M engniu)
M engniu
Biost ime
Y ili
Bright Beingmat e
Nest le
Mead
J ohnson
F rieland Danone
Campina
A bbot t
1230 HK
2319 HK
1112 HK
600887 CH
600597 CH
China
China
China
China
China
002570 CH
Nestle
MJ N US
DANONE
ABBOTT
China
Swissland
France
5.4
7.6
6.4
USA
0.6
9.4
12.4
4.7
5.8
4.2
Scient, Milex Oushi
Yashili,
Series
Biostime,
Adimil
Yili Xinhuo; Bright, Yao+
Pro-Kido
Beingmate
(Love +)
Nestle-NAN,
S-26
Enfamil F riso; FrisoGold
Dumex
Similac
Shanghai, Heilongjiang, Shuangcheng, Guangdong Shenyang Shanghai
Inner
(Huishan J V )
Zhejiang
Tianjin,
Mongolia, Heilongjiang,
Suzhou
Inner
Xinjiang,
Mongolia
Heilongjiang
Zhejiang;
J iaxing
(nutrition
plant)
F risolac- Aptammil
Enfamil,
Enfagrow, Gold, HeroBaby
Enfakid
Similac,
Eleva,
Pediasure
USA Netherlands
11
A SP
Domest ic
product ion
base
Import
Guangdong,
Shanxi,
Heilongjiang,
IM Guangdong
(Mengniu)
Arla-Merla
Baby&Me
New Zealand
Holland
Biostime
Pure
Canterbury
Annum Nestle-NAN
(Fonterra) HA, Illuma, S26 Gold
A SP
Int l base
Part nerships
IM F
Milk
pow der
sourcing
France,
New New Zealand Kerry Ireland
Denmark Zealand, US
collaboration
, as well as
Fonterra
Mengniu
Danone,
None Dairy Farmers Synlait Dairy
Fonterra
Arla
of America
incl. Isigny Partnership Self-owned Contracted
55% Sy nlait, 20%
Fonterra, 7% OCD;
farmers in
(10-20%), with DFA, milk farms in
Imported from Europe for
Shanghai Heilongjiang
NZ plants,
Laiterie de
infant formula;
and & Expanding
Montaigu own farms
Heilongjiang, dairy sources
(60-70%), &
in China
Synlait Dairy
Arla (1020%)
Ireland, Netherlands,
Germany
Singapore
None
Holland Germany
Huishan
Dairy
EU
Fonterra
Holland,
New
Zealand,
Australia and
Netherlands
Source: Company data, DBS Vickers
Page 71
Industry Focus
China Dairy Sector
Market size – Drinking milk products
100,000
Dairy (LHS)
2018F
2017F
2016F
2015
2014
2013
2012
2011
2010
0
5
0
YoY growth (RHS)
Drinking Milk Products (LHS)
Market size – Yoghurt and sour milk products
Market size – Milk formula
RMB m
%
160,000
140,000
120,000
%
250,000
25
25
200,000
20
150,000
15
100,000
10
5
50,000
5
0
0
0
Yoghurt and Sour Milk Products (LHS)
Dairy sector – Geographical breakdown
Southwest
China
13%
East China
28%
South
China
22%
Northwest
China
7%
Source: Euromonitor
North and
Northeast
China
16%
Mid China
14%
Milk Formula (LHS)
2018F
2017F
2016F
2018F
2017F
2016F
2015
2014
2013
2012
2011
2010
0
2015
20,000
2014
40,000
2013
10
2012
60,000
2011
15
2010
80,000
RMB m
30
20
100,000
Page 72
10
2018F
200,000
15
2017F
300,000
20
2016F
400,000
25
2015
500,000
%
2014
600,000
RMB m
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2010
20
18
16
14
12
10
8
6
4
2
0
2013
%
2012
RMB m
700,000
2011
Market size - Dairy
YoY growth (RHS)
Industry Focus
China Dairy Sector
Market share – Drinking milk products
Market share - Dairy
Yili
18%
Bright
7%
Mengniu
19%
Wahaha
6%
Nestlé SA
4%
Yangyuan
Zhihui
4%
Yili
20%
Mengniu
18%
Nestlé SA
5%
Wahaha
5%
Yangyuan
Zhihui
5%
Want Want
5%
Want
Want
4%
CocaCola
2%
Others
37%
Market share – Yoghurt and sour milk products
Yili
14%
Wahaha
9%
Yakult
6%
Jinan
Jiabao
Dairy
3%
Shenyang
Dairy
2%
Bright
23%
Mengniu
24%
Coca-Cola
3%
Others
17%
Others
37%
Bright
2%
Market share – Infant formula
Nestlé SA
14%
Mead Danone
8%
Johnson
9%
Beingmate
7%
Yili
6%
Sichuan
New Hope
2%
Royal
FrieslandCa
mpina
6%
Biostime
5%
Others
36%
Abbott
4%
Mengniu
5%
Source: Euromonitor
Page 73
Industry Focus
China Dairy Sector
Market share - Beverages
Coca Cola
14%
Market share - Beer
Wahaha
7%
Tingyi
12%
Yangshengtang
5%
CRE
5%
Others
53%
UPC
4%
Market share – Instant noodles
Henan
Nanjiecun ,
1.5
Nisson
Foods , 2.0
Henan Si Mei
Te, 4.1
Market share -Wine
COFCO , 3.0
Vats, 0.9
Castel Group,
0.7
Others, 19.0
Tingyi, 39.4
Macrolink, 0.6
Baixiang
Food,
10.0
UPC , 13.2
Jinmailang
Food, 10.8
Source: Euromonitor, AC Nielson, DBS Vickers
Page 74
Yantai Weilong ,
0.9
Citic Guoan , 0.9
Changyu, 3.0
Others, 90.0
Industry Focus
China Dairy Sector
Jun/15
Jun/15
Dec/14
Jun/14
Jun/15
Dec/14
Jun/14
Dec/13
Jun/13
Dec/12
Jun/12
Dec/11
Jun/11
4,000
Dec/13
5,000
Jun/13
6,000
Dec/12
7,000
RMB/ton
13,000
12,500
12,000
11,500
11,000
10,500
10,000
9,500
9,000
8,500
8,000
Jun/12
RMB/ton
8,000
3,000
Feb/15
Packaging – PET China
Dec/11
White sugar (China)
Jun/11
3.0
Jun/11
Sep/11
Dec/11
Mar/12
Jun/12
Sep/12
Dec/12
Mar/13
Jun/13
Sep/13
Dec/13
Mar/14
Jun/14
Sep/14
Dec/14
Mar/15
Jun/15
3.2
Oct/14
3.4
Jun/14
3.6
Feb/14
3.8
Oct/13
4.0
Jun/13
4.2
Feb/13
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
Oct/12
4.4
Jun/12
US$/ton
Jun/11
RMB/kg
Feb/12
Dairy: WMP Fonterra
Oct/11
Dairy: raw milk prices (China)
Source: CEIC, Euromonitor
Page 75
Industry Focus
China Dairy Sector
US$/ton
360
340
320
300
280
260
240
Source: CEIC, Euromonitor
Page 76
Jun/15
Dec/14
Jun/14
Dec/13
Jun/13
Dec/12
200
Jun/12
220
Jun/15
Jun/14
Jun/12
Grain: Alfalfa (US)
Dec/14
2,000
Jun/14
250
Dec/13
2,100
Jun/13
300
Dec/12
2,200
Jun/12
350
Jun/11
2,300
Jun/15
400
Dec/14
2,400
Dec/13
450
Jun/13
2,500
Dec/12
500
Dec/11
Rmb/ton
2,600
Jun/11
US$/ton
550
Dec/11
Grain: Corn (China)
Feedstuff – soybean meal
Industry Focus
China Dairy Sector
China dairy industry chain
Background Growing forage Dairy Farming
Dairy product processing
Sales & Distribution Feed is a mix of forage (corn, silage,
Dairy cows are imported from NZ, AUS and US between
Processing facilities are typically built with raw milk sources nearby.
Infant formula’s fast growing retail
alfalfa) & concentrated feed (corn,
soybean meal, cottonseed meals),
10-14 months. Most choose Holstein breed for its higher
yield.
Since 08 infant formula scandal, downstream players have formed
integrated vertically to ensure a safe and secure supply chain
channel is e-commerce, thereafter
specialty channels.
By herd size
Dairy market share breakdown by RSP % (by comp) Mengniu
Yili
Bright
Distribution channel breakdown (%) with the majority demand being
satisfied by import
Market players Largest exporters to China Alfalfa 90% of volume ‐ USA Corn USA Soybean Argentina Typical feed mix Conce
ntrate
d feed
40%
High Fibre
60%
Latest
China Modern Dairy
Huishan Dairy
Shengmu
J apfa
Bright Dairy-related
Fontera
YST Dairy
Zhongdi Dairy
Top ten
A s of 2014 (China)
Market sh
201,507
180,331
103,252
57,000
50,000
49,000
44,623
21,433
707,146
14,500,000
1.4%
1.2%
0.7%
0.4%
0.3%
0.3%
0.3%
0.1%
4.9%
Overall
Yogurt
16
12
Drinking Dairy
22
25
Infant formula market share RSP % (by comp) US$ per ton
'000 ton
100
Feb'14
420
80
400
60
Nov'14
380
40
2015
Nov
Jul
Sep
340
Mar
0
May
360
Jan
20
2014 Import Volume (LHS)
2015 Import Volume (LHS)
2014 Import Value (RHS)
2015 Import Value (RHS)
Jun'15
12
8
Wyeth
10.0
8.7
Biostime
4.3
Yashili
4.2
Bright Dairy joined hands with RRJ Capital to
develop its upstream capabilities and plans to list
in 3‐5 years.
Yili pans to partner with Dairy Farmers of
America, in addition to announcing its NZ milk
powder plant expansion
Both CMD & Huishan Dairy guide its overall herd
size to grow 10% organically
Date Feb?4
Oct'14
Oct?4
Feb'15
Mar'15
Jun'15
4.0
80%
34.3
60%
50%
40%
42.7
90.2
59.1
35.3
0%
Yogurt
%
6.0
6.6
22
10%
3.9
2.0
4.1
5.7
20%
5.9
Royal Friesland
90%
30%
7.2
Yili
Upstream expansion plans Bright Dairy plans to purchase its Parent
Shanghai Dairy's upstream assets.
21
3
100%
70%
Beingmate
0.0
Date 6
10.1
Abbott
Alfalfa import volume & ASP 7
Mead Johnson
Recent events 18
19
Wahaha
8.0
10.0
12.0
Modern
Internet retailing
Infant
Dairy
formula
Traditional
Overseas partnerships
Danone increases its stake to 9.9% in Mengniu to build up its cold‐chain business , of which Danone's Bio+
has since been launched.
Danone joins as a 2nd largest shareholder with Yashili with plans to work together in infant formula
Friesland Campina invests in a 50/50 JV with Huishan to jointly develop a new infant formula brand and co‐
invest in a production plant in Shenyang for RMB692m. Friesland will also purchase US$30m via open
market purchase.
Fonterra buys c.18% stake in Beingmate and plans to distribute its premium IMF brand Annum through
Beingmate's channels
Want Want develops cold‐chain products with Japan‐Morinaga Milk Industry to be launched in 3Q15
Bright Dairy plans to purchase Israel‐Tnuva Food from Parent Company. Tnuva has >70% market share in
Israel.
Source: Euromonitor, Company data, DBS Vickers
Page 77
Industry Focus
China Dairy Sector
PE & PB band charts
PE band chart
PB band chart
Biostime (1112 HK)
Biostime (1112 HK)
Share Price (HK$)
90
Share Price (HK$)
120
80
44x
70
60
35x
80
50
26x
60
40
17x
30
20
12.6x
100
7x
10
10.0x
7.4x
40
4.8x
20
2.1x
Bright Dairy (600597 CH)
4.8x
15
15
21x
10
10
0
Dec-15
0
Dec-13
5
Dec-11
5
3.2x
1.6x
China Mengniu (2319 HK)
Dec-15
30x
Dec-09
Dec-15
20
20
Dec-07
Dec-14
6.4x
Dec-13
25
25
Dec-11
39x
Dec-09
30
7.9x
30
Dec-07
48x
35
Share Price (RMB)
35
Jan-06
57x
40
Jan-06
Dec-13
Bright Dairy (600597 CH)
Share Price (RMB)
45
Share Price (HK$)
50
Dec-12
Dec-11
Dec-10
Dec-15
Dec-14
Dec-13
Dec-12
Dec-11
0
Dec-10
0
China Mengniu (2319 HK)
31x
27x
45
24x
40
Share Price (HK$)
50
3.6x
3.2x
2.7x
40
20x
35
30
16x
25
20
2.3x
30
1.8x
20
15
Source: Thomson Reuters, DBS Vickers
Page 78
2015
2014
2013
2013
2012
2011
2011
2010
2015
2014
2013
2013
2012
2011
2011
10
2010
10
Industry Focus
China Dairy Sector
PE band chart
PB band chart
China Modern Dairy (1117 HK)
China Modern Dairy (1117 HK)
Share Price (HK$)
6.0
Share Price (HK$)
12.0
9x
2.0
6.0
1.1x
4.0
0.5x
Aug-12
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Dec-12
Mar-13
0.0
Jun-12
0.0
Sep-12
2.0
Mar-12
1.0
China Huishan Dairy (6863 HK)
China Huishan Dairy (6863 HK)
35x
Share Price (HK$)
4
Jul-15
11x
Dec-14
3.0
1.6x
May-14
14x
2.1x
8.0
Oct-13
17x
4.0
2.6x
10.0
Mar-13
20x
5.0
29x
3
23x
Share Price (HK$)
4.0
2.7x
2.3x
3.0
17x
2
11x
1.8x
2.0
1.4x
1
Jul-15
Mar-15
Oct-14
Jun-14
Sep-13
Inner Mongolia Yili (600887 CH)
Feb-14
1.0
Jul-15
Mar-15
Oct-14
Feb-14
Sep-13
Jun-14
1.0x
0
Inner Mongolia Yili (600887 CH)
Share Price (RMB)
35
Share Price (RMB)
35
30
30
24x
25
25
20
19x
20
15
14x
15
10
8x
5
3x
4.2x
3.0x
10
1.8x
5
0.5x
Dec-15
Dec-13
Dec-11
Dec-09
Dec-07
Jan-06
Dec-15
Dec-13
Dec-11
Dec-09
Dec-07
0
Jan-06
0
5.4x
Source: Thomson Reuters, DBS Vickers
Page 79
Industry Focus
China Dairy Sector
PE band chart
PB band chart
Yashili International (1230 HK)
Yashili International (1230 HK)
45x
32x
20x
Page 80
Jul-15
Nov-15
Jul-14
Nov-14
Mar-15
Jul-13
Source: Thomson Reuters, DBS Vickers
Nov-13
Mar-14
Jul-12
7x
Share Price (HK$)
10
9
8
7
6
5
4
3
2
1
0
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
57x
Nov-12
Mar-13
Jul-11
Nov-11
Mar-12
Nov-10
Mar-11
Share Price (HK$)
10
9
8
7
6
5
4
3
2
1
0
4.9x
3.9x
2.8x
1.8x
0.7x
Industry Focus
China Dairy Sector
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
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Industry Focus
China Dairy Sector
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