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Expected to accelerate growth in 4Q21F

  • We expect Mengniu’s topline growth to be affected a bit by Covid volatility, especially for room temperature yoghurt and milk beverages.
  • Management expects 4Q21F sales to be stimulated by advance CNY sales and is confident in doubling sales from FY21 to 25F.
  • Mengniu expects its raw milk purchase price to increase by mid-single digits yoy in 2H21F and to be stable yoy in FY22F.
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3Q21 performance affected by the external environment

After an ex-factory price increase for its mass market UHT pure milk products in Jan 2021 to match that of its competitors, Mengniu raised the ex-factory prices for both its mass market UHT pure milk and flavored milk products in Jul. The price increases were a success, as sales of mass market UHT pure milk and flavored milk products continued their upward trend with mid- to high-double digit growth in 3Q21. However, sales growth of room temperature yoghurt and milk beverages was affected by the pandemic rebound, extreme weather, weak macro-economic conditions and a high base in 3Q20. Management does not expect further price hikes in the near future, but it expects 4Q21F sales growth to be stimulated by advance CNY sales.

Raw milk cost pressure expected to ease

Mengniu expects its raw milk purchase price to increase by mid-single digits yoy in 2H21F and to be stable yoy in FY22F, compared with an over 15% yoy price increase in 1H21. Management expects the raw milk price to stabilize because of a high base and a supply demand rebalance owing to new production capacity. But there are still uncertainties regarding feed costs, which may push up the raw milk price. Also, the fatigue performance of room temperature yoghurt and milk beverages, which usually have higher gross margins, may affect the 2H21F gross margin. We now expect its 2H21F gross margin to drop by 0.4% pts yoy.

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More investment in lower-tier markets

Mengniu is primarily leveraging an invested third-party 2B platform to expand its presence in lower-tier markets, which it started in 2018. Currently, over 600k merchants have joined the platform, operating as both retailers and wholesalers. Mengniu expects the number of merchants on this platform to grow to over 1m in the next 2–3 years, covering all 500k villages in China with 2–3 POS per village.

Diversified competitive landscape

The future competition among dairy players in China will be more diversified, with more fast-developing product categories. The competitive environment for UHT products is expected to improve. Mengniu will put more resources into its low-temperature fresh milk and cheese products. It aims to grow the sales contribution of its high-quality Shiny Meadow fresh milk to over 50% from currently below 40% and to raise the fresh milk gross margin higher than that of its UHT products. Mengniu expects to double its revenue and net profit in five years and to achieve revenue of Rmb10bn for each of the fresh milk, milk powder and cheese segments.