China Malaise Not Confined To The Tech Sector

The high base in 2020, which was positively affected by panic spending and government support, means that DFI has a tough act to follow. Increased levels of competition in China have hurt its key associate Yonghui, and positive yoy performances from some of its segments do not appear to be able to rescue its 2021 numbers. We believe 2021 earnings downgrades have hit a trough and investors should be rewarded over the next few months. Maintain BUY. Target price lowered to US$3.60.


2020’s high base is a tough act to follow. Thus far in 2021, Dairy Farm International’s (DFI) operational performance, and its share price performance as a result, has been underwhelming to say the least. In 2H21 to date, its share price decline of nearly 29% has mirrored the drawdown in China’s tech sector. This can be partly explained by the poor performance of its Yonghui Superstores associate in China (DFI’s stake: 21.08%) which reported a loss of over Rmb1b in 3Q21 alone, and a loss of Rmb2.2b for 9M21 due to intense competition for the grocery dollar in that country. The lack of open borders between Hong Kong and China has also resulted in poor results from its health & beauty and grocery retail businesses in Hong Kong.

In our view, the poor 2021 results should be priced in. We believe that DFI’s anticipated poor performance for the upcoming 2021 results season is largely priced in. With consensus having already downgraded earnings by >50% in the past 3-4 months, and earnings likely to trough in 2021 in our view, we expect DFI’s share price to re-rate in the next few months once the 2022 earnings growth comes into view. The company has in place its “multi-year transformation programme” and remains encouraged by the momentum of the progress, though the market will still need to see evidence of this in the near to medium term.

3Q21 was weaker than expected. In its 3Q21 business update, DFI presented a mixed view of its businesses with revenue for the convenience segment, Maxim’s and Yonghui performing better on a yoy basis – however as indicated above, the competition in China has materially degraded Yonghui’s margins with no guidance from management as to when this will turn around. On the negative side, the grocery, health & beauty and home furnishings segments were worse off vs 3Q20, although it appears that vs 1H21, the convenience and health & beauty segments were stronger.