1H22F weak sales due to the pandemic impact
? We now expect the top line to grow by 5% yoy in 1H22F and 10.9% yoy in FY22F.
? We expect to see a yoy improvement in Mengniu’s OPM in 2H22F after a yoy decline
in 1H22F.
? Sales growth of mass market white milk products was 17–18% yoy in 5M22F, and the
growth of fresh milk and high-end Milk Deluxe was 25–26% yoy and in the double digits
yoy.
? If the pandemic situation stabilizes in 2H22F, we expect Mengniu to continue its new
product launches and promotion campaigns.
? Reiterate Add with a new DCF-based TP of HK$52.3 because of mild sales growth in
1H22F.
Mild 1H22F outlook because of the pandemic rebound
In Mar–May, the pandemic rebound hit multiple cities in China. According to our channel
check, while demand and sales in Shanghai was satisfactory, it was negatively affected in
some other cities, as distributors maintained a cautious attitude toward stocking amid the
pandemic fluctuations, and the product mix shifted to mass market white milk products. If
the pandemic situation stabilizes in 2H22F, we are still confident that Mengniu will make
up some sales. We now expect its top line to grow by 5% yoy in 1H22F and 10.9% yoy in
FY22F. Because of weak sales, a high base and a poor product mix amid the pandemic,
the 1H22F margin is under pressure. In addition, although the domestic raw milk price has
been stable in 1H22F, the price of some other raw materials, such as milk powder,
packaging materials and palm oil, have risen significantly, negatively affecting the gross
margin in 1H22F. We expect the 2H22F raw milk price to remain stable. On the bright side,
because of the weak macro, we expect Mengniu to continue to cut its selling and marketing
expenses for the rest of the year. We now expect its OPM to decline by 0.3% pts yoy in
1H22F, but to be flat yoy in 2H22F.
Liquid milk products outperform
According to our channel check, sales growth of mass market white milk products was 17–
18% yoy in 5M22F, and the growth of fresh milk and high-end Milk Deluxe was 25–26%
yoy and in the double digits yoy. Sales growth of cheese and ice-cream products was also
positive. However, sales of room temperature yogurt and dairy drinks were affected, as
outdoor consumption was significantly affected by the pandemic rebound. If the pandemic
situation stabilizes in 2H22F, we expect Mengniu to continue its new product launches and
promotion campaigns. It already started some promotion campaigns for room temperature
yogurt and dairy drinks in Jun.
Restructuring the milk powder business
Mengniu’s milk powder business underperformed that of its peers in 1H22F. We expect
Mengniu to privatize Yashili (1230 HK, Not rated) and to restructure its milk powder
business. By privatizing Yashili, we expect Mengniu to better allocate resources internally
for its milk powder business and generate more synergy. Going forward, Mengniu will focus
more on Mengniu branded milk powder products to strengthen its brand image and improve
sales growth according to the management.
Reiterate Add with new DCF-based TP of HK$52.3
We cut our FY22F–24F EPS forecasts by 7.95%, 6.50% and 5.33%, respectively. We
adjusted down our DCF-based TP to HK$52.3 (risk free rate: 4.0%, beta: 0.95, WACC:
8.8%) because of mild sales growth in 1H22F. We reiterate our Add rating as we still see
large growth potential from a mix upgrade, distribution channel reforms and global
expansion. Positive catalysts include better margin improvement and stronger sales
growth. The main risks are stronger price competition and a higher raw milk price that hurt
revenue growth and margin of Mengniu.