2Q23 Results Preview: Conservative On Full-year Revenue Guidance
Yili’s 2Q23 revenue growth is likely to be milder than expected, dragged by tepid liquid milk sales and the industry’s intensified promotion of infant milk formulas. We are cautious on its high single-digit organic revenue growth guidance but remain confident on its 30bp organic earnings expansion due to product mix upgrading, lower raw milk prices and lower operating expense ratio. We resume coverage on Yili with a BUY rating and new target price of Rmb37.50.
WHAT’S NEW
• Liquid milk sales growth in 2Q23 was weaker than expected. Liquid milk sales, which accounted for 66% of total sales in 1Q23, was not as strong as management expected in late-Apr 23, despite showing a sequential qoq improvement trend in 2Q23. Among the liquid milk segment, low temperature liquid milk (~10% of liquid milk sales) registered positive revenue growth both in 1Q23 and 2Q23. Premium milk, such as Satine, performed better than basic UHT milk in 1H23, thanks to customers’ growing demand for functionality (such as Jersey Milk, Lactoferrin and A2 ?-casein contained milk) and expansion into new consumption scenes, such as outdoor sporting events and breakfast stores.
• IMF sales decelerated in 2Q23. Infant formula milk distributors have been offering deep discounts to clear inventory against the backdrop of: a) slowing demand from the declining birth rates, and b) smaller brands failing to re-register for their infant formulas under the new national standard implemented on 22 Feb 23. Affected by that, Inner Mongolia Yili Industrial Group’s (Yili) infant milk powder (IMF) sales growth slowed to single digits yoy in 1H23 (vs nearly double-digits yoy in 1Q23). Meanwhile, the company’s adult milk powder grew by double-digits yoy in 1H23, in line with management’s expectation. We are confident that Yili could reach its double-digit revenue growth target in the milk powder categories, driven by: a) strong performance in adult milk powder, b) sequential pricing improvement in the IMF market, and c) its precise investment strategy in higher efficiency stores.
• Mixed performances of discretionary products. Ice cream sales are expected to grow by 10% yoy in 1H23 off a high base (1H22: +31.7% yoy). Cheese product sales declined in 1H23. Specifically, the 2C business (~60% of cheese business) shrank alongside the industry, offset by the double-digit growth in the 2B business.
• Staying vigilant on full-year revenue growth guidance. In Apr 23, management guided for full-year revenue of Rmb135.5b, which implies +10% yoy growth (including Ausnutria consolidation in 2Q22) with high single-digit organic growth. We are conservative on the accomplishment of the target given the lukewarm demand. That said, organic net profit margin expansion remains intact. The company targeted full-year profit before tax (PBT) of Rmb12.5b, which implies +18% yoy growth and PBT margin expansion of 70bp. We are confident on Yili achieving its organic net profit margin expansion target of 30bp yoy in 2023, given the easing raw milk prices and lower marketing expense ratio.
EARNINGS REVISION/RISK
• Earnings revision. Our estimation of a three-year CAGR revenue growth of 9.4% in 2022- 25F is mainly underpinned by: a) its continuous product mix upgrade in liquid milk, and b) market share expansion in the IMF segment. We forecast a revenue of Rmb135b (+9.6% yoy) and a gross profit margin of 32.7% (+15bp yoy) in 2023F. Our new 2023F earnings forecast is at Rmb11b (+16.3% yoy), implying a higher net profit margin at 8.1% (+47bp yoy), which is mainly attributed to: a) improving gross margins, and b) lower marketing expense ratio.
• Risks. a) Slower-than-expected consumption recovery in China, and b) more promotions.
VALUATION/RECOMMENDATION
• Maintain BUY with a new target price of Rmb37.50. We are confident in Yili’s mid-term target to reach at least 9% of net profit margin by 2025 (vs the historical range of 7.3%-8.1% in 2018-22), thanks to: a) ongoing premiumisation (ie functional or organic products), b) softened raw milk prices, and c) alleviated marketing expense amid the easing competition landscape.
• Our target price of Rmb37.50 is based on DCF valuation methodology, assuming a WACC of 12% and a terminal growth rate of 2%. Our target price implies 21.9x 2023F PE.
