Positive margin outlook in 2024F
- We attended Mengniu’s global partner conference on 17 Dec 2023.
- In an analyst meeting during the event, Mengniu retained its guidance of 30-50bp FY23F OPM expansion, driven by a better product mix and lower raw milk costs.
- Management reiterated its mid- to high-single digit yoy revenue growth guidance for FY23F (including the consolidation of Milkground).
- Reiterate Add as we believe Mengniu has further room to improve its margins. We lower our forecasts for FY23-25F and derive a lower DCF-based TP of HK$35.7.
FY23F results likely to reach low end of management’s guidance
Excluding the consolidation of Milkground (consolidated end-FY22), Mengniu guided for organic revenue growth of low-single digits in FY23F, instead of mid-single digit growth it guided in the interim results conference, due to weaker-than-expected sales during the Mid-Autumn Festival and National Day holiday (29 Sep-6 Oct). Including the consolidation of Milkground, it expects FY23F revenue growth to reach mid- to high-single digits. By category, Mengniu expects its high-end UHT brands such as Milk Deluxe to maintain double-digit sales growth in FY23F, while its basic white milk sales grow at a high-single digit rate. It expects sales of its milk beverage products to improve in FY23F, with ‘Fruit Milk Drink’ and ‘Suan Suan Ru’ still posting positive sales growth. It guided for sales of room-temperature yogurt products to stay weak, with a 10%+ decline yoy in FY23F, but sales of chilled yogurt products to improve yoy in FY23F. So far, its sales growth of ice cream has slowed down hoh in 2H23F, but management still expects yoy positive sales growth for FY23F. Sales of its ice cream overseas remained solid and it expects 20% growth for FY23F. We lower our FY23F revenue growth forecast to 6% (7.5% previously), factoring in the lower-than-expected sales over the Mid-Autumn Festival and National Day holiday, and likely no uplift from pre-Chinese New Year (CNY) purchases given the later CNY in 2024 at 10 Feb vs. 21 Jan in 2023.
Lower raw milk costs benefiting margins in FY23-24F
Management said in the analyst meeting that its raw milk cost may decline a further 3-5% in FY24F due to the oversupply of raw milk in China. Management also maintains its OPM guidance of 30-50bp expansion for FY23F. We expect Mengniu’s overall adjusted FY23F OPM to reach 6.2% (1H23: 6.4%, 2H23F: 6.1%), up 0.3% pt yoy. For FY24-25F, management targets to expand its OPM by 30-50bp p.a., driven by margin expansion through lower raw milk costs and a favourable product mix.
Inventory impairment to impact net profit in 2H23F
Management said in the analyst meeting that due to the weak dairy demand in FY23, the company incurred a non-material inventory impairment which it expects to impact the net profit in 2H23F. Starting from 2Q23, it had to sell some of its milk powder (converted from liquid milk for better storage) at a lower price to digest its excess milk powder inventory, which caused a non-material impact to its net profit. We project net profit of Rmb55.5bn for FY23F, up 4.6% yoy (1H23: -19.5%; 2H23F: 63%), factoring in an inventory impairment loss of Rmb400m for FY23F.
Reiterate Add with a lower DCF-based TP of HK$35.7
We lower our TP to HK$35.7 as we cut our FY23-25F EPS forecasts by 8.7-9.2% to reflect a weak net profit. We reiterate Add, as we believe Mengniu has room to improve its margins in over the next 3-5 years, driven by a favourable product mix and improved operating efficiency. Re-rating catalysts include stronger topline growth in 1H24F. Downside risks include 1) higher-than-expected raw material costs, and 2) weak macro, which would impact the demand for its dairy products. Our TP is derived from a DCF valuation with 8.8% WACC and a 3% terminal growth rate.
