乳制品行业报告

eflect my personal views about the subject security(ies) and subject company(ies). I also will be, directly or indirectly, related to the specific recommendations or report. Initiating Coverage COMPANY NOTE China | Consumer | Food and Beverages 20 December 2010 Mengniu Dairy (2319 HK) Resilient Demand and Limited Margin Downside Ahead; Initiate with Buy Key Takeaway We initiate on Mengniu Dairy with a Buy and price target HK$25.0 based on 22.0x 2011 PE and 1.0x 2009-12 PEG. As China’s largest liquid milk producer, Mengniu is well-positioned to capture the resilient demand and outpace industry growth, in our view. We see limited downside ahead for further gross margin squeeze given better raw milk supply and better product mix. The stock trades at a 22% discount to peers’ 2011 PE; Buy, especially into weakness. Resilient Demand for Liquid Milk. China’s dairy industry is expected to increase at a 12% CAGR in the next five years, driven by product mix improvement for urban consumption and volume growth in rural areas. As the largest liquid milk producer in China, Mengniu is well-positioned to capture the resilient demand and outpace industry growth, in our view. We expect 2009-2012 turnover CAGR to be 18.5%. Limited Gross Margin Downside Ahead. We expect gross margin to decrease 0.7 to 26.0% in 2010 on a raw milk cost increase and food price control overhang, recovering to 26.1% and 26.5% in 2011 and 2012, respectively, given: 1) more moderate raw milk cost increase with raw milk supply improvement, and 2) higher ASP mainly from price increase/discount removal in 2H2010 and continuous product mix improvement. Management targets 28% gross margin in five years. We expect 2009-2012 EPS CAGR to be 21.9% driven by turnover growth and margin expansion. Strong Cash Eyeing M&A. Management expects future capex of RMB 1.3-1.5bn can be satisfied by operating cash flow, and the cash balance of RMB 5-6bn will be used on M&A. The recent acquisition of China’s 4th largest yogurt producer, Junlebao, will increase Mengniu’s yogurt market share from 25% to 33%, and strengthen its leadership in the fastest growing yogurt market. We expect potential M&As to be upside catalysts. Valuation/Risks Mengniu is trading at 18.8x 2011 PE and 0.9x 2009-2012 PEG, a 22% discount to HK food and beverages’ 24.1x and 1.2x, respectively. Our price target of HK$25.0 is based on 22x 2011 PE and 1.0x 2009-2012 PEG, implying 19% upside. Risks: 1) potential food price control, 2) higher than expected raw milk cost increase. BUY Price target HK$25.0 Price HK$21.0 B’berg 2319 HK Reuters 2319.HK Financial Summary Book Value (MM) 8,240 Book Value/Share 4.94 Net Debt (MM) -5,359 Return on Avg. Equity 8.8% Long-Term Debt (MM) 350 Cash & ST Investments (MM) 6,150 Net Cash/Share 3.09 Market Data 52-Week Range $20.05-$28.65 Total Entprs Value (MM) $26,695 Market Cap. (MM) $36,497 Insider Ownership 4.6% Institutional Ownership 44.0% Shares Out. (MM) 1,738 Avg. Daily Vol. 5,551,436 Free Float 67.7% E Q U IT Y R E S E A R C H A S IA Tiffany Feng, Equity Analyst* +852 3743 8017 tfeng@jefferies.com * Jefferies Hong Kong Ltd RMB Prev. 2009A Prev. 2010E Prev. 2011E Prev. 2012E Rev. (MM) 25,710 30,733 36,695 42,762 Net Profit (MM) 1,116 1,264 1,674 2,147 Change (% YoY) n.a. 13.3 32.4 28.3 EPS 0.68 0.73 0.96 1.23 Dividend / Share 0.14 0.15 0.19 0.25 FCF / Share 0.90 0.85 0.92 1.04 Valuation P/E (X) 27.1 24.9 18.8 14.6 P/B (X) 3.7 3.1 2.7 2.3 EV / EBITDA (X) 13.2 12.2 9.6 7.8 Dividend Yield (%) 0.8 0.8 1.1 1.4 Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 14 to 17 of this report. Price Performance 0.0 10.0 20.0 30.0 40.0 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 20 December 2010 Initiating Coverage (2319 HK) page 2 of 17 Please see important disclosure information on pages 14–17 of this report. Tiffany Feng, Equity Analyst, +852 3743 8017, tfeng@jefferies.com Investment thesis We initiate on Mengniu Dairy with a Buy and PT HK$25.0 based on 22.0x 2011 PE and 1.0x 2009-12 PEG. As the largest liquid milk producer in China, Mengniu is well-positioned to capture the resilient demand and outpace industry growth, in our view. Despite the potential margin squeeze on a raw milk cost increase and food price control overhang in 2010, we expect limited margin downside ahead given better raw milk supply and continued product mix improvement. The stock trades at a 22% discount to peers’ 2011 PE; Buy, especially into weakness. Resilient demand for liquid milk China’s dairy industry is expected to increase at a 12% CAGR in the next five years, driven by product mix improvement for urban consumption and volume growth in rural areas. Unlike the milk powder market which is dominated by foreign brands after the melamine incident in 2H2008, the liquid milk market (including UHT milk, milk beverage, and yogurt) has recovered quickly and foreign brands still have insignificant involvement. As the largest liquid milk producer in China, Mengniu is well-positioned to capture the resilient demand and outpace industry growth, in our view. We expect Mengniu’s top line CAGR in 2009-2012 to be 18.5%, driven by 12.6% sales volume CAGR and 5.2% ASP CAGR (mainly from product mix improvement and new product launches). Limited gross margin downside ahead We expect gross margin to decrease 0.7 ppt to 26.0% in 2010 on a raw milk cost increase and food price control overhang. However, we expect it to recover to 26.1% and 26.5% in 2011 and 2012, respectively, for the following reasons. On the cost side, we expect the raw milk cost increase to be more moderate (+6.0% and +4.0% yoy in 2011 and 2012, respectively, vs. est. +16.0% yoy in 2010) which will be mainly driven by a cow feeding/raising cost increase and an increasing purchase proportion from large ranches (currently 70%), instead of a supply shortage like in 2010. On the price side, we expect higher ASP to offset cost increase, mainly due to: 1) Mengniu has increased the product price of some high-end UHT milk and yogurt by 5-8% in Aug/Sept 2010, directly resulting in 2-3% higher overall ASP; 2) it has gradually removed the discount to distributors, resulting in a 2-3% ex-factory price increase; and 3) product mix improvement. Given the potential moderate raw milk cost increase and the continuing product mix improvement, we expect that gross margin downside risk is limited going forward. From our sensitivity analysis, a 1% increase in ASP would drive up earnings by around 15%, while a 1% increase in raw milk price can only drag down earnings by around 7%, keeping other elements unchanged. Management targets 28% gross margin in five years. We expect 2009-2012 EPS CAGR to be 21.9% driven by turnover growth and margin expansion. Strong cash eyeing M&A Management expects future capex of RMB1.3-1.5bn can be satisfied by operating cash flow, and the cash balance of RMB5-6bn will be used on M&A. The recent acquisition of China’s 4th largest yogurt producer, Junlebao, will increase Mengniu’s yogurt market share from 25% to 33%, and strengthen its leadership in the fastest growing yogurt market. Mengniu has also joined the bid on 50% Yoplait, the 2nd largest chilled milk brand in the world. This may further enrich Mengniu’s chilled milk product line if successful. We expect potential M&As to be upside catalysts. Key risks 1) Potential government food price control. But we believe this has been largely priced in and management feels government will allow a milk price increase if cost further increases. 2) Higher than expected raw milk cost increase. Chart 1: Turnover trend Source: Jefferies, company data 0 10,000 20,000 30,000 40,000 50,000 RMB m Liquild milk Ice Cream Other dairy product 2009-12CAGR 18.5% Chart 2: Net profit trend Source: Jefferies, company data -1,000 -500 0 500 1,000 1,500 2,000 2,500 RMB m 2009-12CAGR 24.4% 20 December 2010 Initiating Coverage (2319 HK) page 3 of 17 Please see important disclosure information on pages 14–17 of this report. Tiffany Feng, Equity Analyst, +852 3743 8017, tfeng@jefferies.com Valuation and share price analysis Mengniu is trading at 18.8x 2011 PE and 0.9x 2009-2012 PEG, lower than HK food and beverages’ 24.1x and 1.2x, respectively. We believe the concerns on a raw milk cost increase and potential food price control have been largely priced in. Given the resilient demand for liquid milk and limited gross margin downside going forward, we recommend to Buy, especially into weakness. Our price target of HK$25.0 is based on 22.0x 2011 PE and 1.0x 2009-2012 PEG, in line with our DCF valuation. This implies 19% upside potential. Chart 4: Forward PE band Source: Jefferies, Bloomberg Chart 5: Forward PB band Source: Jefferies, Bloomberg 0 10 20 30 40 Jun-08 Mar-09 Dec-09 Sep-10 HK$ 30X 25 20X 15X 7X 0 10 20 30 40 50 Jun/04 May/05 May/06 Apr/07 Apr/08 Mar/09 Mar/10 HK$ 5.0X 3.0X 2.0X 1.0X 4.0X Chart 3: Peer group valuation comparison Source: Jefferies for covered companies and Bloomberg for NC companies. Closing price as of 17 December 2010. Company name Ticker Rating Price Mkt. Cap. (U$ m) FY10 PE (X) FY11 PE (X) FY12 PE (X) 09-12 CAGR (%) FY11 PEG (X) FY10 EV/EBI TDA (X) FY11 EV/EBI TDA (X) FY12 EV/EBI TDA (X) FY10 PB (X) FY11 PB (X) FY12 PB (X) FY10 ROE (%) FY11 ROE (%) FY12 ROE (%) FY10 DY (%) FY11 DY (%) FY12 DY (%) HK-listed food and beverages TINGYI HLDG CO 322 NC 19.9 14,326 32.1 26.7 22.1 19.1 1.4 15.2 12.3 9.9 8.4 7.2 6.1 27.8 28.3 29.2 1.6 1.8 2.1 WANT WANT CHINA 151 NC 6.7 11,315 29.5 23.1 19.5 22.9 1.0 21.9 17.0 13.6 10.3 9.0 8.1 36.4 41.1 44.4 2.5 3.0 3.9 CHINA RES ENTERP 291 BUY 31.0 9,515 34.2 26.0 20.9 27.9 0.9 9.3 8.7 7.5 2.5 2.3 2.1 21.7 9.2 10.6 2.5 1.2 1.4 TSINGTAO BREW-H 168 NC 42.2 7,306 31.1 25.9 22.1 19.8 1.3 16.0 13.2 11.2 5.1 4.5 3.9 17.8 18.4 19.0 0.9 1.1 1.2 CHINA YURUN FOOD 1068 BUY 27.2 6,324 21.0 16.9 14.0 21.1 0.8 15.9 13.1 10.8 3.6 3.1 2.7 21.8 20.0 20.8 1.4 1.8 2.1 CHINA MENGNIU DA 2319 BUY 21.0 4,693 24.9 18.8 14.6 21.9 0.9 12.2 9.6 7.8 3.1 2.7 2.3 13.6 15.4 17.0 0.8 1.1 1.4 WUMART STORES 8277 NC 20.3 3,256 40.1 32.0 26.2 22.5 1.4 18.7 14.9 12.4 7.1 6.2 5.4 20.8 21.7 23.3 1.1 1.4 1.8 LIANHUA SUPERM-H 980 NC 36.0 2,876 30.6 25.5 21.6 20.8 1.2 9.7 7.7 6.0 6.9 5.8 5.1 23.7 24.7 24.8 1.1 1.4 1.3 UNI-PRESIDENT 220 NC 4.3 1,990 21.8 17.6 14.2 9.8 1.8 10.4 8.4 6.7 2.0 1.9 1.7 9.2 10.7 12.6 2.3 2.6 3.2 CHINA FOODS LTD 506 UNPF 5.1 1,840 31.8 22.8 18.8 10.2 2.2 11.7 9.6 8.1 2.5 2.3 2.1 8.0 10.5 11.8 1.1 1.6 1.9 CHINA HUIYUAN 1886 NC 5.5 1,038 46.3 25.0 18.6 16.4 1.5 19.1 11.0 8.7 1.4 1.2 1.1 2.5 4.9 6.2 0.4 0.8 1.3 weighted average 30.5 24.1 19.9 21.2 1.2 15.2 12.3 10.1 6.0 5.2 4.6 23.6 22.9 24.4 1.7 1.8 2.1 A-share listed dairy companies INNER MONG YIL-A 600887 NC 39.5 4,733 40.0 29.5 22.9 28.5 1.0 17.8 14.5 NA 7.6 6.1 5.0 20.7 22.2 22.4 0.4 0.5 0.6 BRIGHT DAIRY-A 600597 NC 51.4 825 82.0 56.5 40.8 30.3 1.9 NA NA NA 7.0 6.3 5.6 8.6 11.3 14.4 0.5 0.8 1.1 GUANGXI ROYAL-A 002329 NC 11.3 1,779 59.5 47.1 37.3 36.2 1.3 21.3 16.5 NA 4.9 4.4 NA 7.5 8.0 8.0 0.8 1.1 1.4 SICHUAN NEW-A 000876 NC 23.4 2,924 36.9 30.5 22.1 29.3 1.0 NA NA NA NA NA NA NA NA NA NA NA NA BEIJING SANYUAN 600429 NC 8.1 1,075 NA 62.2 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA weighted average 45.9 35.0 26.6 30.2 1.2 10.8 8.7 0.0 6.8 5.7 3.8 16.2 17.5 18.0 0.5 0.7 0.9 Total weighted average 32.1 26.0 20.2 22.8 1.1 14.4 11.6 8.2 5.2 4.5 3.9 20.2 19.5 20.9 1.4 1.5 1.8 20 December 2010 Initiating Coverage (2319 HK) page 4 of 17 Please see important disclosure information on pages 14–17 of this report. Tiffany Feng, Equity Analyst, +852 3743 8017, tfeng@jefferies.com Industry demand and supply analysis Resilient demand China’s dairy industry is expected to grow at a 12% CAGR in the next five years, according to Mengniu quoting Mckinsey data. We expect the main growth drivers are product mix improvement for urban consumption and volume growth in rural areas. � Product mix improvement for urban consumption. The per capita consumption volume of milk products in China’s 36 major cities has been relatively stable. However, the per capita consumption value has experienced a 10.5% CAGR in 2005-2009 according to the Dairy Association of China (DAC). Other than inflation, we believe product mix improvement is a main value driver with the increasing income level. In particular, the trend has been accelerating after the melamine incident in 2H2008 as more demand has been shifting towards high quality high-end products. � Volume growth in rural areas. The per capita consumption volume of milk products in rural areas has increased at a 14.7% CAGR in 2004-2008, much faster than in urban areas. However, the rural consumption level is still only about 19% of the urban consumption level now (vs. 8.9% in 2004). Going forward, we believe the rural-urban consumption gap will further narrow with the improving income level and continuing urbanization. Chart 6: National dairy product sales volume Ytd % chg Source: Wind Chart 7: Per capita dairy product consumption value (RMB) Source: DAC Yogurt is the fastest growing liquid milk product Yogurt per capita consumption value in 36 major cities has experienced a 10.4% CAGR in 2005-2009, faster than fresh milk’s 7.2%. In China, yogurt accounts for 16% of total dairy product consumption value, lower than South Korea’s 18%, Taiwan’s 20%, and Japan’s 22%, implying improving room in our view. Going forward, we expect both consumption volume and product mix improvement to drive yogurt consumption value. Domestic brands dominate liquid milk market Unlike the milk powder market which is dominated by foreign brands after the melamine incident in 2H2008, the liquid milk market (including UHT milk, milk beverage, and yogurt) has recovered quickly and foreign brands still have insignificant involvement restricted by high transportation costs. Mengniu, Yili, and Bright remain the top three players with aggregate market share of about 70%. -10.0 0.0 10.0 20.0 30.0 40.0 50.0 1 Q 0 6 2 Q 0 6 3 Q 0 6 4 Q 0 6 1 Q 0 7 2 Q 0 7 3 Q 0 7 4 Q 0 7 1 Q 0 8 2 Q 0 8 3 Q 0 8 4 Q 0 8 1 Q 0 9 2 Q 0 9 3 Q 0 9 4 Q 0 9 1 Q 1 0 2 Q 1 0 3 Q 1 0 ytd chg % 0 50 100 150 200 250 300 2005 2007 2008 2009 Fresh milk Milk powder Yogurt Other milk products 2005-09CAGR 10.5% 20 December 2010 Initiating Coverage (2319 HK) page 5 of 17 Please see important disclosure information on pages 14–17 of this report. Tiffany Feng, Equity Analyst, +852 3743 8017, tfeng@jefferies.com Raw milk price hike to moderate on better supply The raw milk price in the major production provinces increased 17.8% yoy in Oct 2010 ytd, vs. -13.1% in 2009. We believe the raw milk price hike in 2010 is mainly due to the temporary supply shortage after the melamine incident in 2H2008, and the current price is back to the level before the melamine incident. Going forward, we expect the raw milk price increase to be more moderate, which will be mainly driven by a cow feeding/raising cost increase, instead of a supply shortage like in 2010. Chart 8: Raw milk price trend Source: Wind Chart 9: Fresh milk retail price trend Source: Wind Corporate overview Founded in 1999, Mengniu is the largest dairy product manufacturer in China, with MENGNIU as the core brand. It has diversified milk products including liquid milk (such as UHT milk, milk beverages, and yogurt), ice cream, and other dairy products (such as milk powder and cheese). Its UHT milk and yogurt sales volume/revenue have ranked No.1 in the China dairy market since 2003, and its ice cream sales volume has also ranked No.1 since 2005. Its overall dairy turnover ranked 16th globally in 2009. The Company was listed in HKEx in Jun 2004. In Jul 2009, COFCO and Hopu investment became joint controlling shareholder with a 20.0% stake. Mengniu management holds an aggregate 15.2% stake. COFOC owns another seven listed companies including China Foods (506 HK, Underperform), China Agri (606 HK, NC), COFCO Packaging (906 HK, NC), COFCO Property (000031 CH, NC), COFCO Tunhe (600737 CH, NC), and BBCA Biochemical (000930 CH, NC). 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 RMB/kg 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 RMB/kg National 36 major cities Chart 10: Organization chart Source: Company data 20.03% Ice Cream Liquid milk UHT milk Milk Beverage Yogurt China Mengniu Dairy Company Ltd (2319 HK) COFCO & Hopu Investment Other dairy products 20 December 2010 Initiating Coverage (2319 HK) page 6 of 17 Please see important disclosure information on pages 14–17 of this report. Tiffany Feng, Equity Analyst, +852 3743 8017, tfeng@jefferies.com Well-positioned to capture the resilient demand for liquid milk Liquid milk is the major income source for Mengniu, contributing around 90% of turnover. There are three sub-segments, namely UHT (Ultra-high temperature processing) milk, milk beverage, and yogurt, whilst about 60% of the liquid milk revenue is from UHT milk. As the largest liquid milk producer in China with about 40% market share, Mengniu is well- positioned to capture the resilient demand for liquid milk, as discussed in the Industry section. We expect 2009-2012 sales volume CAGR to be 12.6%. Strong capability on product mix improvement and new product launch Mengniu illustrates a strong capacity on developing different products to target different customer groups and improve its product mix. For example, Milk Deluxe focuses on the high income group who are willing to pay more to enjoy the supreme quality. Xin Yang Dao Low-lactose Milk and Future Star target the white collar and children’s market, respectively. These high-end UHT milks’ ASP is about 50-150% higher than the regular one. Mengniu hasn’t raised its product price since Mar 2008, but ASP has increased 7.7% and 7.5% in 2009 and 1H2010, respectively, r