china dairy sector20.0% - credit suisse
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm 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.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
12 January 2015
Asia Pacific/China
Equity Research
Food Producers
China Dairy Sector INITIATION
2015 outlook: Four trends
Figure 1: Valuation matrix—2015E P/E vs 2013 ROE
Mengniu
Yili
Bright DairyModern Dairy
Tingyi TsingtaoSunArt
Nestle
DanoneDean
Want Want
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
8 13 18 23 28
2015 P/E
2013 ROE
Source: Company data, Credit Suisse estimates
■ Four trends down the road. China's dairy consumption slowdown in 2014 was cyclical, in our view. We expect: (1) the 8-10% demand CAGR to continue over the next five years; (2) structural changes in the consumption behaviour (less flavoured milk, more UHT yoghurt and pasteurised milk; (3) firms to import UHT milk to play price arbitrage; and (4) to go vertical for
safety warranty.
■ Exposure to star products and earnings growth. Bright has the greatest exposure to UHT yoghurt—20% of total sales in 2013 and we expect it to contribute 36% of total sales (45% segment share) in 2016. Yili and Mengniu followed and launched similar products at end-2013, and are catching up very quickly. All three are distributing imported UHT in China, based either
an OEM (Yili and Bright) or distributing business model (Mengniu).
■ Pecking order. We prefer a downstream processor over upstream farming. (1) Yili (initiate with OUTPERFORM; Rmb40 TP) differentiates itself from
Mengniu on its higher profitability/ROE, management better motivated, and lower valuation multiple; (2) Bright (initiate with OUTPERFORM; Rmb24 TP) is to deliver a 46% earnings CAGR over 2014-16E, benefiting from its first-mover advantage in the rapid-growing UHT yoghurt segment; (3) Mengniu (upgrade to OUTPERFORM) attracts us with its strategic partnership, execution improvement and margin expansion story; and (4) without fundamental catalyst, Modern (upgrade to NEUTRAL) is a band-trading
stock on valuation.
Research Analysts
Kevin Yin
852 2101 7655
kevin.yin@credit-suisse.com
Contribution by:
Michael Shen
12 January 2015
China Dairy Sector 2
Focus tables and charts Figure 2: Industry demand model—market size and structure forecast
Sales value (Rmb mn) 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CAGR
14-18E
Drinking milk products 116,640 126,622 139,560 162,306 179,457 196,687 204,392 215,498 228,486 241,948 254,208 5.6%
(1) Milk 59,956 62,451 67,010 76,077 83,208 89,959 100,324 113,769 128,780 143,949 157,601 12.0%
- UHT milk 47,965 49,961 53,408 60,162 65,017 68,767 72,893 77,995 83,455 89,297 95,548 7.0%
- UHT yoghurt - - 200 700 1,550 3,200 8,000 14,400 21,600 28,080 32,292 41.7%
- Pasteurized milk 11,991 12,490 13,402 15,215 16,642 17,992 19,431 21,374 23,725 26,572 29,761 11.2%
(2) Flavoured milk drinks 37,793 47,088 54,725 66,845 75,388 84,426 80,205 76,195 72,385 68,766 65,327 -5.0%
(3) Others 18,892 17,083 17,825 19,383 20,861 22,302 23,863 25,534 27,321 29,234 31,280 7.0%
Yoghurt 25,196 29,143 33,280 39,093 45,092 52,264 58,535 69,072 81,504 96,175 113,487 18.0%
IMF 32,516 41,352 50,943 61,952 75,241 91,178 98,472 108,319 119,151 131,066 144,173 10.0%
Ice cream 27,039 26,626 28,401 31,209 32,144 33,501 34,841 36,932 39,886 43,077 46,523 7.5%
Total 201,390 223,743 252,184 294,560 331,934 373,629 396,240 429,820 469,028 512,267 558,391 9.0%
Note: Historical by Euromonitor; forecast by CS; Source: Euromonitor, Credit Suisse estimates
Figure 3: Asian countries dairy consumption vs GDP per
capita in 2013
Figure 4: Cost structure of a typical online retailer selling
imported UHT milk
ChinaSGP
Japan
HK
Korea
10
20
30
40
50
60
70
80
0 10,000 20,000 30,000 40,000 50,000 60,000
Drinking milk consumptionvolume per capita
(Kg/preson)
GDP per capita (US$/preson)
1.2 (15%)
1.4 (17%)
0.8 (10%)
0.4 (5 %)
0
2
4
6
8
10
12
Rm
b8
/L
Rm
b12/L
Rmb/litre
Traif
VAT
Fulfilment
Ad & mkting
CIF
Breakeven price
Source: Euromonitor, Wind Source: Company data, Credit Suisse estimates
Figure 5: Valuation table Figure 6: Business model and financial matrix at a glance Rating Mktcap Trading Target Up- NP CAGR Trading
(US$ mn) price Price side 2014-16E 2015 P/E PEG 2015 P/E
Yili OP 14,123 28.9 40.0 39% 19% 24.0 1.2 17.3
Bright OP 3,513 18.6 24.0 29% 46% 36.0 0.8 27.9
Mengniu OP 8,285 33.4 40.0 20% 20% 26.0 1.2 21.7
Modern N 1,494 2.5 2.8 13% 8% 12.3 1.2 10.9
Target
Yili Mengniu Bright Modern
Establishment 1993 1999 1996 2006
Largest 11% mgmt 18% COFCO 54.6% Group 38.6% Yinmu
Mgmt holding 11% ~5% 4.54%
Distribution 2K+ POS, 2K+ POS, 700 POS, 70% to MN
Sales (Rmb mn) 47,454 43,357 16,179 3,289
- UHT yoghurt Just started Just started 20% ->36% (16) 0.0%
- Chilled yoghurt c12% c13% c10% 0.0%
- High-end UHT c8% c15% Just started 20.0%
- Powder c12% c8% c10% 0.0%
GP margin 28.6% 27.0% 34.9% 38.2%
Opex ratio 22.9% 23.3% 30.0% 6.5%
OP margin 5.5% 4.3% 4.2% 22.1%
Net margin 6.7% 3.8% 2.5% 14.6%
ROE 27.2% 11.7% 9.8% 8.9% Source: Note: price as of 9 January 2014; Source: the BLOOMBERG
PROFESSIONAL™ service, CS estimates; current price and TP in
Rmb
Note: 2013 financial numbers; Source: Company data, Credit Suisse
estimates
12 January 2015
China Dairy Sector 3
Table of contents Focus tables and charts 2 Table of contents 3 2015 outlook: Four trends 4
8-10% CAGR to continue over the next five years 4 Structural changes in consumption behaviour 4 Importing UHT milk to play price arbitrage; go vertical to warrant product safety 4 Stock picks: Yili, Bright, Mengniu and Modern 4
Structural changes in consumption behaviour 10 Importing UHT milk to play price arbitrage; go vertical to warrant product safety 13
Go vertical to warrant product safety 16 Stock picks: Yili, Bright, Mengniu, and Modern 17 Global peer comparison 20 Inner Mongolia Yili Industrial Group (600887.SS / 600887 CH) 22
High margin and ROE; management incentive well aligned; attractive valuation 22 Focus charts and tables 23
Fast-growing high-margin product 24 Extensive and efficient distribution network 26
Strategic alliance with global peers 28 Management's personal interest aligned with share price performance 32 Upstream raw milk source management 34 Valuation 35 Major investment risks 35
Bright Dairy & Food Co., Ltd (600597.SS / 600597 CH) 41 UHT yoghurt to drive sales and margin expansion; a national player in the making 41
Focus charts and tables 42 Difference from Yili and Mengniu 43
First-mover advantage in UHT yoghurt… 45 …Yili and Mengniu are catching up 45 Low-temp products: A long way to go for China 46 Expanding out of East China is challenging, but Mosilian is a chance 47 Global alliance for milk powder and UHT milk 47 Valuation 49 Investment risks 49
China Mengniu Dairy (2319.HK / 2319 HK) 52 Apprehension of slowdown and earnings miss fairly discounted; upgrade to
OUTPERFORM 52 Focus charts and tables 53 China Modern Dairy Holdings Ltd (1117.HK / 1117 HK) 56
Close to the end of tunnel with low visibility; upgrade to NEUTRAL on attractive
valuation 56 Focus charts and tables 57
12 January 2015
China Dairy Sector 4
2015 outlook: Four trends 8-10% CAGR to continue over the next five years
China's dairy consumption volume declined 1% YoY in 2014. The slowdown in 2014 was
cyclical, in our view. We attribute it to: (1) side-effects of the anti-corruption campaign, (2)
a lukewarm macro backdrop, and (3) 10-15% milk price inflation in 2013. This serves a low
comp base for 2015. For the next five years, we forecast China dairy demand will witness
an 8-10% CAGR, mainly driven by (1) penetration improvement, (2) more health-
conscious, (3) lifestyle changes, and (4) consumption upgrade.
Structural changes in consumption behaviour
We anticipate Chinese consumers to drink less UHT flavoured milk (accounting for 22%
of China's total dairy consumption, vs Japan's 3%, Singapore's 6% and Korea's 13%), but
more UHT yoghurt (a new and unique category; similar texture as chilled yoghurt, certain
nutrition level, no cold-chain bottleneck) and pasteurised milk (growing along with cold-
chain system development). Bright Dairy enjoys its first-mover advantage in UHT yoghurt
and pasteurised milk. Yili and Mengniu have been catching up rapidly.
Importing UHT milk to play price arbitrage; go
vertical to warrant product safety
We estimate a mature sizeable retailer will break even for selling imported UHT milk in
China at Rmb12/L (vs Rmb18-21/L retail price for Mengniu/Yili's Deluxe/Satine). To cater
to market demand and play price arbitrage opportunity, the Top 3 all have expanded into
this new territory. Mengniu distributes Denmark-imported Arla-branded UHT milk,
leveraging its strategic shareholder Arla's strength. Yili and Bright use the OEM business
model. They sell the Italy/Australia-made UHT milk in China, with their own brand names
(Perfectlands and Pactum). In addition, all three have expanded into the upstream farming
business (either domestic or overseas). This is to secure consistent supply of quality raw
material and warrant product safety.
Stock picks: Yili, Bright, Mengniu and Modern
For 2015, we prefer downstream dairy processors (benefiting from a demand recovery
and low input cost) over upstream cow farming operators (raw milk price under
pressure on substitution effects of milk powder importing). The criteria for our pecking
order include: (1) growth momentum in both top and bottom lines; (2) growth quality
(profitability, ROE, and management quality); and (3) valuation multiple.
Yili differentiates itself from Mengniu as: (1) Yili has higher margin (6.7% net margin in
2013, vs Mengniu's 3.8%) and ROE (27%, vs Mengniu's 12%), on product mix, execution
and a 40 bp lower opex ratio; and (2) Yili's management is well motivated (the largest
shareholder with an 11% stake, vs Mengniu's ~5%, including 3.9% of old Mengniu
management). President Pan Gang and others bought 1.6% in July 2014 at Rmb24.81 (vs
the current price of Rmb30); and (3) Yili trades at 17x 2015E P/E or 16x ex-cash (vs
Mengniu's 22x and Bright's 27x).
We expect Bright to deliver a 46% earnings CAGR over 2014-16E, benefiting from its
first-mover advantage in UHT yoghurt/Mosilian—a unique star category with a 40-50% GP
margin. Mosilian sales surged a 115% CAGR over 2011-13, and we expect a 27% CAGR
over 2014-16 (a 40% market share and 36% sales contribution in 2016).
We like Mengniu for its margin expansion potential. We expect it to be driven through (1)
leveraging expertise from Danone, Arla, White Wave and Yashili; (2) execution
improvement (distribution reform to bear fruits); and (3) refining product portfolio.
Without meaningful fundamental catalyst, Modern is a band-trading stock on valuation.
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Figure 7: Peer comparison—Yili, Mengniu and Bright Dairy
Yili Mengniu Bright Dairy
Rmb mn 2010 2011 2012 2013 1H14 Rmb mn 2010 2011 2012 2013 1H14 Rmb mn 2010 2011 2012 2013 1H14
Revenue 29,545 37,266 41,736 47,454 27,096 Revenue 30,265 37,388 36,000 43,357 25,836 Revenue 9,299 11,576 13,630 16,179 9,794
- Liquid milk 20,985 26,933 32,271 37,116 20,709 - Liquid Milk 26,872 33,701 32,336 37,903 21,765 - Dairy products 8,995 11,092 13,052 15,412 9,316
- Milk powder 4,623 5,642 4,484 5,512 3,041 - Milk powder 282 428 493 2,431 2,083 ** Liquid milk N/A 8,481 9,888 11,620 7,220
- Ice cream 3,544 4,222 4,294 4,243 3,040 - Ice cream 3,112 3,259 3,171 3,023 1,988 ** Other dairy N/A 2,611 3,164 3,792 2,097
- Feedstock 393 469 687 583 305 - Others 305 484 579 767 478
Revenue mix 100% 100% 100% 100% 100% Revenue mix 100% 100% 100% 100% 100% Revenue mix 100% 100% 100% 100% 100%
- Liquid milk 71% 72% 77% 78% 76% - Liquid Milk 89% 90% 90% 87% 84% - Dairy products 97% 96% 96% 95% 95%
- Milk powder 16% 15% 11% 12% 11% - Milk powder 1% 1% 1% 6% 8% ** Liquid milk N/A 73% 73% 72% 74%
- Ice cream 12% 11% 10% 9% 11% - Ice cream 10% 9% 9% 7% 8% ** Other dairy N/A 23% 23% 23% 21%
- Feedstock 1% 1% 2% 1% 1% - Others 3% 4% 4% 5% 5%
Revenue YoY 22.0% 26.1% 12.0% 13.7% 13.6% Revenue YoY 17.7% 23.5% -3.7% 20.4% 25.0% Revenue YoY 20.5% 24.5% 17.7% 18.7% 32.1%
- Liquid milk 26.8% 28.3% 19.8% 15.0% 15.3% - Liquid Milk 18.2% 25.4% -4.1% 17.2% 19.2% - Dairy products 20.5% 23.3% 17.7% 18.1% 31.2%
- Milk powder 16.6% 22.1% -20.5% 22.9% 9.1% - Milk powder -2.5% 51.7% 15.2% 393.5% 361.7% ** Liquid milk N/A N/A 16.6% 17.5% 33.3%
- Ice cream 8.6% 19.1% 1.7% -1.2% 8.2% - Ice cream 15.9% 4.7% -2.7% -4.7% 1.7% ** Other dairy N/A N/A 21.2% 19.8% 24.5%
- Feedstock -7.7% 19.2% 46.4% -15.1% 2.4% - Others 21.3% 58.8% 19.5% 32.6% 52.8%
GP margin 30.2% 29.2% 29.6% 28.6% 33.2% GP margin 25.7% 25.7% 25.1% 27.0% 32.4% GP margin 35.5% 34.1% 35.5% 34.9% 35.0%
- Liquid milk 28.8% 26.5% 28.1% 26.1% 31.0% - Liquid milk 26.5% 26.1% 25.4% 26.0% 31.2% - Dairy products 35.5% 34.4% 36.2% 36.0% 36.2%
- Milk powder 39.0% 42.6% 39.5% 43.8% 45.9% - Milk powder 28.0% 29.0% 11.8% 52.0% 53.0% ** Liquid milk N/A 40.4% 43.3% 42.9% 42.4%
- Ice cream 29.2% 29.8% 32.3% 32.8% 36.9% - Ice cream 25.5% 22.0% 24.5% 24.5% 25.0% ** Other dairy N/A 15.0% 14.0% 15.0% 15.0%
- Feedstock 12.4% 13.7% 16.0% 11.3% 12.5% - Others 33.7% 28.3% 20.9% 12.1% 10.4%
GP mix 100% 100% 100% 100% 100% GP mix 100% 100% 100% 100% 100% GP mix 100% 100% 100% 100% 100%
- Liquid milk 68% 66% 74% 71% 72% - Liquid milk 89% 92% 88% 83% 81% - Dairy products 97% 97% 98% 98% 99%
- Milk powder 20% 22% 14% 18% 16% - Milk powder 1% 1% 4% 11% 13% ** Liquid milk N/A 87% 88% 88% 89%
- Ice cream 12% 12% 11% 10% 12% - Ice cream 10% 8% 8% 6% 6% ** Other dairy N/A 10% 9% 10% 9%
- Feedstock 1% 1% 1% 0% 0% - Others 3% 3% 2% 2% 1%
SG&A/sales 28.1% 24.7% 25.2% 22.9% 24.6% SG&A/sales 20.3% 20.9% 21.6% 23.3% 28.7% SG&A/sales 31.4% 30.5% 30.9% 30.0% 30.9%
- Selling exp 22.9% 19.5% 18.5% 17.9% 19.1% - Selling exp 17.9% 17.9% 17.8% 18.8% 22.8% - Selling exp 28.5% 27.5% 27.7% 27.1% 28.2%
- Admin exp 5.1% 5.3% 6.7% 5.0% 5.4% - Admin exp 2.2% 2.5% 3.3% 3.7% 3.7% - Admin exp 2.9% 3.0% 3.2% 3.0% 2.7%
- Other exp 0.2% 0.5% 0.5% 0.8% 2.2%
OP 585 1,697 1,665 2,626 2,451 OP 1,909 2,070 1,513 1,852 1,221 OP 235 247 420 679 302
YoY -14.9% 190.1% -1.9% 57.7% 87.8% YoY 14.1% 13.7% -26.9% 22.3% 28.8% YoY 38.1% 5.1% 69.8% 61.8% 28.7%
OP margin 2.0% 4.5% 4.0% 5.5% 9.0% OP margin 6.3% 5.5% 4.2% 4.3% 4.7% OP margin 2.5% 2.1% 3.0% 4.2% 3.1%
Net earnings 777 1,809 1,717 3,187 2,293 Net earnings 1,237 1,589 1,257 1,631 1,049 Net earnings 194 238 311 406 209
YoY 20.0% 132.8% -5.1% 85.6% 31.9% YoY 4.3% 28.4% -20.9% 29.7% 39.9% YoY 58.7% 22.4% 30.9% 30.4% 41.5%
Net margin 2.6% 4.8% 4.1% 6.7% 8.4% Net margin 4.1% 4.3% 3.5% 3.8% 4.1% Net margin 2.0% 2.0% 2.3% 2.5% 2.1%
ROE 18.4% 30.0% 25.7% 27.2% ROE 13.5% 15.0% 10.5% 11.7% ROE 8.8% 9.9% 9.6% 9.8%
Source: Company data
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Figure 8: Valuation matrix—Global dairy comparison
EPS PEG Div
Company name Ticker Mkt cap Performance (%) P/E (x) EV/EBITDA (x) P/B (x) ROE (%) CAGR % yld
Reuters (US$ mn) 1M 3M 12M 2014 2015 2016 2014 2015 2014 2015 2014 2015 2014-16 2015 12MF
Global dairy products producers
Nestle NESN.VX 230,637 2% 6% 11% 21.5 19.9 18.4 12.2 12.4 3.4 3.3 19.1% 17.0% 8.2% 2.4 3.3%
Abbott ABT.N 70,487 3% 10% 16% 20.2 20.3 18.0 13.5 12.8 2.7 2.4 13.4% 12.6% 6.0% 3.4 2.2%
Danone DANO.PA 41,333 -3% 7% 7% 20.7 18.6 16.8 9.1 9.5 3.5 2.3 13.7% 14.6% 10.8% 1.7 3.0%
Mead Johnson MJN.N 20,615 1% 8% 20% 27.3 24.5 22.0 18.1 16.4 26.8 17.7 175% 91% 11.3% 2.2 1.7%
Yakult 2267.T 8,733 2% 17% 21% 47.0 42.6 36.3 16.7 16.3 3.8 3.6 8.4% 8.7% 13.9% 3.1 0.4%
Fonterra FSF.NZ 8,678 -4% -7% 3% 59.6 16.0 14.5 10.0 6.5 1.5 1.4 2.4% 10.0% 103.0% 0.2 5.3%
Meiji Foods 2269.T 7,224 8% 34% 70% 43.7 30.1 26.2 9.3 8.9 2.6 2.4 6.0% 8.7% 29.3% 1.0 0.9%
Parmalat PLT.MI 5,120 -1% -4% -4% 19.6 18.4 16.9 8.5 8.8 1.3 1.2 7.0% 6.9% 7.6% 2.4 1.7%
Vina Milk VNM.HM 4,612 -1% -10% -13% 15.9 14.1 12.9 11.9 10.2 4.8 4.1 32.2% 32.3% 11.1% 1.3 4.4%
Dean Foods DF.N 1,760 6% 47% 9% (204) 20.2 17.1 8.7 4.9 2.6 2.5 -1.4% 11.3% n.a. n.a. 1.6%
Dairy Crest DCG.L 971 -7% 24% -13% 11.7 12.3 11.4 5.7 5.8 (2.2) 2.4 -18.4% 19.2% 1.2% 10.4 4.6%
Morinaga Milk 2264.T 839 1% 14% 30% 20.6 20.8 18.1 2.9 3.5 0.8 0.8 4.1% 3.9% 6.7% 3.1 1.7%
Simple avg. 10.7 22.1 19.5 10.9 9.9 4.4 3.7 21.4% 19.4% 18.8% 0.6 2.4%
Weighted avg. 22.4 20.7 18.8 12.3 12.2 4.5 3.7 24.4% 19.3% 10.8% 2.1 2.9%
Chinese dairy products producers
Inner Mongolia Yili 600887.SS 14,123 3% 10% 15% 19.8 16.4 13.9 14.9 12.4 4.3 3.8 24.2% 25.3% 19.1% 0.9 2.0%
Mengniu Dairy 2319.HK 8,285 13% -1% -10% 24.6 20.1 16.9 13.1 11.0 2.5 2.3 11.5% 12.1% 20.7% 1.0 1.1%
Bright Dairy 600597.SS 3,513 6% 4% -18% 38.1 26.6 19.4 19.3 14.6 4.7 4.2 12.3% 16.5% 40.0% 0.7 1.7%
Sanyuan Daily 600429.SS 1,225 -2% -12% 17% 122.9 (215) n.a. n.a. n.a. n.a. n.a. 2.8% -1.0% n.a. n.a. n.a.
GX Royal Dairy 002329.SZ 1,194 0% 51% 139% 168.8 139.9 36.2 n.a. n.a. 7.9 7.0 11.0% 14.0% 116.0% 1.2 0.7%
Simple avg. 74.8 (2.4) 21.6 15.8 12.7 4.8 4.3 12.4% 13.4% 48.9% 1.5 1.4%
Weighted avg. 34.2 13.9 15.8 13.7 11.2 3.8 3.4 17.5% 18.8% 25.4% 1.3 1.6%
Chinese milk powder producers
Beingmate 002570.SZ 2,726 -1% -1% -13% 36.1 26.3 21.5 32.0 22.7 3.6 3.8 8.3% 11.9% 29.6% 0.9 n.a
Biostime International 1112.HK 1,268 5% -35% -76% 11.4 10.8 10.1 7.7 7.3 2.9 2.6 26.7% 25.6% 6.4% 1.7 n.a
Yashili 1230.HK 1,042 0% -19% -50% 18.2 16.3 13.6 13.3 10.1 2.1 1.9 11.3% 15.2% 15.7% 1.0 2.7%
Synutra SYUT.OQ 317 7% 18% -34% 6.1 4.9 n.a. 3.8 n.a. n.a. 59.6% n.a. n.a. n.a
Simple avg. 21.9 14.9 12.5 17.6 11.0 2.9 2.7 15.5% 28.1% 17.2% 1.3 2.7%
Weighted avg. 22.4 17.7 14.8 18.8 14.1 2.7 2.6 11.6% 17.0% 17.9% 1.3 0.5%
Chinese raw milk producers
Huishan 6863.HK 2,557 -1% -19% -50% 10.9 10.7 9.4 9.4 7.4 n.a. n.a. n.a n.a 7.3% 1.5 3.9%
China Modern Dairy 1117.HK 1,494 9% -29% -39% 9.0 8.3 7.2 5.9 5.7 1.4 1.2 16.6% 16.6% 11.7% 0.7 1.1%
YuanShengTai 1431.HK 418 9% -31% -64% 5.8 4.8 3.7 5.0 4.0 0.6 0.5 10.1% 10.1% 24.8% 0.2 0.0%
Xinjiang Western Animal 300106.SZ 338 -6% -13% -3% 46.6 34.5 n.a n.a. n.a. n.a. n.a. n.a n.a n.a. n.a. n.a
Simple avg. 18.1 14.6 6.8 6.7 5.7 1.0 0.9 13.4% 13.4% 14.6% 2.9 1.7%
Weighted avg. 12.4 11.1 7.6 7.3 6.1 0.5 0.4 6.0% 6.0% 12.4% 1.1 0.4%
Note: Share price as of 8 January 2015. Source: Reuters; Credit Suisse estimates
12 January 2015
China Dairy Sector 7
8-10% CAGR to continue over the next five years We believe the dairy demand slowdown in 2014 was cyclical. The slowdown was mainly
due to: (1) side-effects of the anti-corruption campaign (less gifting, less non-cash staff
benefits); (2) a lukewarm macro backdrop; and (3) rapid dairy price inflation in 2013. The
consumption slowdown was witnessed across the board. Compared with the 9% decline in
instant noodle and a 4% decline in overall beverage, the 1% drop in dairy production
volume was relatively resilient.
From the long-term perspective, we believe China dairy consumption demand would
remain strong, driven by: (1) penetration improvement, (2) more health consciousness, (3)
lifestyle changes, and (4) consumption upgrade. We estimate an 8-10% volume CAGR
over the next five years.
Compared with the neighbouring Asian countries, China's lower dairy consumption per
capita suggests stellar sector demand potential in the long run.
■ In 2013, China's drinking milk consumption volume per capita amounted to 14.3 kg,
33% lower than Japan's 21.4 kg, 36% lower than HK's 22.4 kg, and 47% lower than
Korea's 27 kg.
■ In 2013, China's drinking milk consumption value per capita amounted to 23.3 kg, 62%
lower than HK's 61.7 kg, 64% lower than Japan's 63.9 kg, 66% lower than Korea's
69.2 kg.
Figure 9: Drinking milk consumption volume per capita
(Kg/person, 2013)
Figure 10: Drinking milk consumption value per capita
(US$/person, 2013)
27.0
22.421.4
14.3
0
5
10
15
20
25
30
Korea HK Japan China
Kg/person
69.2 63.9 61.7
23.3
0
10
20
30
40
50
60
70
80
Korea Japan HK China
US$/person
Source: Euromonitor Source: Euromonitor
Historical data suggest that, in addition to diet tradition/habits, dairy consumption volume
is positively correlated with the country's GDP per capita.
12 January 2015
China Dairy Sector 8
Figure 11: Asian countries dairy consumption volume vs GDP per capita in 2013
ChinaSGP
Japan
HK
Korea
10
20
30
40
50
60
70
80
0 10,000 20,000 30,000 40,000 50,000 60,000
Drinking milk consumption volume
per capita (Kg/preson)
GDP per capita (US$/preson)
Source: Euromonitor, Wind
Figure 12: Industry demand model—sales value
Sales value (Rmb mn) 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Drinking milk products 116,640 126,622 139,560 162,306 179,457 196,687 204,392 215,498 228,486 241,948 254,208
(1) Milk 59,956 62,451 67,010 76,077 83,208 89,959 100,324 113,769 128,780 143,949 157,601
- UHT milk 47,965 49,961 53,408 60,162 65,017 68,767 72,893 77,995 83,455 89,297 95,548
- UHT yoghurt - - 200 700 1,550 3,200 8,000 14,400 21,600 28,080 32,292
- Pasteurized milk 11,991 12,490 13,402 15,215 16,642 17,992 19,431 21,374 23,725 26,572 29,761
(2) Flavoured milk drinks 37,793 47,088 54,725 66,845 75,388 84,426 80,205 76,195 72,385 68,766 65,327
(3) Others 18,892 17,083 17,825 19,383 20,861 22,302 23,863 25,534 27,321 29,234 31,280
Yoghurt 25,196 29,143 33,280 39,093 45,092 52,264 58,535 69,072 81,504 96,175 113,487
IMF 32,516 41,352 50,943 61,952 75,241 91,178 98,472 108,319 119,151 131,066 144,173
Ice cream 27,039 26,626 28,401 31,209 32,144 33,501 34,841 36,932 39,886 43,077 46,523
Total 201,390 223,743 252,184 294,560 331,934 373,629 396,240 429,820 469,028 512,267 558,391
Note: Historical by Euromonitor; Forecast by CS; Source: Euromonitor, Credit Suisse estimates
Figure 13: Industry demand model—sales value YoY
YoY growth 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Drinking milk products 9% 10% 16% 11% 10% 3.9% 5.4% 6.0% 5.9% 5.1%
(1) Milk 4% 7% 14% 9% 8% 11.5% 13.4% 13.2% 11.8% 9.5%
- UHT milk 4% 7% 13% 8% 6% 6.0% 7.0% 7.0% 7.0% 7.0%
- UHT yoghurt 250% 121% 106% 150% 80.0% 50.0% 30.0% 15.0%
- Pasteurized milk 4% 7% 14% 9% 8% 8.0% 10.0% 11.0% 12.0% 12.0%
(2) Flavoured milk drinks 25% 16% 22% 13% 12% -5.0% -5.0% -5.0% -5.0% -5.0%
(3) Others -10% 4% 9% 8% 7% 7.0% 7.0% 7.0% 7.0% 7.0%
Yoghurt 16% 14% 17% 15% 16% 12.0% 18.0% 18.0% 18.0% 18.0%
IMF 27% 23% 22% 21% 21% 8.0% 10.0% 10.0% 10.0% 10.0%
Ice cream -2% 7% 10% 3% 4% 4.0% 6.0% 8.0% 8.0% 8.0%
Total 11% 13% 17% 13% 13% 6.1% 8.5% 9.1% 9.2% 9.0%
Note: Historical by Euromonitor; Forecast by CS; Source: Euromonitor, Credit Suisse estimates
12 January 2015
China Dairy Sector 9
Figure 14: Industry demand model—total sales breakdown
Total sales breakdown 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Drinking milk products 58% 57% 55% 55% 54% 53% 52% 50% 49% 47% 46%
(1) Milk 30% 28% 27% 26% 25% 24% 25% 26% 27% 28% 28%
- UHT milk 24% 22% 21% 20% 20% 18% 18% 18% 18% 17% 17%
- UHT yoghurt 0% 0% 0% 0% 0% 1% 2% 3% 5% 5% 6%
- Pasteurized milk 6% 6% 5% 5% 5% 5% 5% 5% 5% 5% 5%
(2) Flavoured milk drinks 19% 21% 22% 23% 23% 23% 20% 18% 15% 13% 12%
(3) Others 9% 8% 7% 7% 6% 6% 6% 6% 6% 6% 6%
Yoghurt 13% 13% 13% 13% 14% 14% 15% 16% 17% 19% 20%
IMF 16% 18% 20% 21% 23% 24% 25% 25% 25% 26% 26%
Ice cream 13% 12% 11% 11% 10% 9% 9% 9% 9% 8% 8%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Note: Historical by Euromonitor; Forecast by CS; Source: Euromonitor, Credit Suisse estimates
Figure 15: Industry demand model—milk sales breakdown
Milk sales breakdown 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
- UHT milk 80% 80% 80% 79% 78% 76% 73% 69% 65% 62% 61%
- UHT yoghurt 0% 0% 0% 1% 2% 4% 8% 13% 17% 20% 20%
- Pasteurized milk 20% 20% 20% 20% 20% 20% 19% 19% 18% 18% 19%
Sub-total milk 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Note: Historical by Euromonitor; Forecast by CS; Source: Euromonitor, Credit Suisse estimates
12 January 2015
China Dairy Sector 10
Structural changes in consumption behaviour Consumption of flavored milk (diluted milk with fruit and other flavor, made of fresh raw
milk or milk powder, mostly UHT milk) represents an extremely high portion of China's total
dairy consumption, which we believe is unsustainable.
■ Over 2008-13, China's flavored milk consumption saw a 15.3% CAGR (in sales
volume) and a 17.7% CAGR (in sales value).
■ In 2013, flavored milk consumption accounted for 22% of China's total dairy consumption
value, vs Korea's 13%, Singapore's 6%, Japan's 3%, and Hong Kong's 1%.
We attribute the extreme popularity of flavored milk in China to: (1) consumer behavior
and low health conscious level (more focusing on flavor than nutrition); (2) strong push by
all leading dairy brands (flavored milk has higher margins than plain milk); and (3) easy
logistics (require no cold chain support, no logistic bottlenecks).
Figure 16: China flavoured milk sales volume (2008-13) Figure 17: China flavoured milk sales value (2008-13)
4,194
5,236
6,299
7,2217,908
8,563
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2008 2009 2010 2011 2012 2013
'000 Tonnes
36,804
46,061
53,746
65,801
74,279
83,261
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2008 2009 2010 2011 2012 2013
'000 Tonnes
Source: Euromonitor Source: Euromonitor
Figure 18: Peer country comparison—flavoured milk consumption as % of total dairy
consumption value (2013)
1%
3%
6%
13%
22%
0%
5%
10%
15%
20%
25%
HK Japan SGP Korea China
Source: Euromonitor
12 January 2015
China Dairy Sector 11
In the neighboring developed markets (where consumers share similar diet
tradition/habits), regular drinking milk and yoghurt play a more critical role on consumers'
dining tables.
■ Regular drinking milk accounted for 32% of total diary consumption value in Korea,
26% in Japan, and 18% in SGP, vs 24% in China in 2013.
■ Yoghurt accounted for 37% of total diary consumption value in Japan, 18% in Korea,
and 15% in SGP, vs 14% in China in 2013.
Following robust income growth, lifestyle changes, and rising health conscious level, we
expect Chinese consumers to gradually switch to pure milk and yoghurt from flavored milk.
■ Within the pure milk segment, UHT milk would continue to dominate the market,
benefiting from dietary habits and a lack of cold-chain system. However, consumers in
high-tier cities would switch to pasteurised milk from UHT products, in our view.
■ UHT yoghurt would grow very quickly in the next 3-5 years. Bright Dairy created UHT
yoghurt in 2009. It has similar texture as chilled yoghurt, offers certain nutrition and
requires no cold-chain support. All these features translated into strong sales growth.
Bright Dairy's UHT yoghurt sales size was Rmb3,220 mn in 2013, representing a
153% CAGR over 2010-13. Management targets Rmb6 bn in 2014 (85% YoY). Yili
and Mengniu followed Bright Dairy and launched their UHT yoghurt products at the
end of 2013.
■ We expect UHT yoghurt to gain market share from UHT flavor milk and UHT pure
milk. We estimate UHT yoghurt will see a 42% CAGR in the next 3-5 years,
representing 25% of China's total UHT consumption (vs currently 10%).
Figure 19: Peer country comparison—drinking milk
consumption as % of total dairy consumption value (2013)
Figure 20: Peer country comparison—Yoghurt
consumption as % of total dairy consumption value (2013)
4%
18%
24%26%
32%
0%
5%
10%
15%
20%
25%
30%
35%
HK SGP China Japan Korea
5%
14% 15%
18%
37%
0%
5%
10%
15%
20%
25%
30%
35%
40%
HK China SGP Korea Japan
Source: Euromonitor Source: Euromonitor
12 January 2015
China Dairy Sector 12
Figure 21: Peer country comparison—dairy consumption value mix (2013)
24%
14%
9%
24%22%
18%15%
18%
29%
6%
26%
37%
25%
3% 3%4% 5% 5%
75%
1%
32%
18%
24%
7%
13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Drinking milk Yoghurt Ice cream Infant formula Flavoured milk drinks
China SGP Japan HK Korea
Note: Hong Kong's extremely high consumption of IMF is mainly driven by mainland Chinese' consumption, leading to a distorted mix.
Source: Euromonitor
Figure 22: Sales exposure to UHT yoghurt Figure 23: UHT yoghurt segment market share
5,957
9,650
5,400 5,400
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
2,000
4,000
6,000
8,000
10,000
12,000
Mosilian
(Bright)
Anmuxi
(Yili)
Chunzhen
(Mengniu)
2013 2016E
20%
36%
8% 9%
As % of
total salesSales ( Rmb mn)
100%
45%
25% 25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2016EMosilian (Bright) Anmuxi (Yili) Chunzhen (Mengniu)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 13
Importing UHT milk to play price arbitrage; go vertical to warrant product safety Starting from 2013, German, French, Australian and New Zealand dairy companies
accelerated UHT milk exports into China, levering their idle capacity and low raw milk cost
in home markets, and benefiting strong demand in China.
Figure 24: Breakdown of China's UHT milk imports Figure 25: Breakdown of China's milk powder imports
Germany
40%
New
Zealand
20%
France
15%
Australia
12%
Others
13%
New
Zealand
80%
USA
6%
Australia
5%
France
2%
Others
9%
Source: CEIC, China Dairy Yearbook, Credit Suisse Source: CEIC, China Dairy Yearbook, Credit Suisse
With competitive pricing on the e-commerce platform (China online retailers bearing the
promotion cost and subsidising Chinese consumers), imported UHT milk rapidly gained
market shares from local peers. China UHT imports increased 92% YoY in 2013 (195,000
tonne) and 77% in 10M14. The total import volume looks still small, accounting for 1.4% of
total liquid milk consumption in China. But in the high-end liquid milk segment, it competes
badly with Mengniu's Delux and Yili's Satine. We estimate imported UHT accounts for 10-
20% of high-end milk consumption in China.
Figure 26: Imported liquid milk import volume and YoY
growth
Figure 27: Imported liquid milk volume as % of total liquid
milk production volume in China
8,330 14,371 17,117
43,067
101,693
194,807
273,907
69%
73%
19%
152%
136%
92% 77%
0%
20%
40%
60%
80%
100%
120%
140%
160%
-
50,000
100,000
150,000
200,000
250,000
300,000
2008 2009 2010 2011 2012 2013 10M14
Imported UHT volume YoY growth
Ton
0.06% 0.09% 0.09%
0.21%
0.47%
0.85%
1.41%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
2008 2009 2010 2011 2012 2013 10M14
Source: Wind Source: Wind
12 January 2015
China Dairy Sector 14
We estimate nearly 50% of imported UHT milk is distributed through the e-commerce
platform in China. Yihaodian is the major online retailer, who accomplished nearly 40%
market share of online sales.
In high-tier cities, most online retailers scarify their profitability of selling imported UHT milk
to exchange for online traffic (for potential high-margin marketplace business). Online
selling prices range from Rmb10 to Rmb15 per litter, versus Rmb17-20 for Mengniu's
Delux and Yili's Satine in traditional hypermarkets. During some shopping events or
inventory clear-up days, the price could be as low as Rmb8-10 per litter (a 50% discount).
Considering 15% tariff and 17% VAT, we estimate Yihaodian's total import cost at Rmb10
per litter. Factoring in a 6-10% fulfilment cost and a 5% plus advertising/marketing
expense, we estimate Yihaodian is barely breakeven when it sells milk at Rmb12 per liter.
Figure 28: Cost structure of a typical online retailer selling imported UHT milk
1.2 (15%)
1.4 (17%)
0.8 (10%)
0.4 (5 %)
0
2
4
6
8
10
12
Rm
b8
/L
Rm
b1
2/L
Rmb/litre
Traiff
VAT
Fulfilmentexp
Ad & mkting exp
CIF
Breakeven price
Source: Credit Suisse estimates
To cater to domestic needs and play global price arbitrage, local dairy companies started
building strategic alliances with the international partners. This creates a cannibalisation
effect with their existing high-end UHT milk products, but helps on overall sales growth.
■ Mengniu (equity investment model): In 2012, Mengniu partnered up with Arla
Foods, a leading dairy company in Demark. Arla Foods is now a strategic shareholder
of Mengniu with a 5.3% stake. In September 2013, Mengniu introduced UHT organic
UHT milk in Shanghai, branded with "Arla". E-commerce platforms are the major
distribution channel.
■ Yili (OEM model): In November 2013, Yili established a strategic partnership with
Sterilgarda Alimenti, the largest dairy company in Italy. In September 2014, Yili
announced it would launch imported UHT product in China, under the brand name of
Perfectlands (a newly created name by Yili). Perfectlands is mainly distributed through
the e-commerce platform, and is priced higher than other imported UHT milk.
■ Bright Dairy (OEM model): In April 2014, Bright Dairy signed a strategic agreement
with Pactum Dairy Group (PDG), a leading Australia dairy company. Based on the
agreement, Bright imports PDG's UHT milk product from Australia, and then
distributes products in China under the brand name of U+. U+ is priced at the high end
of the retail price range on the e-commerce platform.
12 January 2015
China Dairy Sector 15
Figure 29: Imported UHT whole milk price comparison
Brand name Company/
product origin
Package
size
Retail price
(Rmb)
Equivalent price
(Rmb/L)
Price/avg.-1
Oldenburger Nordmilch
(made in Germany) 1L 10.9 10.9 -28.1%
Arla Mengniu
(made in Denmark) 1L 12.9 12.9 -14.9%
Devondale Murray Goulburn
(made in Australia) 1L 13.9 13.9 -8.4%
Lactel Lactalis
(made in France) 200ml*24 23.9 16.5 8.8%
Anchor Fonterra
(made in New Zealand)
1L 16.9 16.9 11.4%
U+ Bright Dairy
(made in Australia) 250ml*10 49.8 19.9 31.2%
Perfectlands Yili
(made in Italy) 1L*4 95.2 23.8 56.9%
Average 15.2
Note: Listing price as of 23 Dec 2014 at Yihaodian; Source: Credit Suisse
Figure 30: Imported UHT whole milk equivalent price
10.9
12.913.9
16.5 16.9
19.9
23.8
0
5
10
15
20
25
Oldenburger(Nordmilch's)
Arla(Introduced by
Mengniu)
Devondale(Murray Goulburn's)
Lactel(Lactalis')
Anchor(Fonterra's)
U+(Bright dairy's)
Perfectlands(Yili's)
Rmb/L
Source: Yihaodian; Note: price as at 23 December 2014
12 January 2015
China Dairy Sector 16
Go vertical to warrant product safety
Vertical integration is a common business model for most dairy companies in mature
markets. The purpose is for dairy processing companies to secure quality raw milk supply
and hence warrant the quality and consistency of finished dairy products.
After the sector-wide melamine scandal in September 2008, Chinese dairy companies
have started to invest more in the upstream farming business.
■ Mengniu was the IPO cornerstone investor of CMD and YST. Currently, Mengniu
owns a 28% equity stake in CMD and 4.4% in YST. Mengniu also signed off-take
contracts with CMD and Shengmu to lock raw milk supply. In addition, Mengniu builds
dairy farms on its own.
■ Yili was the IPO cornerstone investor of Huishan, investing Rmb310 mn in September
2013. It currently holds a 1.1% stake in Huishan.
In addition to that, Yili invested Rmb3.1 bn to develop the world's largest dairy base in
New Zealand.
Phase I: In April 2013, Yili bought the 100% stake of Oceania Dairy Limited and
started to build a new infant milk formula production project. The total investment
amounts to Rmb1,103 mn for a total capacity of 47,000 tonne.
Phase II: In November 2014, Yili invested another Rmb2,000 mn on four different
projects, namely NZ milk powder project (Rmb1,005 mn), NZ Infant milk formula
packaging project (Rmb332 mn), NZ raw milk processing project (Rmb201 mn), and
NZ UHT milk project (Rmb462 mn). The capacity of milk powder is up to 56,000 tonne.
The NZ dairy production base (total investment over Rmb3 bn) cover 380,000 sq m,
with the ability to process 1,400 tonne raw milk per day. It will be the largest dairy base
in the world, with function from processing, production to packaging. The Phase I IMF
project has already started to work with the ability to process 215,000 tonne each year
under full operation. Currently Yili has signed a purchasing contract with 47 local dairy
farmers to meet the production capacity.
Figure 31: Summary of Yili's projects in New Zealand
Investment time Project name Investment value
(Rmb mn)
Capacity
(ton)
Construction period
(month)
Phase 1: 2013 April IMF project 1,103 47,000 Operational now
Phase 2: 2014 Nov Milk powder project 1,005 56,000 19
Phase 2: 2014 Nov IMF packaging project 332 N/A 34
Phase 2: 2014 Nov Raw milk processing project 201 N/A 22
Phase 2: 2014 Nov UHT milk project 462 N/A 22
Total 3,103 380k sqm; 1,400 ton
raw milk output/day
Source: Credit Suisse research
■ Bright Dairy teamed up with RRJ Capital (a PE fund focusing on Asian consumer
space) for its upstream dairy farming business. In February 2014, RRJ Capital
invested Rmb1,525 mn cash for a 45% stake in Bright Holstan (an entity managing all
dairy farms, farms under construction and farm related business of Bright Dairy).
Bright Dairy owns the remaining 55% stake. The partnership helps Bright Dairy more
effectively develop upstream farming business with an easier financial burden.
12 January 2015
China Dairy Sector 17
Stock picks: Yili, Bright, Mengniu, and Modern For 2015, we prefer downstream dairy processors (benefiting from the demand
recovery and low input cost) over upstream cow farming operators (raw milk price
under pressure on substitution effect of milk powder importing).
The criteria for our pecking order include:
(1) growth momentum in both top and bottom lines;
(2) growth quality (profitability, ROE, and management quality);
(3) valuation multiple.
Our pecking order is:
■ Yili differentiates itself from Mengniu as: (1) Yili has higher margin (6.7% net margin
in 2013, vs Mengiu's 3.8%) and ROE (27%, vs Mengniu's 12%), on product mix,
execution and a 40 bp lower opex ratio; and (2) Yili's management is well motivated
(the largest shareholder with an 11% stake, vs Mengniu's ~5%, including 3.9% of old
Mengniu management). President Pan Gang and others bought 1.6% in July 2014 at
Rmb24.81 (vs current price of Rmb30); and (3) Yili trades at 17x 2015E P/E or 16x
ex-cash (vs Mengniu's 21.7x and Bright's 27.5x).
■ We expect Bright to deliver a 46% earnings CAGR over 2014-16, benefiting from its
first-mover advantage in UHT yoghurt/Mosilian—a unique star category with a 40-50%
GP margin. Mosilian sales surged a 115% CAGR over 2011-13, and we expect a 27%
CAGR over 2014-16E (a 40% market share and 36% sales contribution in 2016).
■ We like Mengniu for its margin expansion potential. We expect it to be driven through
(1) leveraging expertise from Danone, Arla, White Wave and Yashili; (2) execution
improvement (distribution reform to bear fruits) and (3) refining product portfolio.
■ Without meaningful fundamental catalyst, Modern is a band-trading stock on
valuation.
Figure 32: Valuation table Figure 33: Business model and financial matrix at a
glance Rating Mktcap Trading Target Up- NP CAGR Trading
(US$ mn) price Price side 2014-16E 2015 P/E PEG 2015 P/E
Yili OP 14,123 28.9 40.0 39% 19% 24.0 1.2 17.3
Bright OP 3,513 18.6 24.0 29% 46% 36.0 0.8 27.9
Mengniu OP 8,285 33.4 40.0 20% 20% 26.0 1.2 21.7
Modern N 1,494 2.5 2.8 13% 8% 12.3 1.2 10.9
Target
Yili Mengniu Bright Modern
Establishment 1993 1999 1996 2006
Largest 11% mgmt 18% COFCO 54.6% Group 38.6% Yinmu
Mgmt holding 11% ~5% 4.54%
Distribution 2K+ POS, 2K+ POS, 700 POS, 70% to MN
Sales (Rmb mn) 47,454 43,357 16,179 3,289
- UHT yoghurt Just started Just started 20% ->36% (16) 0.0%
- Chilled yoghurt c12% c13% c10% 0.0%
- High-end UHT c8% c15% Just started 20.0%
- Powder c12% c8% c10% 0.0%
GP margin 28.6% 27.0% 34.9% 38.2%
Opex ratio 22.9% 23.3% 30.0% 6.5%
OP margin 5.5% 4.3% 4.2% 22.1%
Net margin 6.7% 3.8% 2.5% 14.6%
ROE 27.2% 11.7% 9.8% 8.9% Source: Note: price as of 9 Jan 2014; Source: Bloomberg, CS
estimates; closing price and TP are in Rmb
Note: 2013 financial numbers; Source: Company data, Credit Suisse
estimates
12 J
an
uary
201
5
Ch
ina D
airy
Sec
tor
18
Figure 34: Valuation matrix—Global dairy comparison
EPS PEG Div
Company name Ticker Mkt cap Performance (%) P/E (x) EV/EBITDA (x) P/B (x) ROE (%) CAGR % yld
Reuters (US$ mn) 1M 3M 12M 2014 2015 2016 2014 2015 2014 2015 2014 2015 2014-16 2015 12MF
Global dairy products producers
Nestle NESN.VX 230,637 2% 6% 11% 21.5 19.9 18.4 12.2 12.4 3.4 3.3 19.1% 17.0% 8.2% 2.4 3.3%
Abbott ABT.N 70,487 3% 10% 16% 20.2 20.3 18.0 13.5 12.8 2.7 2.4 13.4% 12.6% 6.0% 3.4 2.2%
Danone DANO.PA 41,333 -3% 7% 7% 20.7 18.6 16.8 9.1 9.5 3.5 2.3 13.7% 14.6% 10.8% 1.7 3.0%
Mead Johnson MJN.N 20,615 1% 8% 20% 27.3 24.5 22.0 18.1 16.4 26.8 17.7 175% 91% 11.3% 2.2 1.7%
Yakult 2267.T 8,733 2% 17% 21% 47.0 42.6 36.3 16.7 16.3 3.8 3.6 8.4% 8.7% 13.9% 3.1 0.4%
Fonterra FSF.NZ 8,678 -4% -7% 3% 59.6 16.0 14.5 10.0 6.5 1.5 1.4 2.4% 10.0% 103.0% 0.2 5.3%
Meiji Foods 2269.T 7,224 8% 34% 70% 43.7 30.1 26.2 9.3 8.9 2.6 2.4 6.0% 8.7% 29.3% 1.0 0.9%
Parmalat PLT.MI 5,120 -1% -4% -4% 19.6 18.4 16.9 8.5 8.8 1.3 1.2 7.0% 6.9% 7.6% 2.4 1.7%
Vina Milk VNM.HM 4,612 -1% -10% -13% 15.9 14.1 12.9 11.9 10.2 4.8 4.1 32.2% 32.3% 11.1% 1.3 4.4%
Dean Foods DF.N 1,760 6% 47% 9% (204) 20.2 17.1 8.7 4.9 2.6 2.5 -1.4% 11.3% n.a. n.a. 1.6%
Dairy Crest DCG.L 971 -7% 24% -13% 11.7 12.3 11.4 5.7 5.8 (2.2) 2.4 -18.4% 19.2% 1.2% 10.4 4.6%
Morinaga Milk 2264.T 839 1% 14% 30% 20.6 20.8 18.1 2.9 3.5 0.8 0.8 4.1% 3.9% 6.7% 3.1 1.7%
Simple avg. 10.7 22.1 19.5 10.9 9.9 4.4 3.7 21.4% 19.4% 18.8% 0.6 2.4%
Weighted avg. 22.4 20.7 18.8 12.3 12.2 4.5 3.7 24.4% 19.3% 10.8% 2.1 2.9%
Chinese dairy products producers
Inner Mongolia Yili 600887.SS 14,123 3% 10% 15% 19.8 16.4 13.9 14.9 12.4 4.3 3.8 24.2% 25.3% 19.1% 0.9 2.0%
Mengniu Dairy 2319.HK 8,285 13% -1% -10% 24.6 20.1 16.9 13.1 11.0 2.5 2.3 11.5% 12.1% 20.7% 1.0 1.1%
Bright Dairy 600597.SS 3,513 6% 4% -18% 38.1 26.6 19.4 19.3 14.6 4.7 4.2 12.3% 16.5% 40.0% 0.7 1.7%
Sanyuan Daily 600429.SS 1,225 -2% -12% 17% 122.9 (215) n.a. n.a. n.a. n.a. n.a. 2.8% -1.0% n.a. n.a. n.a.
GX Royal Dairy 002329.SZ 1,194 0% 51% 139% 168.8 139.9 36.2 n.a. n.a. 7.9 7.0 11.0% 14.0% 116.0% 1.2 0.7%
Simple avg. 74.8 (2.4) 21.6 15.8 12.7 4.8 4.3 12.4% 13.4% 48.9% 1.5 1.4%
Weighted avg. 34.2 13.9 15.8 13.7 11.2 3.8 3.4 17.5% 18.8% 25.4% 1.3 1.6%
Chinese milk powder producers
Beingmate 002570.SZ 2,726 -1% -1% -13% 36.1 26.3 21.5 32.0 22.7 3.6 3.8 8.3% 11.9% 29.6% 0.9 n.a
Biostime International 1112.HK 1,268 5% -35% -76% 11.4 10.8 10.1 7.7 7.3 2.9 2.6 26.7% 25.6% 6.4% 1.7 n.a
Yashili 1230.HK 1,042 0% -19% -50% 18.2 16.3 13.6 13.3 10.1 2.1 1.9 11.3% 15.2% 15.7% 1.0 2.7%
Synutra SYUT.OQ 317 7% 18% -34% 6.1 4.9 n.a. 3.8 n.a. n.a. 59.6% n.a. n.a. n.a
Simple avg. 21.9 14.9 12.5 17.6 11.0 2.9 2.7 15.5% 28.1% 17.2% 1.3 2.7%
Weighted avg. 22.4 17.7 14.8 18.8 14.1 2.7 2.6 11.6% 17.0% 17.9% 1.3 0.5%
Chinese raw milk producers
Huishan 6863.HK 2,557 -1% -19% -50% 10.9 10.7 9.4 9.4 7.4 n.a. n.a. n.a n.a 7.3% 1.5 3.9%
China Modern Dairy 1117.HK 1,494 9% -29% -39% 9.0 8.3 7.2 5.9 5.7 1.4 1.2 16.6% 16.6% 11.7% 0.7 1.1%
YuanShengTai 1431.HK 418 9% -31% -64% 5.8 4.8 3.7 5.0 4.0 0.6 0.5 10.1% 10.1% 24.8% 0.2 0.0%
Xinjiang Western Animal 300106.SZ 338 -6% -13% -3% 46.6 34.5 n.a n.a. n.a. n.a. n.a. n.a n.a n.a. n.a. n.a
Simple avg. 18.1 14.6 6.8 6.7 5.7 1.0 0.9 13.4% 13.4% 14.6% 2.9 1.7%
Weighted avg. 12.4 11.1 7.6 7.3 6.1 0.5 0.4 6.0% 6.0% 12.4% 1.1 0.4%
Note: Share price as of 8st Jan, 2015. Source: Reuters; Credit Suisse estimates
12 J
an
uary
201
5
Ch
ina D
airy
Sec
tor
19
Figure 35: Peer comparison—Yili, Mengniu and Bright Dairy
Yili Mengniu Bright Dairy
Rmb mn 2010 2011 2012 2013 1H14 Rmb mn 2010 2011 2012 2013 1H14 Rmb mn 2010 2011 2012 2013 1H14
Revenue 29,545 37,266 41,736 47,454 27,096 Revenue 30,265 37,388 36,000 43,357 25,836 Revenue 9,299 11,576 13,630 16,179 9,794
- Liquid milk 20,985 26,933 32,271 37,116 20,709 - Liquid Milk 26,872 33,701 32,336 37,903 21,765 - Dairy products 8,995 11,092 13,052 15,412 9,316
- Milk powder 4,623 5,642 4,484 5,512 3,041 - Milk powder 282 428 493 2,431 2,083 ** Liquid milk N/A 8,481 9,888 11,620 7,220
- Ice cream 3,544 4,222 4,294 4,243 3,040 - Ice cream 3,112 3,259 3,171 3,023 1,988 ** Other dairy N/A 2,611 3,164 3,792 2,097
- Feedstock 393 469 687 583 305 - Others 305 484 579 767 478
Revenue mix 100% 100% 100% 100% 100% Revenue mix 100% 100% 100% 100% 100% Revenue mix 100% 100% 100% 100% 100%
- Liquid milk 71% 72% 77% 78% 76% - Liquid Milk 89% 90% 90% 87% 84% - Dairy products 97% 96% 96% 95% 95%
- Milk powder 16% 15% 11% 12% 11% - Milk powder 1% 1% 1% 6% 8% ** Liquid milk N/A 73% 73% 72% 74%
- Ice cream 12% 11% 10% 9% 11% - Ice cream 10% 9% 9% 7% 8% ** Other dairy N/A 23% 23% 23% 21%
- Feedstock 1% 1% 2% 1% 1% - Others 3% 4% 4% 5% 5%
Revenue YoY 22.0% 26.1% 12.0% 13.7% 13.6% Revenue YoY 17.7% 23.5% -3.7% 20.4% 25.0% Revenue YoY 20.5% 24.5% 17.7% 18.7% 32.1%
- Liquid milk 26.8% 28.3% 19.8% 15.0% 15.3% - Liquid Milk 18.2% 25.4% -4.1% 17.2% 19.2% - Dairy products 20.5% 23.3% 17.7% 18.1% 31.2%
- Milk powder 16.6% 22.1% -20.5% 22.9% 9.1% - Milk powder -2.5% 51.7% 15.2% 393.5% 361.7% ** Liquid milk N/A N/A 16.6% 17.5% 33.3%
- Ice cream 8.6% 19.1% 1.7% -1.2% 8.2% - Ice cream 15.9% 4.7% -2.7% -4.7% 1.7% ** Other dairy N/A N/A 21.2% 19.8% 24.5%
- Feedstock -7.7% 19.2% 46.4% -15.1% 2.4% - Others 21.3% 58.8% 19.5% 32.6% 52.8%
GP margin 30.2% 29.2% 29.6% 28.6% 33.2% GP margin 25.7% 25.7% 25.1% 27.0% 32.4% GP margin 35.5% 34.1% 35.5% 34.9% 35.0%
- Liquid milk 28.8% 26.5% 28.1% 26.1% 31.0% - Liquid milk 26.5% 26.1% 25.4% 26.0% 31.2% - Dairy products 35.5% 34.4% 36.2% 36.0% 36.2%
- Milk powder 39.0% 42.6% 39.5% 43.8% 45.9% - Milk powder 28.0% 29.0% 11.8% 52.0% 53.0% ** Liquid milk N/A 40.4% 43.3% 42.9% 42.4%
- Ice cream 29.2% 29.8% 32.3% 32.8% 36.9% - Ice cream 25.5% 22.0% 24.5% 24.5% 25.0% ** Other dairy N/A 15.0% 14.0% 15.0% 15.0%
- Feedstock 12.4% 13.7% 16.0% 11.3% 12.5% - Others 33.7% 28.3% 20.9% 12.1% 10.4%
GP mix 100% 100% 100% 100% 100% GP mix 100% 100% 100% 100% 100% GP mix 100% 100% 100% 100% 100%
- Liquid milk 68% 66% 74% 71% 72% - Liquid milk 89% 92% 88% 83% 81% - Dairy products 97% 97% 98% 98% 99%
- Milk powder 20% 22% 14% 18% 16% - Milk powder 1% 1% 4% 11% 13% ** Liquid milk N/A 87% 88% 88% 89%
- Ice cream 12% 12% 11% 10% 12% - Ice cream 10% 8% 8% 6% 6% ** Other dairy N/A 10% 9% 10% 9%
- Feedstock 1% 1% 1% 0% 0% - Others 3% 3% 2% 2% 1%
SG&A/sales 28.1% 24.7% 25.2% 22.9% 24.6% SG&A/sales 20.3% 20.9% 21.6% 23.3% 28.7% SG&A/sales 31.4% 30.5% 30.9% 30.0% 30.9%
- Selling exp 22.9% 19.5% 18.5% 17.9% 19.1% - Selling exp 17.9% 17.9% 17.8% 18.8% 22.8% - Selling exp 28.5% 27.5% 27.7% 27.1% 28.2%
- Admin exp 5.1% 5.3% 6.7% 5.0% 5.4% - Admin exp 2.2% 2.5% 3.3% 3.7% 3.7% - Admin exp 2.9% 3.0% 3.2% 3.0% 2.7%
- Other exp 0.2% 0.5% 0.5% 0.8% 2.2%
OP 585 1,697 1,665 2,626 2,451 OP 1,909 2,070 1,513 1,852 1,221 OP 235 247 420 679 302
YoY -14.9% 190.1% -1.9% 57.7% 87.8% YoY 14.1% 13.7% -26.9% 22.3% 28.8% YoY 38.1% 5.1% 69.8% 61.8% 28.7%
OP margin 2.0% 4.5% 4.0% 5.5% 9.0% OP margin 6.3% 5.5% 4.2% 4.3% 4.7% OP margin 2.5% 2.1% 3.0% 4.2% 3.1%
Net earnings 777 1,809 1,717 3,187 2,293 Net earnings 1,237 1,589 1,257 1,631 1,049 Net earnings 194 238 311 406 209
YoY 20.0% 132.8% -5.1% 85.6% 31.9% YoY 4.3% 28.4% -20.9% 29.7% 39.9% YoY 58.7% 22.4% 30.9% 30.4% 41.5%
Net margin 2.6% 4.8% 4.1% 6.7% 8.4% Net margin 4.1% 4.3% 3.5% 3.8% 4.1% Net margin 2.0% 2.0% 2.3% 2.5% 2.1%
ROE 18.4% 30.0% 25.7% 27.2% ROE 13.5% 15.0% 10.5% 11.7% ROE 8.8% 9.9% 9.6% 9.8%
Source: Company data
12 January 2015
China Dairy Sector 20
Global peer comparison Figure 36: Peer comparison—business model, sales size and breakdown, and brands
Company Business model Brief introduction Sales and margin Sales breakdown Key brands
Fonterra
(NZ-based)
Dairy cooperative;
vertical integrated
(farming and
processing); listed in
NZ, market cap of
US$9 bn
Fonterra is the largest global milk processor
and dairy products exporter in the world. It
is a cooperatively-owned company and
owned by more than 10,000 New Zealand
farmers and public shareholders. Its milk
powder export accounts for above 60% of
China's total imports. Its dairy product
exports account for above 30% of world's
total exports.
FY12/6 sales of
NZ$19.8 bn
(US$16 bn), net
margin of 3%.
By geography:
Asia (ex-China)
29%, Australia
12%, China 10%,
NZ 10%, US 7%,
Europe 6%
Anchor,
Anmum and
Anlene
Friesland
Campina
(Netherland-
based)
Dairy cooperative;
vertical integrated
(farming and
processing); "from
grass to glass"
Friesland Campina is based in the
Netherlands, operating both upstream and
downstream dairy business. Together with
its member dairy farmers, it supplies dairy
products to both individual and professional
consumers in over 100 countries. It has
offices in 28 countries and 19,946
employees.
2012 sales of €10.3
bn (US$13.7 bn),
with net margin of
2.7%
By category: dairy
57%, cream,
cheese & butter
24%, ingredients
19%; By
geography:
Europe 59%, Asia
& Oceania 26%,
US & Africa 15%
Dutch Lady,
Friso, Fristi,
Fruttis, and
Campina
Arla Foods
(Denmark-
based)
Dairy cooperative;
vertical integrated
(farming and
processing)
Arla Foods is a cooperative owned by dairy
farmers in Denmark, Sweden, Germany,
UK, Luxemburg and Belgium. It is the
seventh largest dairy company with
production plants in 12 countries, sales
offices in 30+ countries, and 18k+
employees
2012 sales of
DKK63 bn
(US$11.2 bn), milk
10.4 bn kg, net
margin of 3%
By category: fresh
dairy 42%, cheese
25%, butter 14%,
others 19%; by
geography: UK
22%, Sweden
19% and Denmark
11%;
Arla &
Cravendale
(milk & cream),
Lurpak (butter)
and Castello
(cheese)
Dairy Farmers
of America
(US-based)
Dairy cooperative;
vertical integrated
(farming and
processing); "from
farm to table"
DFA (HQ in Kansas City) is a national milk
marketing cooperative. It is owned by and
serves nearly 13,000 dairy farmer members
(1.8 mn cows, 9K + farms in 48 states).
DFA buys raw milk from its members and
sells dairy products, food components,
ingredients, and shelf-stable dairy products
to wholesale buyers. 31 DFA-owned plants.
2010 net sales of
US$9.8 bn (30% of
total US raw milk);
marketed 63 bn
pounds (28.6 mn t)
of fluid milk in 2011
31 plants
throughout the
US
Borden®
Cheese, Cache
Valley®
Cheese,
Keller’s®
Creamery
Butter, Plugrá®
Butter,
Breakstone’s®
Butter, Kemps®
and Guida’s
Dairy
China
Mengniu
(China-based)
Mainly on
processing; secure
quality raw milk
supply through
minority equity
investment;
HK-listed; market
cap of US$7-8 bn
Established in 1999, Mengniu is the largest
liquid milk producer in China with a market
share of 25.4% in 2013, according to
Nielsen. In 2013, 94% raw milk was
sourced from scaled farms; of which, 20%
are self-built/operated/equity investment
and 74% with farms through cooperation.
Mengniu has an 80:20 JV with Danone,
65% stake in Yahsili, strategic partnership
with Arla, 28% interest in CMD and plans to
build a JV with CMD for pasteurised milk
production.
2013 sales of
Rmb43 bn, 7.7 mn
tons of capacity of
dairy products,
27.3% GP margin,
5.1% EBIT margin,
3.8% net margin
UHT 49%, milk
beverage 23%,
yoghurt 12.4%,
ice cream 7.7%,
Infant and dairy
products 8.1% in
1H14
UHT: Mengniu,
Milk Deluxe,
Future Star;
Milk beverage:
Fruit Milk Drink,
Suan Suan Ru,
Youyi C;
Yoghurt:
Champion,
Future Star; Ice
cream: Deluxe,
Ice+; Milk
powder:
Mengniu ARLA
Dean Foods
(US-based)
Processors of fluid
milk marketed under
more than 50 local
and regional dairy
brands and private
labels. US-listed,
market cap
~US$1.4bn.
Dean Foods is an American food and
beverage company that specialises in dairy
products. Dean Foods has 100 facilities
located in 35 American states as well as
five manufacturing plants in the countries of
Belgium, France, the United Kingdom, and
the Netherlands. Dean Food’s market share
in US fluid milk is 35.7% by volume.
2013 sales of
US$9bn, 2.8mn
gallons of fluid milk,
21% GP margin,
2.5% operating
margin, and 8.9%
ROIC.
Fluid milk: 73%;
Ice Cream: 9%;
Fresh cream: 3%;
ESL &
creamers:3%;
Cultured: 4%;
Others 7%. (2013)
US: Dean’s,
McArthur Dairy,
Garlick Farms,
Land Lakes,
Mayfield Dairy
Farms, Alta
Dena;
International:
TruMoo
12 January 2015
China Dairy Sector 21
Figure 37: Peer comparison—business model, sales size and breakdown, and brands
Company Business model Brief introduction Sales and margin Sales breakdown Key brands
Agropur
(Canada-
based)
Dairy cooperative;
vertical integrated
(farming and
processing)
Founded in 1938, The Agropur cooperative
is the largest Canadian dairy company with
annualised sales of US$3 bn and a volume
of 2.7 bn litres). It has 3,615 shareholders
and 5,700 employees in 27 plants and
numerous distribution centres and offices
across Canada, the US and Argentina.
Agropur is the co-owner of Ultima Foods
with Agrifoods Intl Cooperative Ltd. Ultima
Foods markets yoghurt in Canada under
the Yoplait brand.
2012 sales of
US$3.8 bn
Fresh milk,
cheese, yoghurt,
butter
Québon, Oka,
Sealtest,
Natural, Island
Farms, Yoplait,
La Lacteo,
Trega and
Schrœder
Prairie Farms
Dairy (US-
based)
Dairy cooperative;
vertical integrated
(farming and
processing); US-
based
Founded in 1938, Prairie Farms (HQ in
Illinois) receives milk from 743 producers,
operates 24 plants, and produces dairy
products through 13 JV plants. In 2008, it
produced 1.4 bn pounds of milk, averaging
1.873 mn pounds per farm. It expanded
largely through M&A and JV with various
dairy cooperatives, producers, and
manufacturers.
FY2007-08 sale of
US$2.9 bn
Cheese, butter,
ice cream, sour
cream, cottage
cheese, various
dips, yoghurt, and
fluid milk. It
produces and
sells juices,
flavoured drinks,
and pre-made
iced tea
Prairie Farms;
North Star; Kids
China
Huishan
Dairy
(China-based)
Vertical integrated
(plantation, farming
and processing);
China-based
Commenced farming operation in 2009, HS
is the second largest cow farm operator in
China (50 farms, herd size of 112,851, raw
milk of 352,411 tonne, and yield of 9.1
tonne in FY13/3). In 2012, HS used 60%
raw milk to produce liquid milk and powder,
while the remainder was sold to Mengniu
and Yili. HS is the largest liquid milk
producer in Northeastern China (mainly
Liaoning & Jilin) with market share of
13.7%.
FY2013/3 sales of
Rmb2.553 bn
(US$412 mn), 54%
overall GPM, 59%
farming GPM; 45%
OP margin; 37.2%
net margin
Raw milk 27%,
liquid milk 67%,
milk powder 3%
and grain 3%
Dr Fresh (fresh
milk, 10% of
total); Jersey
Queen,
Nature's Farm
and Huishan
(UHT, 32%);
Colostrum, Ten
Days, Huishan
(yoghurt, 44%);
Wonderful (milk
beverage, 14%)
China Modern
Dairy (China-
based)
Mainly on farming,
gradually expanding
into processing; HK-
listed, market cap of
US$1.6 bn
Commenced farming operation in 2006,
CMD is the largest cow farm operator (22
mega farms, herd size of 176,300, raw milk
of 567,021 tons, and yield of 8.23 tonne in
FY13/6). Based on the ten-year off-take
contract, CMD should sell at least 70% raw
milk to Mengniu, and keep or sell the
remaining 30% to third parties (excluding
Yili).
FY2013/6 sales of
Rmb2.481 bn
(US$400 mn),
567,021 tons of raw
milk, 8.23 ton yield,
33.2% GP margin,
27.3% cash
EBITDA margin,
13.1% reported net
margin
Raw milk to
Mengniu 82%; raw
milk to others
15%; premium
UHT milk 3%
Modern Dairy
(premium UHT
milk)
Yili Mainly on
processing; secure
quality raw milk
supply through
global plants
investment;
China-listed; market
cap of US$13.6 bn
Established in 1993, Yili is the largest dairy
products in China. The core operating
business includes liquid milk, ice cream and
milk formula. Yili is the leading player in the
room-temperature products market and
leverage on its extensive distribution
network in China.
2013 sales of
Rmb48 bn, 28.7%
GP margin, 6.3%
EBIT margin, 6.7%
net margin
Liquid milk 76%,
milk powder 11%,
ice cream 11%,
Feed stock 1%
UHT: Satine,
QQ star,
Anmuxi; Yogurt :
Changqin,; Milk
powder: Pro-
kido, Tofer; Ice
cream: Qiaolezi,
Ice factory
Bright dairy Mainly on
processing; secure
quality raw milk
supply through
global partner
alliance ;
China-listed; market
cap of US$7-8 bn
Established in 1996, Bright dairy is the
largest pasteurized milk manufacture in
China. It specialises in the manufacture of
dairy products in Shanghai and East China.
The company is the first player to initiative
room-temperature yoghurt, Mosilian, which
is the key growth driver of the company.
2013 sales of
Rmb16 bn, 34.7%
GP margin, 4.7%
EBIT margin, 2.5%
net margin
Liquid milk 72%,
other dairy
products 23%,
commercial retail
5%
UHT:
Mosilian,U+;
Pasteurized
milk: Youbei;
Yoghurt:
Changyou,
Rushi; Milk
powder: Pure
Canterbury
Source: Company data, Fonterra, Friesland Campina, Arla Foods, Dairy Farmers of America, China Mengniu, Agropur, Prairie Farms Dairy,
Huishan, China Modern Dairy, Yili, Bright dairy, Credit Suisse
12 January 2015
China Dairy Sector 22
Asia Pacific / China
(Consumer Staples CN (Asia))
Inner Mongolia Yili Industrial Group (600887.SS / 600887 CH)
INITIATION
High margin and ROE; management incentive
well aligned; attractive valuation
■ Initiate coverage with OUTPERFORM. Established in 1993, Yili is the
largest dairy company in China (a 20% market share in 2013, before
Mengniu's 19% and Bright Dairy's 8%), and the second-largest liquid milk
producer in China (a 23% market share in 2013, after Mengniu's 25.4%). We
forecast Yili's earnings will see a 19.4% CAGR over 2014-16, on a sales
CAGR of 12%.
■ Superior profitability and ROE. Yili and Mengniu share a similar business
model. Yili has higher profitability (a 6.7% net margin in 2013, vs Mengniu's
3.8%) and ROE (27% in 2013, vs Mengniu's 12%). We attribute the gap to:
(1) product mix (Yili has 12% sales exposure to high-margin IMF, vs
Mengniu's 6%); (2) product pricing (Yili's ice cream GP margin 32.8% vs
Mengniu's 24.5%); and (3) operating efficiency (Yili's opex/sales ratio of
22.9% was 40 bp lower than Mengniu and 710 bp lower than Bright).
■ Management well motivated. In July 2014, President Pan Gang and three
other management members bought 48.8 mn shares (1.6%) from the
secondary market at Rmb24.81 (vs the current share price of around
Rmb30). Top management is the largest shareholder of Yili, with an 11%
stake. This compares with Jinniu/Yinniu (old Mengniu)'s ownership of 3.9%
and CEO Sun Yiping's 0.43% (assuming all restricted reward share vested).
Management's personal interest is closely aligned with the share price,
favouring minority shareholders.
■ Our target price of Rmb40 is based on 24x 2015E P/E (implying 1.2x
PEG). Yili trades at 17x 2015E P/E (low-end of historical forward P/E band)
and 0.9x PEG. This also compares with Mengniu's 21.7x, Bright's 27x,
Tingyi'x 22x, UPC's 30.5x, Want Want's 20.6x, Hengan's 21.2x, Sunart's 18x
and Tsingtao's 24.5x. The investment risks include food safety, competition
and inflation.
Share price performance
0
100
200
300
0
20
40
11-Jan-13 11-Jan-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
Shanghai Shenzhen CSI300 index which closed at 3559.26 on
09/01/15
On 09/01/15 the spot exchange rate was Rmb6.21/US$1
Performance Over 1M 3M 12M Absolute (%) 1.7 8.5 12.6 — Relative (%) -3.8 -1.3 0.1 —
Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 47,778.9 54,407.5 60,794.8 67,880.8 EBITDA (Rmb mn) 3,768.7 5,780.5 7,096.1 8,232.5 EBIT (Rmb mn) 2,626.0 4,432.9 5,580.9 6,570.1 Net profit (Rmb mn) 3,187.3 4,165.2 5,102.5 5,938.0 EPS (CS adj.) (Rmb) 1.04 1.36 1.67 1.94 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 1.45 1.76 2.07 EPS growth (%) 85.6 30.7 22.5 16.4 P/E (x) 27.1 20.7 16.9 14.5 Dividend yield (%) 1.9 1.9 2.4 2.8 EV/EBITDA (x) 21.8 14.0 11.1 9.3 P/B (x) 5.3 4.6 4.0 3.4 ROE (%) 27.2 24.0 25.3 25.3 Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating OUTPERFORM* Price (09 Jan 15, Rmb) 28.15 Target price (Rmb) 40.00¹ Upside/downside (%) 42.1 Mkt cap (Rmb mn) 86,262 (US$ 13,900) Enterprise value (Rmb mn) 81,201 Number of shares (mn) 3,064.37 Free float (%) 98.2 52-week price range 29.9 - 20.9 ADTO - 6M (US$ mn) 229.7
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Kevin Yin
852 2101 7655
kevin.yin@credit-suisse.com
12 January 2015
China Dairy Sector 23
Focus charts and tables Figure 38: 2013 Yili sales revenue mix Figure 39: Yili high-end products sales contribution
- Liquid milk78%
- Milk powder and other dairy
products12%
- Ice cream product
9%
- Feedstock1%
QQ star (QQ星)
15%
Satine (金典)
8%
Pro-Kido(金领冠)
4%
Qiaolezi (巧乐兹)
3%
Other high-end products
5%
Other products65%
Source: Company data Source: Credit Suisse estimates
Figure 40: OP margin comparison-Yili and Mengniu Figure 41: China raw milk price
2.0%
4.5%4.0%
5.5%
9.0%
6.3%
5.5%
4.2% 4.3%4.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2010 2011 2012 2013 1H14
Yili OP margin Mengniu OP margin
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jan-
06
Jun-
06
Nov
-06
Apr
-07
Sep
-07
Feb-
08
Jul-0
8
Dec
-08
May
-09
Oct
-09
Mar
-10
Aug
-10
Jan-
11
Jun-
11
Nov
-11
Apr
-12
Sep
-12
Feb-
13
Jul-1
3
Dec
-13
May
-14
Oct
-14
(Rmb/kg)
Source: Company data Source: Wind
Figure 42: Yili—forward P/E (standard deviation) Figure 43: Yili—12M forward P/E band
0
20
40
60
80
100
'09 '10 '11 '12 '13 '14
P/E mean -1std
+1std -2std +2std
5
10
15
20
25
30
35
40
45
50
Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Yili 12x 15x
20x 25x 35x
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service
12 January 2015
China Dairy Sector 24
Fast-growing high-margin product
Yili produces and markets around 1,000 products under around 30 brands. The star
products are Satine (high-end UHT), QQ Star (UHT kid milk), Shuhua (UHT function milk),
Pro-Kido (IMF) and Qiaolezi (ice cream). We estimate the star products accounted for
35% of Yili's total sales revenue in 2013.
We expect these star products to continue serving as growth and margin expansion
drivers for Yili in the next 3-5 years.
Figure 44: 2013 Yili sales revenue mix Figure 45: 2013 Yili gross profits mix
- Liquid milk78%
- Milk powder and other dairy
products12%
- Ice cream product
9%
- Feedstock1%
- Liquid milk71%
- Milk powder18%
- Ice cream10%
- Feedstock1%
Source: Company data Source: Company data
Figure 46: Yili high-end products sales contribution
QQ star (QQ星)
15%
Satine (金典)
8%
Pro-Kido (金领冠)
4%
Qiaolezi (巧乐兹)
3%
Other high-end products5%
Other products65%
Source: Credit Suisse estimates
12 January 2015
China Dairy Sector 25
■ Satine (金典, high-end UHT milk, priced nearly 60% higher than plain UHT milk)
was launched in March 2007, competing with Mengniu's Deluxe (特伦苏) launched in
2006. Satine fell behind Deluxe for long time. Satine's sales amounted to Rmb3.8 bn
in 2013, representing Yili's 10% liquid milk revenue and 8% of total revenue. This
compared with Deluxe' sales size of Rmb6.6 bn in 2013, accounting for Mengniu's
17% liquid milk revenue and 15% of total revenue. However, Satine started to catch
up rapidly. In 1H14, Satine sales increased nearly 50% YoY, vs Deluxe's 14%.
■ QQ Star (QQ 星, priced nearly 70% higher than plain UHT milk) accounted for 19%
total liquid sales revenue and 15% of total sales in 2013. QQ Star was launched in
2006, competing with Mengniu's Future Star (未来星) launched in 2008 and Want
Want's Hot-Kid milk. We estimate QQ Star sales increased nearly 40% YoY in 1H14.
■ Shuhua (舒化奶, priced nearly 40% higher than plain UHT milk) accounted for 6%
total liquid sales revenue in 2013. Shuhua was launched in 2007, competing with
Mengniu's Xinyangdao (新养道) launched in 2008 and Bright Dairy's Youshu (优舒奶)
launched in end-2009.
■ Pro-kido (金领冠, IMF) was launched in 2008. GP margin was over 60% in 2013, vs
Yili's milk powder segment margin of 44% and Yashili's 53% in 2013. We estimate
Pro-kido sales increased over 50% in 2013, contributing 34% of Yili's milk powder
segment sales and 4% of total sales in 2013. According to Euromonitor, Yili is the
eighth-largest IMF company in China with a 3.8% market share, after Mead Johnson's
10%, Beingmate's 9.4%, Wyeth's 8.2%, International Nutrition's 7.8%, Biostime's 6%,
Yashili's 5.4% and Abbott's 4.1%.
■ Anmuxi (安慕希, UHT yoghurt) was lunched in end-2013, competing with Bright
dairy's Mosilian (莫斯利安 ) launched in 2009 and Mengniu's Chunzhen (纯甄 )
launched in 2H13. Anmuxi achieved over 100% QoQ growth in 2Q14. Management
expected it to achieve a Rmb1 bn sales revenue in 2014 (vs Mosilian's sales target of
Rmb6 bn). Yili planned to expand production lines up to 22 in 2015 from 5 in 2014. We
estimate Anmuxi will achieve Rmb3 bn sales in 2015.
■ Perfectlands (培兰, imported UHT milk) was launched in September 2014. It is
branded and distributed by Yili in China and manufactured by Sterilgarda in Italy. The
unique filter membrane technology helps save the protein level to the greatest extent.
The Perfectlands is mainly distributed through e-commerce platform. Given the cost
advantage in Europe and premium pricing in China (priced at high-end of imported
UHT price range, and even higher than Satine and Deluxe), we expect it to become
one of earnings and growth contributor in the coming 2-3 years.
12 January 2015
China Dairy Sector 26
Figure 47: Yili sales breakdown by product category (2004-13)
67%74% 71% 69% 67% 68% 71% 72%
77% 78%
13%
11% 12% 14% 15%16%
16% 15%11% 12%
16%12% 14% 14% 15% 13% 12% 11% 10% 9%
3% 3% 2% 3% 3% 2% 1% 1% 2% 1%
0%
20%
40%
60%
80%
100%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Liquid milk Milk powder and other dairy products Ice cream product Feedstock Snack food
Source: Company data
Extensive and efficient distribution network
Yili started to penetrate into rural area in China in 2007. It has established extensive
distribution network cross the whole country.
■ In terms of POS count, we estimate both Yili and Mengniu have nearly 2 mn, covering
more than 50% of total POS in China. We estimate Bright Dairy has nearly 700k POS.
■ In terms of geographic reach, we estimate Yili has greater coverage in direct sales
(modern trade) and rural area. Most of Bright Dairy's POS are located in modern trade
in Eastern China area.
■ In most of our distributor and industry expert interviews, Yili is highly rated for strong
management in display, inventory, pricing and working capital.
■ In 2013, Yili had 1.6% higher GP margin than Mengniu and 0.4% lower Opex ratio,
leading to a 1.2% higher OP margin. We attribute Yili's lower opex ratio to its strong
distribution and operation management.
12 January 2015
China Dairy Sector 27
Figure 48: No. of POS comparison-Bright dairy, Mengniu
and Yili
Figure 49: OPEX ratio comparison-Yili and Mengniu (2010-
13)
c.700
c.2,000 2,000+
-
500
1,000
1,500
2,000
2,500
Bright dairy Mengniu Yili
'000
28.1%
24.7% 25.2%
22.9%24.6%
20.3% 20.9% 21.6%23.3%
28.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2010 2011 2012 2013 1H14
Yili OPEX raio Mengniu OPEX ratio
Source: Credit Suisse research Source: Company data
Figure 50: GP margin comparison—Yili and Mengniu
(2010-13)
Figure 51: OP margin comparison—Yili and Mengniu
(2010-13)
30.2%29.2% 29.6%
28.6%
33.2%
25.7% 25.7% 25.1%27.0%
32.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2010 2011 2012 2013 1H14
Yili GP margin Mengniu GP margin
2.0%
4.5%4.0%
5.5%
9.0%
6.3%
5.5%
4.2% 4.3%4.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2010 2011 2012 2013 1H14
Yili OP margin Mengniu OP margin
Source: Company data Source: Company data
12 January 2015
China Dairy Sector 28
Strategic alliance with global peers ■ Partnership with DFA for the milk power business
In July 2013, Yili entered into the strategic partnership with Dairy Farmers of America
(DFA), for procuring raw material and managing dairy farms.
DFA is the largest dairy cooperative in the US. It is owned by nearly 16,000 dairy farmer
members covering more than 9,000 dairy farms in 48 states, accounting over 30% of US
overall milk supply. It is Kraft and Dean Food's supplier. The production volume of liquid
milk was 27.5 mn t in 2013, which is 1.2x of China's total liquid milk production amount
(22.8 mn t) in 2013.
On 11 November 2014, Yili inked another deal with DFA to establish a milk powder JV
plant in Kansas with an annual capacity of 80,000 tonne. The total registered investment
amounted to US$100 mn. Yili invested US$30 mn for a 30% stake, and DFA 70%. Once
the plant commences operation in 2017, it would become the largest milk powder plant in
the US. The milk powder product will not only be exported into China (exact volume
number of the power to Yili is not disclosed), but also other countries.
With this strategic partnership, Yili is able access the international upstream milk/milk
powder source, lower/stabilise raw material cost, and improve execution and R&D skills.
Figure 52: Milk production volume comparison—DFA vs China as a whole
28.5 28.6 28.6 27.9 27.5
16.3
18.3
20.4 21.5
22.8
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2009 2010 2011 2012 2013
DFA China
mn ton
Source: CEIC, Credit Suisse
12 January 2015
China Dairy Sector 29
Figure 53: A DFA dairy farm Figure 54: DFA membership network—more than 9,000
dairy farms in 48 states
Source: Company website Source: Company website
■ Partnership with Sterilgarda for imported UHT milk
In November 2013, Yili established a strategic partnership with Sterilgarda Alimenti.
Sterilgarda is the largest dairy company in Italy. It is reputed for its high quality milk source
and advanced filter membrane technology for UHT milk production (which saves protein
level to the greatest extent).
In September 2014, Yili launched Perfectlands, a new brand name that Yili created for its
imported UHT milk products. The UHT milk is produced by Sterilgarda in Italy, with 100%
raw milk sourced from Europe and through its unique filter membrane technology.
Perfectlands UHT milk is mainly distributed through the e-commerce platform. It is priced
at the high end of the price range of imported UHT milk, even higher than Yili's Satine and
Mengniu's Deluxe that are made of fresh premium raw milk in China.
Given the cost advantage in Europe and premium pricing in China, we expect decent
margin for Perfectlands once the production materialises.
Figure 55: Sterilgarda's UHT milk—advance filter
technology with longer life
Figure 56: Sterilgarda's dairy product portfolio—Yoghurt,
cream and cheese
Source: Company website Source: Company website
12 January 2015
China Dairy Sector 30
Figure 57: Price comparison—Perfectlands, Satine and Deluxe
Name Company Package size Retail price
(Rmb)
Equivalent price
(Rmb/L)
Deluxe Mengniu 250ml*12 63.8 21.3
Satine Yili 250ml*12 64.9 21.6
Perfectlands Yili 1L*4 95.2 23.8
Source: Yihaodian; Note: price as at Dec.23, 2014
12 January 2015
China Dairy Sector 31
Figure 58: Imported UHT whole milk price comparison
Brand name Company/
product origin
Package
size
Retail price
(Rmb)
Equivalent price
(Rmb/L)
Price/avg.-1
Oldenburger Nordmilch
(made in Germany) 1L 10.9 10.9 -28.1%
Arla Mengniu
(made in Denmark) 1L 12.9 12.9 -14.9%
Devondale Murray Goulburn
(made in Australia) 1L 13.9 13.9 -8.4%
Lactel Lactalis
(made in France) 200ml*24 23.9 16.5 8.8%
Anchor Fonterra
(made in New Zealand)
1L 16.9 16.9 11.4%
U+ Bright Dairy
(made in Australia) 250ml*10 49.8 19.9 31.2%
Perfectlands Yili
(made in Italy) 1L*4 95.2 23.8 56.9%
Average 15.2
Note: Listing price as of 23 December 2014 at Yihaodian; Source: Credit Suisse
12 January 2015
China Dairy Sector 32
■ Cooperation with Netherlands Wageningen University for R&D
In February 2014, Yili opened its European R&D Centre at Wageningen Campus in
Netherlands. The campus is located in the 'food valley' area, where a large number of
international food companies and research institutes are based. Taking advantage of the
location, Yili works with the university on farm management, dairy product processing and
food safety control.
In May 2014, Yili launched TOFER, a new high-end IMF brand and also the very first
product developed by the European R&D Centre. TOFER is made of 100% imported raw
materials. It is marketed through free trial, online marketing, and word-of-mouth.
Figure 59: TOFER infant milk formula series Figure 60: Online marketing through free trail
Source: Company website Source: Company website
Management's personal interest aligned with share
price performance
In 2006, Yili issued 50 mn share options to the president, three president assistants and
other 29 core management members. This accounted for 9.7% of total share base then.
Upon option exercised in July 2013, management owned 8.6% of Yili, ahead of the second
largest shareholder of Hohhot Investment Company's 8.05%.
On 29-30 July 2014, the top-four management (including President Pan Gang) bought
another 48.8 mn share from the secondary market at an average price of Rmb24.81/share.
Post transaction, whole management owns 11% of Yili, ahead of the second-largest
shareholder of Hohhot Investment Company's 9.3%.
As the largest shareholder, management's personal interest is closely aligned with Yili's
fundamental development and share price performance. This ownership favours the
minority shareholders of Yili, in our view.
12 January 2015
China Dairy Sector 33
Figure 61: Management owns 11% of Yili, the largest shareholder
Shareholders Percentage of total shares
Management team 11.0%
(1) Top 4 management 7.87%
- Gang Pan (President) 3.85%
- Chengxiao Zhao (CFO) 1.37%
- Chunhai Liu (VP) 1.36%
- Liping Hu (VP) 1.29%
(2) the rest of management 3.12%
Hohhot investment company 9.31%
A-share investors 79.7%
Total 100.0%
Source: Company data
Figure 62: Yili shareholding structure
11.0% 9.3% 79.7%
-1% of 1H14 sales
- 0.4% of 1H14 GP
Feedstock and snack food
- 76% of 1H14 sales
- 72% of 1H14 GP
- 11% of 1H14 sales
- 15% of 1H14 GP
- 11% of 1H14 sales
- 12% of 1H14 GP
Management Hohhot invesment Public shareholder
Liquid milk Milk powder Ice cream
Inner Mongolia Yili (600887.SS)
Source: Company data
Yili's incentive scheme and ownership compares with Mengniu.
■ Incentive scheme: Mengniu used to issue share options to motivate management.
After COFCO took over the control from founder Niu Gengshen, Mengniu switched to
the restricted share reward scheme (17.6 mn free shares vested to the management
team if business targets met; of which, nearly 48% goes to CEO Sun Yiping).
■ Ownership: COFCO owns 18% of Mengniu. Old Mengniu people (mainly founders,
suppliers, distributors, etc.; some are not involved in Mengniu operations any more)
own 3.9%. Assuming CEO Sun Yiping received all restricted share rewards, she would
own 0.43% of Mengniu.
Figure 63: Restricted share rewards
Restricted shares reward No. of shares As % of total shares
(1) 2013 reward scheme 17,569,400 0.90%
- Vested to Sun Yiping (CEO) in 5 years 8,425,800 0.43%
- Vested to other management 9,143,600 0.47%
(2) 2014 reward scheme (no breakdown) 6,055,000 0.31%
Shares of scheme (1)+(2) 23,624,400 1.21%
Total shares outstanding 1,958,326,175
Source: Company data
12 January 2015
China Dairy Sector 34
Figure 64: A glance at Mengniu's ownership and strategy
3.9% 18.0% 5.9% 4.1% 68.0%
100% 80% 51% 28%
Management
China Mengniu Dairy (2319.HK)
Free-float
Arla Foods
(1) Danone ow ns 25% of YSL;
(2) brands of "Yashily" and
"Scient"; (3) leading position in
2nd & 3rd-tier cities; (4) market
share (value): 2nd among
domestic, 5th in all
a JV w/ WhiteWave
(1) 51/49 by MN/WW; (2)
the initial assets w as YSL
Zhengzhou (priced at
Rmb510mn); (3) the JV to
produce and sell nutritious
products in China
COFCO
Existing biz CMD (1117.HK)
More than 70%
of CMD's quality
raw milk should
be supplied to
MN
UHT, milk beverage,
ice cream, yoghurt;
under brand name of
MN and JLB
a 80/20 JV w ith Danone for mid/high-end Yoghurt;
prepare to integrate in Sept; JV to establish in Dec;
1 plant in SH + 1 plant in GZ; Danone's old sales
team focus on SH&GZ; to leverage MN's distribution
coverage in the rest of China
a 80/20 JV with Danone Yashili (1230.HK)
Cooperation w ith Arla Foods
in (1) UHT organic milk; (2)
Baby & me (high-end
formula); (3) ice cream; (4)
farming
Arla Foods Danone
Source: Credit Suisse estimates
Upstream raw milk source management
Yili secures and controls the raw milk resource in Hulun Buir (呼伦贝), Xilingol (锡林郭勒)
and Tiansha (新疆天山), which are perceived as one of the best regions for raw milk
production. Currently, Yili has over 800 dairy farms in China, most of which are located in
the three regions.
Yili's first large scale dairy farm with 15k cows was constructed and commenced operation
in 2009. Yili was also the cornerstone investor of Huishan IPO in September 2013. Yili
invested Rmb310 mn for a 1.1% stake in Huishan. Currently, Huishan owns 162,394 cows
and 63 dairy farms in Liaoning province, which is the second largest dairy herd in China.
Figure 65: Yili's raw milk source arrangement
Hulun Buir
(呼伦贝尔)
Xilingol
(锡林郭勒)
Tiansha
(新疆天山)
Source: Credit Suisse research
In addition to that, Yili invested Rmb3.1 bn to develop the world's largest dairy base in
New Zealand.
12 January 2015
China Dairy Sector 35
Phase I: In April 2013, Yili bought the 100% stake of Oceania Dairy Limited and started to
build a new infant milk formula production project. The total investment amounts to
Rmb1,103 mn for a total capacity of 47,000 tonne.
Phase II: In November 2014, Yili invested another Rmb2,000 mn on four different projects,
namely NZ milk powder project (Rmb1,005 mn), NZ Infant milk formula packaging project
(Rmb332 mn), NZ raw milk processing project (Rmb201 mn), and NZ UHT milk project
(Rmb462 mn). The capacity of milk powder is up to 56,000 tonne.
The NZ dairy production base (total investment of over Rmb3 bn) covers 380,000 sq m,
with the ability to process 1,400 tonne of raw milk per day. It will be the largest dairy base
in the world, with functions from processing, production to packaging. The Phase I IMF
project has already started to work with the ability to process 215k tonne each year under
full operation. Currently Yili has signed purchasing contracts with 47 local dairy farmers to
meet the production capacity.
Figure 66: Summary of Yili's projects in New Zealand
Investment time Project name Investment value
(Rmb mn)
Capacity
(tonne)
Construction period
(month)
Phase 1: 2013 April IMF project 1,103 47,000 Operational now
Phase 2: 2014 Nov Milk powder project 1,005 56,000 19
Phase 2: 2014 Nov IMF packaging project 332 N/A 34
Phase 2: 2014 Nov Raw milk processing project 201 N/A 22
Phase 2: 2014 Nov UHT milk project 462 N/A 22
Total 3,103 380k sq m; 1,400 tonne
raw milk output/day
Source: Credit Suisse research
Valuation
Our target price of Rmb40 is based on 24x 2015 P/E (implying 1.2x PEG), which is in line
with the average of China's dairy product companies' 2015E P/E. We also crosscheck with
a DCF methodology. Yili trades at 17x 2015 P/E (low-end of historical forward P/E band)
and 0.9x PEG. This also compares with Mengniu's 21.7x, Bright's 27x, Tingyi'x 22x, UPC's
30.5x, Want Want's 20.6x, Hengan's 21.2x, Sunart's 18x and Tsingtao's 24.5x.
Yili differentiates from Mengniu on: (1) Yili has higher margin (6.7% net margin in 2013, vs
Mengiu's 3.8%) and ROE (27%, vs Mengniu's 12%), on product mix, execution and 40 bp
lower Opex ratio; (2) Yili management is well motivated (the largest shareholder with 11%
stake, vs Mengniu's ~5%, including 3.9% old Mengniu management). President Pan Gang
and others bought 1.6% in Jul 2014 at Rmb24.81 (vs current price of Rmb30); and (3) Yili
trades at 17x 2015 P/E or 16x ex-cash (vs Mengniu's 21.7x and Bright's 27.5x).
Major investment risks
(1) Food safety
The 2008 melamine scandal had a negative impact on the China daily industry, including
Yili, which suffered a Rmb1.7 bn loss in 2008. The sales growth YoY decelerated to 11.9%
which is the lowest point during 2005-13. With consumer's rising concern about the health
issue, any food safety incident could negatively affect Yili's reputation, leading to the
decrease in sales volume of dairy products.
12 January 2015
China Dairy Sector 36
Figure 67: Sales YoY growth was the lowest in 2008
12,175
16,580 19,360
21,659 24,324
29,665
37,451
41,991
47,779
39.4%
36.2%
16.8%
11.9% 12.3%
22.0%
26.2%
12.1%
13.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
-
10,000
20,000
30,000
40,000
50,000
60,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
Yili sales revenue Sales YoY
Rmb mn
Source: Company data
Figure 68: Huge loss in 2008 due to the melamine scandal
293 325
(21)
(1,687)
648 777
1,809 1,717
3,187
(2,000)
(1,000)
-
1,000
2,000
3,000
4,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
Rmb mn
Source: Company data
(2) Raw milk price fluctuation
We estimate that raw milk accounts for 50% of Yili's COGS, thus significant raw milk price
fluctuations or the failure to pass cost pressure to customer through price hike would
adversely affect Yili's GP margins.
12 January 2015
China Dairy Sector 37
Figure 69: Yili cost structure Figure 70: China raw milk price
Raw milk50%
Packing cost23%
Other raw material
15%
Other manufacture
cost6%
Depreciation2%
Staff cost2% Utilities
2%
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jan-
06
Jun-
06
Nov
-06
Apr
-07
Sep
-07
Feb
-08
Jul-0
8
Dec
-08
May
-09
Oct
-09
Mar
-10
Aug
-10
Jan-
11
Jun-
11
Nov
-11
Apr
-12
Sep
-12
Feb
-13
Jul-1
3
Dec
-13
May
-14
Oct
-14
(Rmb/kg)
Source:Credit Suisse research Source: Wind
Figure 71: Liquid milk sales value breakdown by high-end liquid milk and mass market liquid milk
19% 21% 24% 26% 29% 32% 35% 38% 41% 45%
81% 79% 76% 74% 71% 68% 65% 62% 59% 55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
High-end liquid milk Mass market liquid milk
Source: Shengmu prospectus
(3) Industry competition
The China dairy industry is very competitive. Yili and Mengniu are the two largest national
players, with nearly a 40% market share. In each region, they compete with local players.
For example, Bright Dairy is the largest player in Shanghai, with above 50% market share.
12 January 2015
China Dairy Sector 38
Figure 72: Key milestones of Yili
Year Event
1993 Inner Mongolia Yili was established
1996.3 Listed on Shanghai stock exchange
1999 Established first Liquid milk department in China
2003-2004 Yili's brand was ranked first position in the F&B sector in the most valuable brand ranking
2005 The first dairy company to reach Rmb10 bn sales revenue
2005.11 Became the exclusive dairy company to provide milk to Beijing Olympic Game
2009 Became the exclusive dairy company to provide milk to Shanghai EXPO
2010 Announced the new logo and vision; promoted to become the world class healthy food company
2012 Become the exclusive milk provider for China team in London Olympic Game
2014.2 Set up highest standard oversea R&D centre in Holland among China dairy companies
2014.7 Ranked No.10 among the global dairy companies
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 39
Figure 73: Income statement (2010-16E)—Yili
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Gross revenue 29,665 37,451 41,991 47,779 54,408 60,795 67,881
- Product revenue 29,545 37,266 41,736 47,454 54,034 60,366 67,387
** Liquid milk 20,985 26,933 32,271 37,116 42,684 48,019 54,021
** Milk powder & others 4,623 5,642 4,484 5,512 6,174 6,791 7,402
** Ice cream 3,544 4,222 4,294 4,243 4,582 4,949 5,345
** Feedstock 393 469 687 583 595 607 619
- Other revenue 120 186 255 325 373 429 494
Revenue YoY 22.0% 26.2% 12% 14% 14% 12% 12%
- Product revenue 22.0% 26.1% 12% 14% 14% 12% 12%
** Liquid milk 26.8% 28.3% 20% 15% 15% 13% 13%
** Milk powder & others 16.6% 22.1% -21% 23% 12% 10% 9%
** Ice cream 8.6% 19.1% 2% -1% 8% 8% 8%
** Feedstock -7.7% 19.2% 46% -15% 2% 2% 2%
- Other revenue 4% 55% 37% 27% 15% 15% 15%
Sales revenue mix 100% 100% 100% 100% 100% 100% 100%
- Product revenue 100% 100% 99% 99% 99% 99% 99%
** Liquid milk 71% 72% 77% 78% 78% 79% 80%
** Milk powder & others 16% 15% 11% 12% 11% 11% 11%
** Ice cream product 12% 11% 10% 9% 8% 8% 8%
** Feedstock 1% 1% 2% 1% 1% 1% 1%
- Other revenue 0% 0% 1% 1% 1% 1% 1%
Business tax (88) (233) (249) (234) (272) (304) (339)
Business tax rate -0.3% -0.6% -0.6% -0.5% -0.5% -0.5% -0.5%
COGS (20,686) (26,486) (29,505) (34,083) (36,743) (40,673) (45,291)
Gross margin (%) 30.3% 29.3% 29.7% 28.7% 32.5% 33.1% 33.3%
- Product GP margin 30.2% 29.2% 29.6% 28.6% 32.4% 33.0% 33.2%
** Liquid milk 28.8% 26.5% 28.1% 26.1% 30.5% 31.0% 31.0%
** Milk powder & others 39.0% 42.6% 39.5% 43.8% 46.0% 48.0% 50.0%
** Ice cream 29.2% 29.8% 32.3% 32.8% 35.0% 35.0% 35.0%
** Feedstock 12.4% 13.7% 16.0% 11.3% 12.0% 12.0% 12.0%
- Other GP margin 42.2% 51.5% 53.7% 43.6% 35.0% 40.0% 40.0%
Product GP mix 100.0% 100.0% 100% 100% 100% 100% 100%
- Liquid milk 67.7% 65.7% 74% 71% 74% 75% 75%
- Milk powder & others 20.2% 22.1% 14% 18% 16% 16% 17%
- Ice cream 11.6% 11.6% 11% 10% 9% 9% 8%
- Feedstock 0.5% 0.6% 1% 0% 0% 0% 0%
SG&A / Sales (%) -28.1% -24.7% -25.2% -22.9% -24.6% -24.2% -23.8%
- Selling exp -22.9% -19.5% -18.5% -17.9% -19.2% -18.9% -18.6%
- Admin exp -5.1% -5.3% -6.7% -5.0% -5.4% -5.3% -5.2%
Operating profit 585 1,697 1,665 2,626 4,433 5,581 6,570
OP Profit YoY -14.9% 190.1% -1.9% 57.7% 68.8% 25.9% 17.7%
OP margin 2.0% 4.5% 4.0% 5.5% 8.1% 9.2% 9.7%
Financial expense 21 49 (49) 33 93 48 41
- Income tax rate (%) -7% -14% -17% 5% -14% -15% -15%
Minority interest -19 -23 -19 -14 (23) (25) (25)
Net earnings 777 1,809 1,717 3,187 4,165 5,103 5,938
Net earnings YoY 20.0% 132.8% -5.1% 85.6% 30.7% 22.5% 16.4%
Net margin 2.6% 4.8% 4.1% 6.7% 7.7% 8.4% 8.7%
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 40
Figure 74: Balance sheet (2010-16E)—Yili
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Cash 3,342 3,921 2,004 8,173 9,561 11,685 14,700
Total current assets 7,558 8,727 6,207 16,467 17,671 20,916 23,788
Total non-current assets 7,805 11,202 13,608 16,410 17,838 19,072 20,160
Total Assets 15,362 19,930 19,815 32,877 35,508 39,989 43,948
Total current liabilities 10,199 12,866 11,478 15,517 15,614 17,008 17,379
Long-term borrowing 60 7 5 0 - - -
Account payable 5 0 0 0 - - -
Provision 70 58 64 102 102 102 102
Deferred tax liability 3 2 2 4 4 4 4
Other non-current liabilities 514 691 742 942 942 942 942
Total LT liabilities 652 758 813 1,048 1,047 1,047 1,047
Total Liabilities 10,850 13,624 12,290 16,565 16,661 18,055 18,426
Share capital 799 1,599 1,599 2,043 2,043 2,043 2,043
Additional paid-in capital 2,654 1,851 1,845 7,539 7,539 7,539 7,539
Surplus reserve 407 532 683 914 914 914 914
Retained earnings 359 2,043 3,209 5,641 8,140 11,202 14,765
Shareholder equity 4,219 6,024 7,335 16,125 18,637 21,698 25,261
Minority interest 294 282 190 188 211 236 261
Total liabilities and equity 15,362 19,930 19,815 32,877 35,508 39,989 43,948
Source: Company data, Credit Suisse estimates
Figure 75: Cash flow (2010-16E)—Yili
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Net earnings 795.8 1,832.4 1,736.0 3,201.3 4,188 5,128 5,963
OP cash flow before WC 1,414.9 2,349.5 2,758.9 3,935.4 5,629 6,690 7,667
Change in working capital 59.7 1,320.8 (350.3) 1,539.4 (133) 272 14
Net cash flow from
operating
1,475 3,670 2,409 5,475 5,496 6,963 7,681
FCF (118) (693) 2,234 2,746 4,213 4,931
CAPEX (1,987) (3,789) (3,102) (3,241) (2,750) (2,750) (2,750)
Net cash flow from
investing
(2,181) (3,476) (3,057) (6,260) (2,776) (2,750) (2,750)
Net cash flow from
financing
(87) (132) (905) 7,241 (1,345) (2,089) (1,916)
Net increase/(decrease) in
cash and cash equivalents
(793) 62 (1,554) 6,451 1,388 2,124 3,014
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 41
Asia Pacific / China
Food Producers
Bright Dairy & Food Co., Ltd
(600597.SS / 600597 CH) INITIATION
UHT yoghurt to drive sales and margin
expansion; a national player in the making
■ Initiate coverage with OUTPERFORM. We initiate coverage on Bright Dairy
with an OUTPERFORM rating and a Rmb24 target price, implying 32% upside
potential. Established in 1996, Bright is the largest dairy company in Shanghai
(above 50% share), the third-largest dairy company in China (an 8% share),
the largest pasteurised milk producer in China (a 36% share), and the second-
largest yoghurt marker in China (a 16% share). We forecast Bright's earnings
will see a 46% CAGR over 2014-16, on a sales CAGR of 14%.
■ Mosilian: A great chance for Bright to go national. Bright created this UHT
yoghurt product in 2009. It has similar texture as chilled yoghurt, offers certain
nutrition, requires no cold-chain support, and enjoys a 40-50% gross margin.
Mosilian sales surged a 115% CAGR over 2011-13. We forecast a 27% sales
CAGR over 2014-16 (implying a 45% segment share in 2016). We expect
segment margin to expand from a negative 3.3% (2011) and 3.1% (2013) to
3.3-4.2% (2014-16), on economy of scale and operating leverage.
■ Expanding out of home market. East China contributes 60% revenue and
70% earnings, in our estimates. We believe the popularity of the new UHT
yoghurt would help Bright expand national coverage. To facilitate that, Bright
added additional 500k POS in 2014, lifting total POS count to 700k from
200k in 2013. We expect Mosilian's sales contribution to increase from 20%
(2013) to 36% (2016), the major growth and margin expansion contributor.
■ Our target price of Rmb24 is based on 36x 2015E P/E (implying 0.8x
PEG). This compares with: (1) our target 24x P/E and 1.2x PEG for Yili, (2)
target 25.5x P/E and 1.2x PEG for Mengniu, and (3) trading 1.5-2x PEG for
Tingyi, UPC, Hengan, Want Want, Sunart, and Tsingtao. Investment risks
include food safety, competition and inflation. Risks include stronger-than-
expected Mosilian sales and operating leverage.
Share price performance
0
100
200
300
0
20
40
11-Jan-13 11-Jan-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
Shanghai Shenzhen CSI300 index which closed at 3559.26 on
09/01/15
On 09/01/15 the spot exchange rate was Rmb6.21/US$1
Performance Over 1M 3M 12M Absolute (%) 9.0 7.1 -15.8 — Relative (%) 3.5 -2.6 -28.3 —
Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 16,290.9 20,436.2 23,824.3 26,675.6 EBITDA (Rmb mn) 1,003.7 1,152.4 1,610.4 2,125.7 EBIT (Rmb mn) 679.3 736.6 1,123.0 1,575.4 Net profit (Rmb mn) 406.0 533.0 805.4 1,134.6 EPS (CS adj.) (Rmb) 0.33 0.44 0.66 0.93 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.47 0.67 0.91 EPS growth (%) 30.4 31.3 51.1 40.9 P/E (x) 54.9 41.8 27.7 19.6 Dividend yield (%) 1.1 1.4 2.2 3.1 EV/EBITDA (x) 21.3 19.3 13.8 10.6 P/B (x) 5.2 5.0 4.6 4.2 ROE (%) 9.8 12.2 17.3 22.5 Net debt/equity (%) net cash net cash net cash 3.9
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating OUTPERFORM* Price (09 Jan 15, Rmb) 18.20 Target price (Rmb) 24.00¹ Upside/downside (%) 31.9 Mkt cap (Rmb mn) 22,398 (US$ 3,609) Enterprise value (Rmb mn) 22,185 Number of shares (mn) 1,230.64 Free float (%) 99.8 52-week price range 22.7 - 14.4 ADTO - 6M (US$ mn) 55.5
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Kevin Yin
852 2101 7655
kevin.yin@credit-suisse.com
12 January 2015
China Dairy Sector 42
Focus charts and tables Figure 76 Dairy product market share in 2013 Figure 77: 2013 Bright Dairy sales breakdown by product
Yili
20%
Mengniu
19%
Bright
Dairy
8%Huishan
6%
Xiajin
3%
Sanyuan
3%
Others
41%
Low-temp dairy44%
UHT milk29%
Milk powder and others
27%
Source: AC Nielson, Credit Suisse Source: Company data, Credit Suisse
Figure 78: High-end products structure by sales revenue Figure 79: Mosilian sales, UHT NPM and overall NPM
Mosilian 20%
Changyou 7%
Ubest 6%
Other high-end prodcuts
7%
Others60%
200700
1,559
3,220
5,957
8,042
9,650
11,098
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
0
2000
4000
6000
8000
10000
12000
2009 2011 2013 2015E
Mosilian sales (Rmb mn) UHT product NPM
Overall NPM
Rmb mn
Source: company data, Credit Suisse Source: Company data, Credit Suisse estimates
Figure 80: Bright Dairy—forward P/E (standard deviation) Figure 81: Bright Dairy—12M forward P/E band
0
10
20
30
40
50
60
'09 '10 '11 '12 '13 '14
P/E mean -1std
+1std -2std +2std
5
10
15
20
25
30
Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Bright Dairy 20x 25x
35x 45x 55x
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service
12 January 2015
China Dairy Sector 43
Difference from Yili and Mengniu Established in 1996, Bright Dairy is the third largest dairy company in China, with an 8%
market share (in terms of sales) in 2013, after Yili's 20% and Mengniu's 19%.
Figure 82: Dairy product market share in 2013
Yili
20%
Mengniu
19%
Bright Dairy
8%Huishan
6%
Xiajin
3%
Sanyuan
3%
Others
41%
Source: AC Nielson, Credit Suisse
Bright Dairy differentiates itself from Yili and Mengniu in product portfolio and geographic
coverage.
■ Product portfolio: Bright focuses on low-temperature dairy (pasteurised milk, chilled
yoghurt), while Yili and Mengniu focus on UHT products (UHT milk, milk beverage,
and others).
Low-temperature products accounted for 44% of Bright's total sales in 2013, vs 8% for
Yili and 13% for Mengniu.
UHT products accounted for 29% of Bright's total sales in 2013, vs 70% for Yili and
51% for Mengniu.
40% of Bright sales come from high-end products, including UHT yoghurt Mosilian (莫
斯利安), chilled yoghurt Changyou (畅优) and pasteurised milk Ubest (优倍).
■ Geographic coverage: As a home market for Bright, Shanghai is the major sales and
earnings contributor for Bright.
Shanghai contributed 56% of total sales in 2013.
East China region contributed c.70% of milk and yoghurt sales, 73% of low-temp milk
and yoghurt sales, and 86% of low-temp milk and yoghurt net earnings in 2013.
Yili and Mengniu are national players. Their distribution network is relatively evenly
distributed cross the whole country. North and East China contributed c.70% of Yili's
sales in 2013.
■ A national player in the making: Given different strategy and disadvantage in raw
milk sourcing, Bright missed the opportunity of expanding out of Shanghai with UHT
milk products in 2009. The UHT milk market has been further consolidated by Yili and
Mengniu. In 2011, Bright created a brand new product—UHT yoghurt, providing
similar texture as chilled yoghurt, offering certain nutrition level, and requiring no cold
12 January 2015
China Dairy Sector 44
chain support. This product was well received by Chinese consumers and became a
star product. Yili and Mengniu followed Bright and launched similar products in late
2013. Leveraging its strong sale momentum, we expect Bright to develop into a
national player in the next 5-10 years.
Figure 83: 2013 Bright Dairy sales breakdown by product Figure 84: 2013 Bright Dairy sales breakdown by region
Low-temp dairy44%
UHT milk29%
Milk powder and others
27%
- Shanghai56%
- Other regions of China
29%
- Overseas15%
Source: Company data, Credit Suisse Source: Company data, Credit Suisse
Figure 85: Bright Dairy high-end products structure by sales revenue
Mosilian (莫斯利安, room-
temperature yoghurt)20%
Changyou (畅优, chilled yoghurt)
7%
Ubest (优倍, pasteurized milk)
6%
Other high-end prodcuts7%
Others60%
Source: company data, Credit Suisse
12 January 2015
China Dairy Sector 45
First-mover advantage in UHT yoghurt…
In 2009, Bright created a brand new UHT yoghurt product—Mosilian (莫斯利安). Mosilian
provides similar texture as chilled yoghurt, offers a certain nutrition level, and requires no
cold chain support.
Upon launching, Mosilian was well received by the Chinese consumers.
■ Mosilian's sales revenue jumped from Rmb200 mn in 2010 (2% of total product sales)
to Rmb3.2 bn in 2013 (20% of total product sales), representing a 153% CAGR over
2010-13. In 1H14, Mosilian's sales revenue increased 95% YoY to Rmb2.8 bn.
■ We estimate Mosilian sales of Rmb6 bn (2014), Rmb8 bn (2015) and Rmb9.6 bn
(2016), representing a 27.3% CAGR.
■ To facilitate the growth potential, Bright has been rapidly expanding its distribution
network. It added nearly 500K POS in 2014, ramping up the total POS count to 700k
as of end-2014 (vs Yili and Mengniu's 2 mn each).
■ We estimate Mosilian has nearly 50% gross margin, vs 34% for its low-temp products,
30% for room-temp products, and 34.7% for group level. The 50% gross margin
provides lots of buffer to compensate for the incremental SG&A expense when
expanding out of East China regions. We expect the economy of scale and operating
leverage to drive up Bright's profitability in 204-16E.
Figure 86: Mosilian sales and market share forecast
2010 2011 2012 2013 2014E 2015E 2016E
Mosilian sales (Rmb mn) 200 700 1,559 3,220 5,957 8,042 9,650
- as % of UHT yoghurt 100% 100% 101% 101% 74% 56% 45%
- as % of UHT total 0% 1% 1% 2% 4% 5% 5%
Source: Company data, Credit Suisse estimates
Figure 87: Bright's Mosilian—once critical mass established, margin would pick up
200700
1,559
3,220
5,957
8,042
9,650
-0.1%
-3.3%
2.9%3.1%
3.3%3.8%
4.2%
2.0%2.0%
2.3%
2.5% 2.6%
3.4%
4.3%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
0
2000
4000
6000
8000
10000
12000
2010 2011 2012 2013 2014E 2015E 2016E
Mosilian sales (Rmb mn) UHT product NPM Overall NPM
Rmb mn
Source: Company data, Credit Suisse estimates
…Yili and Mengniu are catching up
Mengniu and Yili followed Bright and launch similar UHT yoghurt products—Chunzhen (纯
甄) and Anmuxi (安慕希)—at end-2013.
■ Yili's Anmuxi is priced nearly 12% cheaper than Bright's Mosilian. Mengniu's
Chunzhen is priced nearly 4% more expensive than Bright's Mosilian.
12 January 2015
China Dairy Sector 46
■ We estimate each of Yili's and Mengniu's UHT yoghurt will record sales of around
Rmb1 bn and Rmb3 bn in 2014E and 2015E, respectively, vs Bright's Rmb8 bn and
Rmb9.6 bn.
■ We estimate UHT yoghurt segment will witness a 42% CAGR over 2014-18, outpacing
China overall dairy sales growth CAGR of 8-10%. We expect Bright to have a 50%
market share in the next five years.
Figure 88: Room temperature yoghurt price comparison—Anmuxi, Mosilian and Chunzhen
Name Company Package size Retail price
(Rmb)
Equivalent price
(Rmb/g)
Price/average-1
Anmuxi (安慕希) Yili 205g*12 49 19.9 -9.1%
Mosilian (莫斯利安) Bright Dairy 200g*12 53.9 22.5 2.7%
Chunzhen (纯甄) Mengniu 200g*12 55.9 23.3 6.4%
Average 21.9
Source: Yihaodian, Note: Price on 8 January 2015
Low-temp products: A long way to go for China
Low-temp products (pasteurised milk and chilled yoghurt) are growing rapidly in China,
especially in high-tier cities. However, given the cold-chain system bottleneck (leading to
higher selling price and availability), the contribution would remain lower than UHT milk for
the next five years. We believe low-temp products would dominate the China market in the
next 20 years.
■ We forecast pasteurized milk sales will see a 11.2% CAGR over 2014-18, accounting
for 5% of China total dairy consumption in 2018.
■ We forecast chilled yoghurt sales will see an 18% CAGR over 2014-18, accounting for
20% of China total dairy consumption in 2018.
Bright is the largest pasteurised milk producer and the second-largest chilled yoghurt
producer in China, with a more geographic focus in East China.
■ Pasteurised milk
Bright is the largest pasteurised milk producer in China, with a 36% market share in
terms of sales volume in 2013, vs the second player Sanyuan's 15%.
Ubest (优倍 , premium pasteurized milk) was launched in 2006. It is priced at
Rmb19.5/litre, around 27% higher than Bright's plain pasteurised milk. Despite the
high pricing, Ubest has been well received by consumers in the East China region.
Ubest sales revenue increased 38.3% YoY to Rmb900 mn, representing 6% of total
product sales or 13% of low-temp product sales.
■ Chilled yoghurt
12 January 2015
China Dairy Sector 47
According to Euromonitor, Bright is the second-largest yoghurt producer in China, with
a 16% market share in terms of sales value. Mengniu (including contribution from
Junlebao) is the largest player, with a 19% market share.
Changyou (畅优, chilled yoghurt) was launched in 2007. It was priced at Rmb25.8/kg,
around 29% higher than Bright Dairy's plain chilled yoghurt and 10% higher than UHT
yoghurt Mosilian. Changyou's sales revenue increased 35.2% YoY to Rmb1.2 bn in
2013, representing 7% of total product sales or 17% of low-temp product sales.
Expanding out of East China is challenging, but
Mosilian is a chance
Bright's low-temp dairy products sales are highly concentrated in the East China region. In
2013, East China region contributed 73% of low-temp product sales, vs 16% for Central
China, 6% for South China and 5% for North China.
OP margin of East China is also the highest among all regions—14.1% vs 4.3% for
Central China, 3.1% for South China and negative 27.3% for North China in 2013.
Bright has nearly 700k POS, vs 2 mn POS for each of Yili and Mengniu. Most of Bright's
POS are concentrated in East China. Outside East China, Bright is relatively weak, but Yili
and Mengniu are more dominant.
It is challenging to explore new markets with chilled dairy products, as in each market that
has a developed cold-chain system there is a strong local player. For example, Sanyuan
(三元) is in Beigjing, Tianyou (天友) in Chongqing and Qinpai (琴 牌) in Chongqing.
However, Mosilian created a business opportunity for Bright to develop out of East China,
even though Bright has to bear more advertising and marketing expenses for its adventure
in the rest of China, in our view.
Mosilian was launched in 2009. The incremental opex in the initial stage dragged down the
UHT segment net margin from 1.4% in 2009, to negative 0.1% in 2010 and negative 3.3%
in 2011. But once a critical mass is established, margin turned around to 2.9% in 2012 and
3.1% in 2013. We estimate Mosilian's sales will witness a 27% CAGR over 2014-16, and
segment margin to expand to 4.2% in 2016.
Global alliance for milk powder and UHT milk
Equity investment in Synlait NZL for milk powder business
■ Established in 2005, Synlait is one of the five independent milk processing companies
based in the Canterbury region of New Zealand. It mainly manufactures ingredients
and nutritional milk powders. The milk processing plant commenced production in
August 2008 with an annual milk processing capacity of 50,000 tonne.
■ In July 2010, Synlait Milk Limited spun off its milk production business, and retained
full ownership in its farming business. Synlait's milk production division then issued
26,021,658 new shares to Bright for NZ$82 mn. Bright then become the largest
shareholder of Synlait with a 51% stake.
■ In July 2013, Synlait was listed on the New Zealand Exchange. The company raised
NZ$75 mn through issuing 34 mn new shares. Post IPO, Bright Dairy remained the
largest shareholder of Synlait with a 39.12% stake. Synlait's IPO pricing implies nearly
a 25% annualised return for Bright.
■ In late 2011, Bright launched a high-end IMF product, Pure Canterbury. The new
product is manufactured by Synlait with local ingredients in New Zealand. It is then
marketed by Bright in China under Bright's brand name. Pure Canterbury sales
volume amounted to 625 tonne in 2013 and 1,250 tonne in 2014.
12 January 2015
China Dairy Sector 48
Figure 89: Bright Dairy's stake in Synlait
Bright Dairy's investment in 2011
Old no. of shares 25,001,201
New issued no. of shares to Bright Dairy 26,021,658
Total no. of shares 51,022,859
Bright Dairy's stake 51%
Purchase price (NZ$/share) 3.15
Investment amount (NZ$ mn) 82
After IPO in 2013
Total no. of shares after split (1:2.2) 112,250,289
New issued no. of shares via IPO 34,090,910
Total no. of shares after IPO 146,341,199
IPO price (NZ$/share) 2.2
IPO proceeds (NZ$ mn) 75
No. of shares held by Bright Dairy 57,247,648
Bright Dairy's stake 39.12%
Bright Dairy's stake value as of IPO 126
Investment return 53.7%
Source: Company data, Credit Suisse
Partnership with Pactum Australia for UHT OEM
■ In April 2014, Bright Dairy signed a strategic agreement with Pactum Dairy Group
(PDG), a leading Australia dairy company.
■ Based on the agreement, Bright imports PDG's UHT milk product from Australia, and
then distributes products in China under the brand name of U+.
■ U+ is priced at the high end of the retail price range (66% higher than Bright Dairy's
plain UHT milk and 50% higher than domestic U+) on the e-commerce platform.
Figure 90: Pure Canterbury IMF series Figure 91: Premium raw milk source in Canterbury
Source: Company website Source: Company website
12 January 2015
China Dairy Sector 49
Figure 92: Bright Dairy UHT milk price comparison
Name Origin Package size Retail price
(Rmb)
Equivalent price
(Rmb/L)
Price premium
Pure milk China 1L 12 12 66%
U+ China 250ml*12 39.9 13.3 50%
Imported U+ Australia 250ml*12 49.8 19.9
Source: Yihaodian. Note: price on 7 January 2015
Valuation
Our target price of Rmb24 is based on 36x 2015 P/E (implying 0.8x PEG). We also
crosscheck with a DCF methodology. This compares with: (1) our target 24x PE and 1.2x
PEG for Yili, (2) target 25.5x PE and 1.2x PEG for Mengniu, and (3) trading 1.5~2x PEG
for Tingyi, UPC, Hengan, Want Want, Sunart, and Tsingtao.
We expect Bright to deliver 46% earnings CAGR over 2014-16E, benefiting from its first-
mover advantage in UHT yoghurt/Mosilian – a unique star category with 40-50% GP
margin. Mosilian sales surged 115% CAGR over 2011-13, and we expect 27% CAGR over
2014-16E (40% market share and 36% sales contribution in 2016).
Investment risks
1) Food safety
The 2008 melamine scandal had a negative impact on the Chinese industry, including
Bright, which suffered Rmb286 mn loss in 2008. With consumers' rising concern on health
issues, any food safety incident could negatively affect Bright's reputation, leading to the
decrease in sales volume of dairy products.
(2) Raw milk price fluctuation
We estimate that raw milk accounts for 50% of Bright's COGS, thus significant raw milk
price fluctuation or the failure to pass cost pressure to customer through price hike would
adversely affect Bright's GP margin.
3) Industry competition
China dairy industry is very competitive. Yili and Mengniu (the two largest national players)
are quickly catching up with Bright’s UHT yoghurt (accounting for 20% total sales in 2013),
which could negatively affect Bright’s sales growth.
12 January 2015
China Dairy Sector 50
Figure 93: Income statement—Bright
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Total revenue 9,572 11,789 13,775 16,291 20,436 23,824 26,676
(1) Product sales revenue 9,299 11,576 13,630 16,179 20,335 23,718 26,564
- Dairy products 8,995 11,092 13,052 15,412 19,415 22,659 25,378
** Liquid milk 8,481 9,888 11,620 15,054 17,776 20,006
Mosilian (莫斯利安) 200 700 1,559 3,220 5,957 8,042 9,650
Changyou(畅优 ) 880 1,190 1,428 1,642 1,839
Ubest(优倍 ) 651 900 1,170 1,463 1,755
Other liquid milk 6,797 6,310 6,499 6,629 6,762
** Powder & ice cream 2,611 3,164 3,792 4,361 4,884 5,372
- Others 305 484 579 767 921 1,059 1,186
(2) Other revenue 273 213 145 112 101 106 111
Revenue growth YoY % 21% 23% 17% 18% 25% 17% 12%
(1) Product sales revenue 20% 24% 18% 19% 26% 17% 12%
- Dairy products 20% 23% 18% 18% 26% 17% 12%
** Liquid milk 17% 18% 30% 18% 13%
Mosilian (莫斯利安) 107% 85% 35% 20%
Changyou(畅优 ) 35% 20% 15% 12%
Ubest(优倍 ) 38% 30% 25% 20%
Other liquid milk -7% 3% 2% 2%
** Powder & ice cream 21% 20% 15% 12% 10%
- Others 21% 59% 20% 33% 20% 15% 12%
(2) Other revenue 21% -22% -32% -23% -10% 5% 5%
Product revenue mix 100% 100% 100% 100% 100% 100% 100%
- Dairy products 97% 96% 96% 95% 95% 96% 96%
** Liquid milk 0% 73% 73% 72% 74% 75% 75%
Mosilian (莫斯利安) 2% 6% 11% 20% 29% 34% 36%
Changyou(畅优 ) 6% 7% 7% 7% 7%
Ubest(优倍 ) 5% 6% 6% 6% 7%
Other liquid milk 50% 39% 32% 28% 25%
** Powder & ice cream 0% 23% 23% 23% 21% 21% 20%
- Others 3% 4% 4% 5% 5% 4% 4%
Gross margin (%) 34.5% 33.5% 35.1% 34.7% 34.6% 35.3% 35.7%
(1) Products 35.5% 34.1% 35.5% 34.9% 34.8% 35.5% 35.9%
- Dairy products 35.5% 34.4% 36.2% 36.0% 35.9% 36.6% 37.0%
** Liquid milk 40.4% 43.3% 42.9% 42.0% 42.5% 42.8%
** Powder & ice cream 15.0% 14.0% 15.0% 15.0% 15.2% 15.5%
- Others 33.7% 28.3% 20.9% 12.1% 11.0% 11.0% 11.0%
(2) Other 1.9% -3.8% -5.6% 13.5% 2.0% 2.0% 2.0%
SG&A / Sales (%) -31.4% -30.5% -30.9% -30.0% -30.1% -29.9% -29.2%
- Selling exp -28.5% -27.5% -27.7% -27.1% -27.1% -27.0% -26.3%
- Admin exp -2.9% -3.0% -3.2% -3.0% -3.0% -2.9% -2.9%
Operating profit 235 247 420 679 737 1,123 1,575
OP YoY 38.1% 5.1% 69.8% 61.8% 8.4% 52.5% 40.3%
OP margin 2.5% 2.1% 3.0% 4.2% 3.6% 4.7% 5.9%
Financial expense (27) (47) (65) (53) (53) (67) (73)
Income tax rate (%) 6% -13% 20% 33% 25% 25% 25%
Net earnings 194 238 311 406 533 805 1,135
Net earnings YoY 58.7% 22.4% 30.9% 30.4% 31.3% 51.1% 40.9%
Net margin 2.0% 2.0% 2.3% 2.5% 2.6% 3.4% 4.3%
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 51
Figure 94: Balance sheet—Bright
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Cash 1,139 1,114 2,339 2,600 2,180 2,331 1,947
Total current assets 3,107 3,751 4,962 6,411 6,721 7,180 7,367
Total non-current assets 2,867 3,623 4,377 5,157 5,762 6,300 6,775
Total Assets 5,975 7,374 9,339 11,568 12,483 13,480 14,142
Total current liabilities 2,562 3,817 3,960 5,948 6,547 7,152 7,300
Total long-term liabilities 726 722 955 596 659 679 679
Total liabilities 3,288 4,539 4,915 6,544 7,206 7,831 7,979
Ordinary shares 1,049 1,049 1,225 1,225 1,225 1,225 1,225
Additional paid-in capital 448 454 1,677 1,756 1,756 1,756 1,756
Statutory reserves 256 277 321 364 364 364 364
Retained earnings 577 668 777 920 1,133 1,455 1,909
FX statement translation (1) 3 13 13 13 13 13
Shareholder equity 2,329 2,452 4,014 4,278 4,491 4,813 5,267
Minority interest 357 383 411 746 786 836 896
Total liabilities and equity 5,975 7,374 9,339 11,568 12,483 13,480 14,142
Source: Company data, Credit Suisse estimates
Figure 95: Cash flow—Bright
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Net earnings 228 271 335 475 573 855 1,195
OP cash flow before WC 498 606 760 830 1,042 1,410 1,818
Change in working capital 36 (516) 482 475 (485) 96 (422)
Net cash flow from operating 534 89 1,242 1,305 553 1,496 1,384
FCF 191 (888) 150 111 (461) 482 370
Cash paid for buying fixed assets,
intangible assets and other long-term
assets
(344) (977) (1,091) (1,195) (1,014) (1,014) (1,014)
Net cash flow from investing (319) (931) (910) (1,040) (1,016) (1,014) (1,014)
Net cash flow from financing 9 821 893 (4) 42 (331) (753)
Balance of foreign currency statement
translation
(0) (1) (1) (1) (0) - -
Net increase/(decrease) in cash and
cash equivalents
223 (21) 1,225 260 (421) 151 (383)
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 52
Asia Pacific / China
Food Producers
China Mengniu Dairy
(2319.HK / 2319 HK) UPGRADE RATING
Apprehension of slowdown and earnings miss
fairly discounted; upgrade to OUTPERFORM
■ Upgrade to OUTPERFORM from Neutral. We believe that the market has
fairly factored in apprehensions of a consumption slowdown and Mengniu's
earnings miss in its share price, after plenty of discussion on supply/demand
and CMD's raw milk price. The situation turned out to be: (1) dairy
consumption slowdown was not the worst within the whole consumer industry;
and (2) Mengniu's 2014 earnings are likely to be above market expectations.
■ 2014 OP margin likely to expand 100 bp. Mengniu's management guided
at the reverse roadshow that: (1) 2014 sales up 15-16% YoY (in line with our
assumption of 15.6%); (2) OP margin up 100 bp (vs our 30 bp); and (3) net
margin up 100 bp (vs our 20 bp). Margin improvement came from price lifts,
mix upgrade and efficiency. For 2015, management targets: (1) double-digit
growth (vs our 9%) and (2) margin improvement (vs our 40 bp).
■ Distribution reform ongoing. In high-tier cities, Mengniu introduced "CBU"
model—MN's own sales team will replace third-party distributors who are
downgraded to the logistics providers. CBU contributes 13% of total revenue.
In 2015, it is to be rolled out to the entire Shanghai and a part of Beijing. This
new model requires a higher level of managerial skills and causes sales
disruption, especially when demand is sluggish. However, upon the system
well established, Mengniu is able to manage the distribution network more
effectively and efficiently.
■ Our target price of HK$40 (from HK$35) is based on 26x 2015E P/E
(implying 1.2x PEG). Mengniu trades at 21.7x 2015E P/E (mid-point of the
historical forward P/E band) and 1.0x PEG. This also compares with Yili's
17x, Bright's 27x, Tingyi'x 22x, UPC's 30.5x, Want Want's 20.6x, Hengan's
21.2x, Sunart's 18x and Tsingtao's 24.5x. The investment risks include food
safety, competition and inflation. Catalysts are stronger-than-expected sales
growth, margin and contribution from YSL and CMD.
Share price performance
80
130
180
20
30
40
50
60
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
MSCI CHINA F IDX which closed at 6950. on 09-01-15
On 09-01-15 the spot exchange rate was HK$7.75/US$1
Performance Over 1M 3M 12M Absolute (%) 14.8 0.5 -8.3 — Relative (%) 9.4 -9.3 -20.7 —
Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 43,356.9 50,134.0 54,638.3 60,951.1 EBITDA (Rmb mn) 2,940.5 3,635.9 4,401.9 5,174.9 EBIT (Rmb mn) 1,724.7 2,430.0 3,007.0 3,609.5 Net profit (Rmb mn) 1,630.9 1,995.6 2,418.0 2,953.5 EPS (CS adj.) (Rmb) 0.90 1.02 1.23 1.50 Change from previous EPS (%) n.a. 3.4 6.8 2.0 Consensus EPS (Rmb) n.a. 1.07 1.31 1.56 EPS growth (%) 26.0 13.4 21.2 22.1 P/E (x) 29.7 26.2 21.7 17.7 Dividend yield (%) 0.6 1.9 2.8 3.4 EV/EBITDA (x) 19.3 15.2 12.3 10.0 P/B (x) 3.2 3.2 3.0 2.8 ROE (%) 11.7 12.6 14.4 16.5 Net debt/equity (%) 26.0 15.1 10.5 net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating (from Neutral) OUTPERFORM Price (09 Jan 15, HK$) 33.30 Target price (HK$) (from 35.00) 40.00¹ Upside/downside (%) 20.1 Mkt cap (HK$ mn) 65,221 (US$ 8,411) Enterprise value (Rmb mn)
55,120 Number of shares (mn) 1,958.59 Free float (%) 68.0 52-week price range 42.8 - 27.6 ADTO - 6M (US$ mn) 22.5
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Kevin Yin
852 2101 7655
kevin.yin@credit-suisse.com
12 January 2015
China Dairy Sector 53
Focus charts and tables Figure 96: A glance at Mengniu's ownership and strategy
3.9% 18.0% 5.9% 4.1% 68.0%
100% 80% 51% 28%
Management
China Mengniu Dairy (2319.HK)
Free-float
Arla Foods
(1) Danone ow ns 25% of YSL;
(2) brands of "Yashily" and
"Scient"; (3) leading position in
2nd & 3rd-tier cities; (4) market
share (value): 2nd among
domestic, 5th in all
a JV w/ WhiteWave
(1) 51/49 by MN/WW; (2)
the initial assets w as YSL
Zhengzhou (priced at
Rmb510mn); (3) the JV to
produce and sell nutritious
products in China
COFCO
Existing biz CMD (1117.HK)
More than 70%
of CMD's quality
raw milk should
be supplied to
MN
UHT, milk beverage,
ice cream, yoghurt;
under brand name of
MN and JLB
a 80/20 JV w ith Danone for mid/high-end Yoghurt;
prepare to integrate in Sept; JV to establish in Dec;
1 plant in SH + 1 plant in GZ; Danone's old sales
team focus on SH&GZ; to leverage MN's distribution
coverage in the rest of China
a 80/20 JV with Danone Yashili (1230.HK)
Cooperation w ith Arla Foods
in (1) UHT organic milk; (2)
Baby & me (high-end
formula); (3) ice cream; (4)
farming
Arla Foods Danone
Source: Credit Suisse estimates
Figure 97: 2015 sales breakdown Figure 98: 2015 net earnings breakdown
UHT milk
47%Milk
beverages
23%
Yogurt
15%
Ice cream
7%
Dairy
products
2%
Yashili
6%
Mengniu
core
82%
Yashili
9%
CMD
9%
Source: Credit Suisse estimates Source: Credit Suisse estimates
Figure 99: Mengniu—forward P/E (standard deviation) Figure 100: Mengniu—12M forward P/E band
5
15
25
35
45
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Mengniu 12m fwd PE Average -1 stdev +1 stdev
(X)
+1 stdev = 30.3x
Average = 22.9x
-1 stdev = 15.4x
5
10
15
20
25
30
35
40
Jan/
06
Jun/
06
Nov
/06
Apr
/07
Sep
/07
Feb
/08
Jul/0
8
Dec
/08
May
/09
Oct
/09
Mar
/10
Aug
/10
Jan/
11
Jun/
11
Nov
/11
Apr
/12
Sep
/12
Feb
/13
Jul/1
3
Dec
/13
May
/14
Oct
/14
(HK$)
10x
18x
26x34x42x
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service
12 January 2015
China Dairy Sector 54
Figure 101: Income statement—Mengniu
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Total Sales 30,265 37,388 36,000 43,357 50,134 54,638 60,951
Sales YoY 17.7% 23.5% -3.7% 20.4% 15.6% 9.0% 11.6%
Liquid milk 18.2% 25.4% -4.1% 17.2% 12.9% 9.1% 11.5%
- UHT 18.3% 24.1% -5.4% 11.9% 11.4% 5.0% 8.0%
- Milk beverages 14.9% 13.3% -3.3% 29.7% 12.7% 8.0% 9.0%
- Yogurt 27.5% 65.9% 0.8% 18.1% 19.6% 26.5% 26.5%
Ice cream 15.9% 4.7% -2.7% -4.7% 6.4% 7.0% 12.0%
Dairy products -2.5% 51.7% 15.1% 393.5% 69.2% 9.5% 11.5%
- Dairy products -2.5% 51.7% 15.1% 89.1% 7.3% 8.0% 10.0%
- Yashili 107.6% 10.0% 12.0%
Sales mix 100% 100% 100% 100% 100% 100% 100%
Liquid milk 89% 90% 90% 87% 85% 85% 85%
- UHT 55% 56% 55% 51% 49% 47% 46%
- Milk beverages 24% 22% 22% 24% 23% 23% 23%
- Yogurt 9% 12% 13% 13% 13% 15% 17%
Ice cream 10% 9% 9% 7% 6% 6% 6%
Dairy products 1% 1% 1% 6% 8% 8% 8%
- Dairy products 1% 1% 1% 2% 2% 2% 2%
- Yashili 0% 0% 0% 3% 6% 6% 6%
Gross margin 25.7% 25.7% 25.1% 27.3% 28.3% 28.4% 28.6%
Liquid milk 26.5% 26.1% 25.4% 26.0% 25.9% 26.0% 26.3%
- UHT 26.4% 26.5% 25.0% 25.6% 25.6% 25.6% 25.6%
- Milk beverages 27.0% 25.0% 25.0% 26.5% 26.0% 26.2% 26.5%
- Yogurt 25.5% 26.0% 27.5% 26.5% 27.0% 27.2% 28.0%
Ice cream 25.5% 22.0% 24.5% 24.5% 25.0% 25.0% 25.0%
Dairy products 28.0% 29.0% 11.8% 52.0% 55.0% 55.0% 55.0%
SG&A (6,159) (7,818) (7,798) (10,134) (14,313) (15,490) (17,005)
SG&A as % of sales -20.3% -20.9% -21.6% -23.4% -28.6% -28.4% -27.9%
OP 1,821 2,070 1,513 1,852 2,430 2,952 3,609
YoY 14.7% 13.7% -26.9% 22.3% 31.2% 21.5% 22.3%
OP margin 6.0% 5.5% 4.2% 4.3% 4.8% 5.4% 5.9%
Finance costs (45) (61) (42) (160) (295) (295) (295)
PBT 1,538 2,061 1,685 2,204 2,775 3,301 4,102
Income tax (182) (276) (245) (367) (472) (561) (697)
Profit for the year 1,356 1,785 1,440 1,838 2,303 2,740 3,404
Profit for the year from
discontinued operations
24
Minority (119) (195) (182) (231) (307) (363) (451)
Reported earnings 1,237 1,589 1,257 1,631 1,996 2,377 2,953
Earnings growth (%) 10.9% 28.4% -20.9% 29.7% 22.4% 19.1% 24.2%
Net margin (%) 4.1% 4.3% 3.5% 3.8% 4.0% 4.4% 4.8%
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 55
Figure 102: Balance sheet—Mengniu
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Non-current assets 7,642 9,815 11,230 24,018 24,025 26,172 25,440
Cash and cash equivalents 6,698 6,523 5,778 7,102 8,867 9,608 12,383
Current assets 9,664 10,387 9,761 15,225 14,069 13,805 17,009
Current liabilities 6,238 7,226 6,981 17,860 15,227 15,789 16,617
Non-current liabilities 850 927 938 4,265 3,550 3,558 3,569
Minority interests 459 578 629 2,650 2,958 3,320 3,771
Issued capital 179 181 181 186 186 186 186
Retained earnings and
other reserves
9,579 11,290 12,262 15,174 16,172 17,123 18,304
Final dividend
Shareholders' equity 9,758 11,471 12,443 15,361 16,359 17,310 18,491
Total equity (mi + sh's eq) 10,218 12,049 13,072 18,011 19,316 20,630 22,262
Source: Company data, Credit Suisse estimates
Figure 103: Cash flow—Mengniu
(Rmb mn) 2010 2011 2012 2013 2014E 2015E 2016E
Net profit before tax 1,538 2,061 1,685 2,229 2,775 3,301 4,102
Operating profit before working
capital change
2,474 2,725 2,393 3,181 3,355 4,041 4,833
Net cash from operating activities 2,485 2,520 2,007 3,284 2,698 4,663 3,925
Capex (1,138) (2,387) (2,299) (2,857) (2,857) (2,857) (2,857)
Net cash from investing activities (2,204) (1,645) (3,239) (15,269) (2,158) (2,141) (2,040)
Net cash from financing activities (396) (238) (181) 12,331 (998) (1,426) (1,772)
Increase in cash and cash equivalents (115) 637 (1,414) 346 (458) 1,096 113
Other adjustments 663 (812) 669 978 2,223 (356) 2,662
Cash and cash equivalents at beginning
of year
6,150 6,698 6,523 5,778 7,102 8,867 9,608
Cash and cash equivalents at end of
year
6,698 6,523 5,778 7,102 8,867 9,608 12,383
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 56
Asia Pacific / China
Agricultural Products & Agribusiness
China Modern Dairy Holdings Ltd (1117.HK / 1117 HK)
UPGRADE RATING
Close to the end of tunnel with low visibility;
upgrade to NEUTRAL on attractive valuation
■ Upgrade to NEUTRAL from Underperform on attractive valuation. Modern's
share price dived from the recent peak of HK$4.19 (17 Sep) to trough HK$1.88
(9 Dec), discounting: (1) raw milk price weakness and (2) negative media reports
on the farm shut-down and inappropriate waste management. Dust settles;
valuation becomes attractive.
■ Fundamental close to the bottom; visibility remains low. Mengniu and
Modern recently set 1Q15 raw milk price at Rmb4.6-4.7/kg. Rmb4.3-4.5/kg is
likely the bottom, as we see: (1) some loss-making farmers already started
slaughtering cows for beef; (2) Beijing is stepping in, urging local
government to offer help (including subsidy); and (3) NZL auction price is
picking up (China's dairy downstream companies still sit on high-cost powder
inventory. Once out of stock, they are to import powder, leading to a higher
international price, which favours Modern's raw milk price.
■ Next catalyst to come in 4Q15. We believe the raw milk price pick-up is the
key catalyst for the share price rebound, despite nearly 20% sales coming
from the downstream UHT business. We expect milk price to stabilise in
summer and trend up in 4Q15. However, before that, we will likely experience
some turmoil, given (1) high 1H14 (both mill price Rmb5.14/kg and OPM
33.5% are historical high) would cause a massive 1H15 decline; and (2) bio-
assets loss would enlarge (lower milk price leading to lower NPV for cows).
■ Our DCF-based TP of HK$2.80 (from HK$3.25) implies 12.3x/9.8x 2015E
reported/recurrent earnings. Modern Dairy trades at 1.2x 2015E P/B, low-
end of the historical range. 2015 is a transitional year. We forecast 2015
reported earnings will decline 3% (operating deleverage) on sales growth of
12% (an 8% ASP drop wiping off volume growth). We estimate 2016
earnings and sales will grow 19% and 18%, respectively.
Share price performance
0
50
100
150
200
0
2
4
6
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
MSCI CHINA F IDX which closed at 6950. on 09-01-15
On 09-01-15 the spot exchange rate was HK$7.75/US$1
Performance Over 1M 3M 12M Absolute (%) 12.7 -25.9 -36.3 — Relative (%) 7.2 -35.6 -48.8 —
Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 3,289.3 4,893.0 5,498.6 6,479.5 EBITDA (Rmb mn) 929.4 1,500.2 1,402.1 1,584.7 EBIT (Rmb mn) 760.5 1,305.8 1,196.8 1,374.3 Net profit (Rmb mn) 481.4 897.0 873.1 1,037.9 EPS (CS adj.) (Rmb) 0.10 0.19 0.18 0.22 Change from previous EPS (%) n.a. -3.2 -9.5 -8.1 Consensus EPS (Rmb) n.a. 0.21 0.23 0.27 EPS growth (%) 17.2 87.1 -2.7 18.9 P/E (x) 20.0 10.7 11.0 9.2 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 15.4 9.7 10.4 8.9 P/B (x) 1.7 1.4 1.2 1.1 ROE (%) 8.9 14.3 11.9 12.2 Net debt/equity (%) 80.1 70.6 61.8 48.5
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating (from Underperform) NEUTRAL* Price (09 Jan 15, HK$) 2.49 Target price (HK$) (from 3.25) 2.80¹ Upside/downside (%) 12.4 Mkt cap (HK$ mn) 12,020 (US$ 1,550) Enterprise value (Rmb mn)
14,514 Number of shares (mn) 4,827.34 Free float (%) 28.4 52-week price range 4.18 - 2.01 ADTO - 6M (US$ mn) 9.6
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Kevin Yin
852 2101 7655
kevin.yin@credit-suisse.com
12 January 2015
China Dairy Sector 57
Focus charts and tables Figure 104 China raw milk price Figure 105: NZ milk powder price vs China raw milk price
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jan-
06
Jun-
06
Nov
-06
Apr
-07
Sep
-07
Feb
-08
Jul-0
8
Dec
-08
May
-09
Oct
-09
Mar
-10
Aug
-10
Jan-
11
Jun-
11
Nov
-11
Apr
-12
Sep
-12
Feb
-13
Jul-1
3
Dec
-13
May
-14
Oct
-14
(Rmb/kg)
3.00
3.20
3.40
3.60
3.80
4.00
4.20
4.40
2500
3000
3500
4000
4500
5000
5500
6000
6500
11/3
/201
0
2/3/
2011
5/3/
2011
8/3/
2011
11/3
/201
1
2/3/
2012
5/3/
2012
8/3/
2012
11/3
/201
2
2/3/
2013
5/3/
2013
8/3/
2013
11/3
/201
3
2/3/
2014
5/3/
2014
Intl milk poder price China raw milk price
(USD/metric tonne) (Rmb/kg)
Source: Wind Source: Bloomberg and CEIC
Figure 106: CMD ASP, Cash EBIT margin and net margin Figure 107: Sales mix change (2013-16E)
4.7
5.0
4.6
4.7
12%
17%
22%
27%
32%
4.4
4.5
4.6
4.7
4.8
4.9
5.0
5.1
2013 2014E 2015E 2016E
CMD ASP Cash EBITDA margin Net margin
Rmb
Net
external
raw milk
90%
liquid milk products
10%
Net
external raw milk
74%
Sales of
cows 2%
Lliquid
milk products
24%
Source: company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 108: Modern—forward P/E (standard deviation) Figure 109: Modern—12M forward P/E band
10.0
15.0
20.0
25.0
30.0
35.0
Nov-
10
Feb-
11
May
-11
Aug-
11
Nov-
11
Feb-
12
May
-12
Aug-
12
Nov-
12
Feb-
13
May
-13
Aug-
13
Nov-
13
Feb-
14
May
-14
Aug-
14
Nov-
14
12m fwd PE Average -1 stdev +1 stdev
(X)
Average=20.4x
-1 stdev = 15.4x
+1 stdev = 25.4x
1.5
2
2.5
3
3.5
4
4.5
Nov
/10
Feb/
11
May
/11
Aug/
11
Nov
/11
Feb/
12
May
/12
Aug/
12
Nov
/12
Feb/
13
May
/13
Aug/
13
Nov
/13
Feb/
14
May
/14
Aug/
14
Nov
/14
(HK$) 26x
22x
20x
24x
18x
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service
12 January 2015
China Dairy Sector 58
Figure 110: Income statement—Modern
Rmb mn 2010 2011 2012 2013 2014E 2015E 2016E
Total sales 782 1,392 2,035 3,289 4,893 5,499 6,479
(1) Net external raw milk sales 1,978 2,968 4,093 4,189 4,798
* Sales to Mengniu 2,360 2,865 2,932 3,359
* Sales to others 608 1,228 1,257 1,440
(2) Sales of dairy cows 0 100 110 121
(3) liquid milk products 56 321 700 1,200 1,560
Sales YoY (%) 78% 46% 62% 49% 12% 18%
(1) Net external raw milk 50% 38% 2% 15%
* Sales to Mengniu 21% 2% 15%
* Sales to other external 102% 2% 15%
(2) Sales of dairy cows 10% 10%
(3) liquid milk products 470% 100% 100% 30%
Sales mix 100% 100% 100% 100% 100% 100% 100%
(1) Net external raw milk 90% 84% 76% 74%
* Sales to Mengniu 97.6% 97.0% 96.0% 72% 59% 53% 52%
* Sales to other external 2.4% 3.0% 4.0% 18% 25% 23% 22%
(2) Sales of dairy cows 0% 2% 2% 2%
(3) liquid milk products 10% 14% 22% 24%
Gross profit margin(%) 34.6% 31.1% 32.1% 38.2% 35.9% 31.6% 30.8%
- Upstream 38.1% 34.1% 33.2%
* Raw milk 39.0% 35.0% 34.0%
* Dairy cow 0.0% 0.0% 0.0%
- Downstream 23.0% 22.5% 23.5%
SG&A/sales -6.2% -6.8% -6.7%
- Selling exp -2.0% -2.3% -2.3%
* Upstream -1.5% -1.4% -1.3%
* Downstream -5.3% -5.3% -5.3%
- Admin exp -4.2% -4.5% -4.4%
Income from operations 139 331 423 843 1,506 1,417 1,616
YoY (%) 138% 28% 99% 79% -6% 14%
Operating margin (%) 17.8% 23.7% 20.8% 25.6% 30.8% 25.8% 24.9%
Gain arising from changes in fair
value less costs to sell of dairy
cows
63 76 96 (82) (200) (220) (242)
Cash EBITDA 197 383 544 1,021 1,700 1,622 1,827
YoY (%) 94.7% 42.0% 87.8% 66.5% -4.6% 12.6%
Cash EBITDA margin (%) 25.1% 27.5% 26.7% 31.0% 34.7% 29.5% 28.2%
Finance costs -47 -60 -101 -208 -250 -250 -250
Effective tax rate (%) 0.0% 0.0% 0.8% 2.0% 2.0% 2.5% 2.8%
Minority interests -50 -7 -14 -26 -40 -50 -55
Reported net earnings 105 313 409 481 897 873 1,038
YoY (%) 198.5% 30.7% 17.7% 86.3% -3% 19%
Net margin (%) 13.4% 22.5% 20.1% 14.6% 18.3% 15.9% 16.0%
Recurrent earnings 66 237 313 564 1,097 1,093 1,280
YoY (%) 262% 32% 80% 95% 0% 17%
Net margin (%) 8.4% 17.1% 15.4% 17.1% 22.4% 20% 20%
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 59
Figure 111: Balance sheet—Modern
Rmb mn 2010 2011 2012 2013 2014E 2015E 2016E
Cash and cash equivalents 251 1,022 518 369 782 827 1,082
Total current assets 505 1,660 1,099 2,037 2,821 3,347 4,230
Total non-current assets 3,699 5,247 7,553 10,457 11,836 13,044 13,908
Total assets 4,204 6,907 8,652 12,494 14,657 16,391 18,138
Total current liabilities 738 787 1,493 4,472 4,899 5,440 6,143
Total non-current
liabilities
892 1,393 2,018 2,150 2,790 2,890 2,690
Total liabilities 1,631 2,179 3,511 6,622 7,689 8,330 8,833
Minority interests 1,133 55 66 118 143 183 216
Share capital 0 413 413 415 415 415 415
Reserves 1,436 4,255 4,653 5,328 6,395 7,448 8,670
Total shareholders’
equity
1,437 4,668 5,066 5,743 6,810 7,863 9,085
Total liabilities and
shareholders' equity
4,200 6,902 8,644 12,483 14,642 16,376 18,134
Source: Company data, Credit Suisse estimates
Figure 112: Cash flow—Modern
Rmb mn 2010 2011 2012 2013 2014E 2015E 2016E
Profit before taxation 107 225 407 350 956 947 1,124
Operating cash flows before movements in
working capital
116 282 422 663 1,550 1,802 2,309
Cash from operations 118 292 544 669 1,622 1,888 2,412
Income tax paid 0 0 0 -3 -19 -24 -31
Net cash provided by operating activities 118 292 543 666 1,603 1,864 2,380
Free cash flow -1,160 -1,206 -1,708 -1,604 -53 112 628
Purchases of items of PPE -535 -655 -842 -854 -600 -600 -600
Net cash (used in)/ provided by investing
activities
-1,268 -1,718 -2,076 -2,552 -1,616 -1,710 -1,708
Net cash provided by/(used in) financing 579 2,120 941 1,511 426 -110 -417
Net cash increase (decrease) in cash and
cash equivalents
-571 693 -591 -375 413 44 256
Source: Company data, Credit Suisse estimates
12 January 2015
China Dairy Sector 60
Companies Mentioned (Price as of 09-Jan-2015)
Abbott Laboratories (ABT.N, $45.68) Beingmate (002570.SZ, Rmb16.57) Biostime (1112.HK, HK$16.54) Bright Dairy & Food Co., Ltd (600597.SS, Rmb18.2, OUTPERFORM, TP Rmb24.0) China Mengniu Dairy (2319.HK, HK$33.3, OUTPERFORM, TP HK$40.0) China Modern Dairy Holdings Ltd (1117.HK, HK$2.49, NEUTRAL, TP HK$2.8) Dairy Crest (DCG.L, 453.4p) Danone (DANO.PA, €53.22) Dean Foods Company (DF.N, $18.76) Fonterra (FSF.NZ, NZ$6.0) Huishan (6863.HK, HK$1.38) Inner Mongolia Yili Industrial Group (600887.SS, Rmb28.15, OUTPERFORM, TP Rmb40.0) Mead Johnson Nutrition Co. (MJN.N, $101.41) Meiji Holdings (2269.T, ¥11,330) Morinaga Milk (2264.T, ¥404) Nestle (NESN.VX, SFr72.65) Parmalat (PLT.MI, €2.358) RoyalGroup (002329.SZ, Rmb27.85) Sanyuan Foods (600429.SS, Rmb8.57) Sun Art (6808.HK, HK$7.82) Synutra Int (SYUT.OQ, $5.53) Tingyi (0322.HK, HK$17.7) Tsingtao (0168.HK, HK$52.8) U-Presid China (0220.HK, HK$6.9) Vietnam Dairy Products Joint Stock Company (VNM.HM, D103000.0) Want Want China Holdings Ltd. (0151.HK, HK$10.06) Western Animal (300106.SZ, Rmb12.72) Yakult Honsha (2267.T, ¥6,310) Yashili (1230.HK, HK$2.36) YuanShengTai Dairy Farm (1431.HK, HK$0.83)
Disclosure Appendix
Important Global Disclosures
I, Kevin Yin, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for China Mengniu Dairy (2319.HK)
2319.HK Closing Price Target Price
Date (HK$) (HK$) Rating
16-Jan-12 19.98 18.00 U
17-Jun-12 19.80 23.00 O
28-Aug-12 23.10 27.00
08-May-13 21.80 25.70
20-May-13 27.05 30.00
08-Jul-13 28.60 31.50
30-Aug-13 32.80 38.00
19-Sep-13 33.95 39.50
12-Feb-14 37.95 47.50
27-Mar-14 39.15 49.00
14-Jul-14 37.25 46.50
28-Aug-14 35.45 45.00
02-Oct-14 32.00 35.00 N
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
O U T PERFO RM
N EU T RA L
12 January 2015
China Dairy Sector 61
3-Year Price and Rating History for China Modern Dairy Holdings Ltd (1117.HK)
1117.HK Closing Price Target Price
Date (HK$) (HK$) Rating
16-Jan-12 1.71 3.25 O
18-Sep-12 2.04 2.80
27-Feb-13 2.61 3.10
08-Jul-13 2.19 2.80
19-Sep-13 2.73 3.40
31-Oct-13 3.61 4.50
05-Jun-14 3.36 4.10
02-Oct-14 3.60 3.25 U
* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM
U N D ERPERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector , with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total retu rn relative to the average total return of the relevant country or regional benchmark.
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Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 46% (54% banking clients)
Neutral/Hold* 38% (50% banking clients)
Underperform/Sell* 14% (43% banking clients)
Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
12 January 2015
China Dairy Sector 62
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Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html
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Price Target: (12 months) for Bright Dairy & Food Co., Ltd (600597.SS)
Method: Our target price of Rmb24 for Bright Dairy & Food Co., Ltd is based on 36x 2015 P/E (implying 0.8x PEG). This compares with: (1) our target 24x PE and 1.2x PEG for Yili, (2) target 25.5x PE and 1.2x PEG for Mengniu, and (3) trading 1.5~2x PEG for Tingyi, UPC, Hengan, Want Want, Sunart, and Tsingtao.
Risk: Risks that could impede achievement of our Rmb24 target price for Bright Dairy & Food Co., Ltd include: food safety, raw milk price fluctuations, industry competition (other players are quickly catching up to Bright's UHT yoghurt, which accounted for 20% of total sales in 2013) and inflation.
Price Target: (12 months) for Inner Mongolia Yili Industrial Group (600887.SS)
Method: Our target price of Rmb40 for Inner Mongolia Yili Industrial Group is based on 24x 2015 P/E (implying 1.2x PEG), which is in line with the average of Chinese dairy product companies' 2015 P/E. Yili trades at 17x 2015 P/E (mid-point of historical forward P/E band) and 0.9x PEG.
Risk: Risks that could impede achievement of our Rmb40 target price for Inner Mongolia Yili Industrial Group include food safety, competition and inflation.
Price Target: (12 months) for China Modern Dairy Holdings Ltd (1117.HK)
Method: We use a DCF (discounted cash flow) model as our primary matrix to value China Modern Dairy Holdings Ltd (CMD). Compared with the multiple method, a DCF model is better to capture CMD's long-term growth rather than focus on current and next year earnings, given (1) CMD's earnings visibility is high, on the back of its ten-year off-take agreement with Mengniu; and (2) it will take some years for CMD to reach a normalised stage when it will have 30 dairy farms in operation. Assuming a WACC of 13.4% and terminal growth of 2%, our DCF-based target price of HK$2.80 implies 12.3x/9.8x 2015E reported/recurrent earnings.
Risk: Our DCF-based target price for China Modern Dairy Holdings Ltd is HK$2.80. We believe downside risks include: (1) food safety; (2) animal disease; (3) over-reliance on one product and one customer; and (4) short history and track record. Upside risks include: (1) stronger-than-expected milk yield improvement; (2) faster ramp-up of new dairy farms; and (3) stronger sales growth of Mengniu.
Price Target: (12 months) for China Mengniu Dairy (2319.HK)
Method: Our TP of HK$40 for China Mengniu Dairy is based on 24x 2015E P/E (implying 1.1x PEG) vs Tingyi’s 23x, WW’s 21x, Hengan's 21x,
Sunart’s 19x, and Tsintao’s 26x (all on consensus).
Risk: Risks that could impede achievement of our target price of HK$40 for China Mengniu Dairy include worse-than-expected sales recovery and deteriorating consumer confidence on dairy products due to the food safety issue.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (600597.SS, 0322.HK, NESN.VX, MJN.N, FSF.NZ, VNM.HM, 1431.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (NESN.VX, MJN.N, 1431.HK) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (NESN.VX) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (NESN.VX) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (NESN.VX, MJN.N, 1431.HK) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (600597.SS, 0322.HK, 0151.HK, NESN.VX, ABT.N, MJN.N, FSF.NZ, VNM.HM, 1431.HK) within the next 3 months.
12 January 2015
China Dairy Sector 63
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (NESN.VX) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (ABT.N, MJN.N, DF.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (NESN.VX).
Credit Suisse has a material conflict of interest with the subject company (NESN.VX) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program for capital reduction purposes.
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Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (600597.SS, 600887.SS, 1117.HK, 2319.HK, 0322.HK, 0151.HK, NESN.VX, ABT.N, DANO.PA, MJN.N, FSF.NZ, VNM.HM, DF.N, DCG.L, 1431.HK) within the past 12 months
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Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
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The following disclosed European company/ies have estimates that comply with IFRS: (NESN.VX, DANO.PA, DCG.L).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (NESN.VX, FSF.NZ, 1431.HK) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Credit Suisse has entered into a strategic partnership with First NZ Capital ("FNZC"). Pursuant to this agreement, (FSF.NZ) is jointly covered by Credit Suisse and First NZ Capital.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse (Hong Kong) Limited ............................................................................................................................................................ Kevin Yin
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
12 January 2015
China Dairy Sector CS0781.doc
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
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