china dairy stats 2012
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8/12/2019 China Dairy Stats 2012
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CompanyResearch|HK&ChinaModernDairy(1117.HK)
Forratingsdefinitionsandotherimportantdisclosures,refertotheInformationDisclosures attheendofthisreport. 1
June 5, 2012
Modern Dairy (1117.HK)BUY| Share price: HK$2.02 | Target price: HK$2.80 | Upside: 39%
A growing cash cow
Investment highlights
Modern Dairy is the largest dairy producer in China. By the end of 2011,
Modern Dairy had 128,759 dairy cows on 16 farms (four more farms are under
construction) producing 288,620 tonnes of milk annually, as of June 30, 2011.
Huge growth expected in dairy industry. Per capita fluid milk consumption in
China is only 18.6 kg, which is lower than the global average. The huge
potential demand will drive development of dairy farms. Modern Dairy is
expanding rapidly by building replicable standardised farms and purchasing
heifers and calves from overseas.
Cooperation with Mengniu Dairy. Modern Dairy signed a 10-year supply
agreement with Mengniu in 2008. Based on the agreement, Mengniu has to
purchase all the raw milk supplied by Modern Dairy and offer it the most
favourable treatment. Due to the outstanding quality of Modern Dairys raw milk
and the close proximity of its farms with Mengnius factory, the two companieshave some inter-dependent relationship.
Selective breeding wil l drive unit milk y ield.As more heifers become dairy
cows and enter the peak lactation cycle, we expect raw milk production will
increase sharply. Furthermore, the genetic improvement will continue to drive
unit milk yield over the next 10 years at least.
Changes in the formula for the feed to reduce cost.Feed accounts for more
than 70% of production costs. Replacing expensive feed ingredients with
cheaper alternatives will help reduce costs.
Buy rating. Modern Dairy is undergoing a rapid expansion phase and weexpect its growth to remain strong. We initiate coverage with a Buy rating and
TP of HK$2.80, which corresponds to 0.6x PEG and 38.9x PE for FY 2012.
Exhibit 1: Financial summary
Year to Jun e 2010A 2011A 2012E 2013E 2014E
Turnover (RMB mn) 589 1,113 1,829 2,644 3,437
Chg (%) N/A 89 64 45 30
Core net profit (RMB mn) 23 174 345 549 778
Chg (%) N/A 650 118 59 42
EPS (RMB) 0.011 0.04 0.072 0.114 0.162
CFO per share (RMB) 0.06 0.07 0.11 0.16 0.26
P/E (x) 63.3 44.7 22.8 14.3 10.1
Dividend per share (HK$) N/A 0 0 0 0
Note: our forecasts exclude the impact from gains arising from changes in fair value less costs
associated with sale of dairy cows
Source: Guosen Securities (HK)
Analyst
Todd Yang(852)28998300yangnx@guosen.com.hkSFC CE No.:AYJ777
Price performance vs. HSI
Source: Bloomberg, data as at May 31, 2012
Sales Contact
Dan WeilGlobal Head of InstitutionalSales and TradingManaging Director+852 2248 3588dan.weil@guosen.com.hk
Chris BerneyManaging Director+852 2248 3568
chris.berney@guosen.com.hk
Roger ChimanManaging Director+852 2248 3598roger.chiman@guosen.com.hk Joe ChanDirector+852 2248 3578
joe.chan@guosen.com.hk
Cancy KongVice President+852 2248 3538cancy.kong@guosen.com.hk
0
5,000
10,000
15,000
20,000
25,000
1.0
1.3
1.6
1.9
2.2
2.5
2.8
May/2011 Oct/2011 Feb/2012
HK$
1117.HK (HK$ LHS) HSI (RHS)
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1 The largest dairy cow breeder in China
by herd size
1.1 Core business: rearing dairy cow s and sale of raw milk
Modern Dairy was established in July 2008 and listed on the main board of the HK stock
exchange on November 26, 2010. The rearing of dairy cows and sale of raw milk
represent Modern Dairys core businesses. As of December 31, 2011, Modern Dairy had
128,759 dairy cows on 16 farms (four more farms are under construction) producing
288,620 tonnes of milk annually. For financial year1 2011, it sold 288,620 tonnes of milk,
while for 1H 2012, milk sales volume increase by 66.5% y-o-y to 195,321 tonnes. It
reported RMB1.113 billion in revenue and RMB244 million in net profit for FY 2011.
Exhibi t 2: The sales volume of raw milk rose by a CAGR of 73%
over 2008-2011
Exhibi t 3: Modern Dairys net pro fit enjoyed an 86% CAGR over
2008-11
Source: company information, Guosen Securities (HK)
2 Modern Dairy is expected to achieve
exponential growth in the short term
2.1 Growing downstream demand represents considerable
opportunities for large-scale dairy farm operators
Per capita liquid milk consumption has significant potential for growth
According to USDA statistics for 2010, an average urban dweller in China consumed
merely 18.6 kg of liquid milk, significantly less than that in the US, Europe, as well as the
worlds average of 24.7 kg. As the quality of life of Chinese citizens improve, we believe
per capita dairy consumption in China has considerable growth potential, given dairy
products are important sources of protein.
1 ModernDairysfinancialyearendisJune30.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
FY 2008 FY 2009 FY 2010 FY 2011 1st half
of FY2012
tonne
Sales volume of milk (tonne, LHS)
Y-o-y growth rate (RHS)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
FY 2008 FY 2009 FY 2010 FY 2011 1st half of
FY 2012
RMB '000
Sales (RMB'000) Net profit (RMB'000)
CAGR over FY2008-11
Sales: 82.3%
Net profit: 86%
Modern Dairys 1H 2012 milk sales
volume surged by 66.5% y-o-y.
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GuosenSecurities(HK)BrokerageCo.,Ltd. 3
Dairy cow popu lation and milk output li kely to continue to increase in the
coming years
A melamine milk scandal hit China in 2008 and caused a temporary slump in Chinas
dairy farming market. Chinas dairy cow population dropped significantly in the following
years but total milk output remained stable thanks to an increase in unit milk yield. Acleanup in Chinas milk industry ensued. Large dairy farms sprung up and many breeders
were introduced in China, which contributed to a surge in herd size and advancement of
breeding techniques in China. As such, we expect Chinas milk output is on track to rise
further in the years ahead.
Exhibit 4: Per capita liquid milk consumption in Chinas urban
areas has substantial room to grow
Exhibit 5: Chinas raw milk outpu t is poised to regain growth
momentum
Source: National Bureau of Statistics, USDA, Guosen Securities (HK)
2.2 A golden era for large-scale and modernised dairy farming
Chinas dairy farming industry has grown substantially in the past decade, as supporting
husbandry has been high on the governments agenda. The herd size in China grew from
4.432 million heads in 1999 to 14.201 million heads in 2010, equivalent to a CAGR of
11.2%. We estimate the high growth rate will be sustained in the coming years.
Exhibit 6: Herd size in China continues to rise quickly Exhibit 7: Herd sizes at most dairy farms in China are small
Source: Chinas Ministry of Agriculture, Guosen Securities (HK)
102.0
91.3
83.6
67.159.1
40.632.7 31.7
24.718.6
0
20
40
60
80
100
120
Australia
theU.S.
Russia
EU-27
Brazil
India
Japan
Korea
World
China
kg
0
1
2
3
4
5
67
8
9
5
10
15
20
25
30
35
40
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
millionheads
milliontonnes
Milk output in China (million tonnes, LHS)
The population of milkable cows (million heads, RHS)Dairy cow population in China (million heads, RHS)
0
2
4
6
8
10
12
14
16
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
millionheads
Cow population (million heads)
41%
28%
17%
2%
7%
4%
900 heads
Growing dairy product consumption
in China will d rive increase in dairy
cow population and milk output.
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Overall, Chinas dairy farming is still in a nascent stage, as around 70% of dairy herds in
China are reared by dairy farmers who own less than 20 cows. The rapid development in
the industry has further exacerbated the mismatch between demand by modern dairy
processors and supply by small-scale dairy farms. After the melamine milk scandal in
2008, the government pushed for modernisation and expansion in upstream dairy
farming. We think agri-businesses like Modern Dairy are the epitome of Chinas drive tomodernise and industrialise its husbandry industry.
2.3 Replicable large-scale industrialised dairy farming model
Modern Dairy adopts an industrialised and large-scale farming model, which features
standardised procedures and farm design. One Modern Dairy farm can rear up to 10,000
cows. Modern Dairy adopts standardised design of milking parlors, loafing barns and
waste treatment facilities, and installs special facilities in some farms based on local
conditions (e.g. LPCV cowsheds are installed in the companys farms located in Southern
China in order to maintain a constant temperature), which we believe is conducive to
hygiene maintenance and milk quality improvement.
Modern Dairys management has a sound track record in dairy farm construction and has
a clear-defined expansion plan. We believe management should be able to transfer their
managerial expertise and rearing techniques to newly constructed dairy farms.
2.4 Modern Dairy imported a large number of heifers and
managed to expand its dairy herd size within a short period of
time
Modern Dairy has become the largest dairy farm operator in China since 2009. In 2009, ithad 65,000 dairy cows on its farms, accounting for 0.52% of the total number of cows in
China. We estimate that the share will rise to over 2% by 2015. The combined number of
dairy cows of the top 5 and top 7 dairy farm operators accounted for 1.39% and 1.63% of
Chinas dairy herd in 2009. We believe the low concentration rate in the industry indicates
good expansion opportunities for Modern Dairy through M&A. In addition, its easier to
achieve intensive management for Modern Dairy, as its herd size per farm is larger than
that of other major dairy farm operators in China.
Exhibit 8: A growing herd size boosted by heifer imports Exhibit 9: Modern Dairys herd accounts for a very small share
of Chinas total
Source: company information, Guosen Securities (HK)
24,358
107,576
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Jun/08 Jun/09 Dec/09 Jun/10 Dec/10 Jun/11 Jul/05
head
Modern Dairy's herd size (head)
0.52%
0.62%
0.46%
0.48%
0.50%
0.52%
0.54%
0.56%
0.58%
0.60%
0.62%
0.64%
2009.12 2010.12
Modern Dairy's herd size as % of China's total
The 2008 melamine milk scandal has
accelerated themodernisation andexpansion in upstream dairy
farming.
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Exhibi t 10: Dairy herd sizes (December 2009)
Dairy companies No. of dairy farmsDairy herd size
(total)Herd size per farm No. of dairy cows
Unit milk yield(tonne/year)
Modern Dairy 11 65,000 5,909 19,300 8.5
Beijing Lvhe Dairy 27 35,000 1,296 18,769 9Huishan Dairy 15 30,000 2,000 15,000 8
Shanghai Dairy Group 18 25,000 1,389 15,000 8
Shanghai Bright Holstan Co., Ltd 8 20,000 2,500 12,000 8
Tianjin Jialihe Dairy 14 1,6000 1,143 N/A 8
Heilongjiang Feihe Dairy 3 14,000 4,667 N/A 7.5
Hebei Fucheng Wufeng 2 7,000 3,500 N/A 9
Jilin Guangze Milk Industry 7 6,000 857 N/A 8.5
Beijing Shuangwa Dairy 7 5,300 757 N/A 7
Inner Mongolia Dairy United 5 5,000 1,000 N/A 6Ji Nan Jiabao Milk Co. ,Ltd. 2 4,000 2,000 N/A 7.8
Shanxi Gucheng Dairy 2 2,500 1,250 N/A 6Source: China Dairy Industry Yearbook, www.hesitan.com, Guosen Securities (HK)
3 Tremendous growth potential and
win-win cooperation with Mengniu
3.1 Its quality raw milk is sold at a considerable premium
The advanced and scientific dairy farming approaches adopted by Modern Dairy enable
it to produce safe and quality raw milk at a relatively low cost. Both CFU/mL
(colony-forming units per milliliter) and somatic cell count (SCC), which are two important
indicators of milk quality, of the companys products surpass EU standards and Chinas
national standards. Besides, its products enjoy obvious advantages in terms of protein
and fat contents. Through its long-standing supply agreement with Mengniu, Modern
Dairy can sell its quality products at a considerable premium.
Exhibit 11: The quality of Modern Dairys liquid milk surpasses the EU standards
Modern Dairy Other large dairy farms Chinas national standards EU standards
Protein content 3.1% N/A 2.8% N/A
Fat content 3.7% N/A 3.1% N/A
CFU 50,000/milliliter N/A 2,000,000/ milliliter 100,000/milliliter
Somatic cell count 300,000/milliliter 592,000/milliliter NA 400,000/ milliliter
Note: Data on other large dairy farms are calculated based on statistics for 62 dairy farms in 2009.
Source: company information, GB19301-2010, China Dairy Industry Yearbook for 2010, Guosen Securities (HK)
Safe and quality products are
expected to enable Modern Dairy to
maintain high ASP.
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Exhibit 12: Modern Dairys liquid mil k has been sold at a considerable premium
Note: major production areas include Heilongjiang, Liaoning, Inner Mongolia, Hebei,Shanxi, Henan, Shangdong, Xinjiang, Shaanxi, Ningxia provinces
Source: Chinas Ministry of Commerce, company information, Guosen Securities (HK)
3.2 Long-term cooperation wi th Mengniu expected to create a
win-win situation
Modern Dairy has been cooperating with Mengiu for more than five years. Modern Dairy
became Mengnius raw milk supplier in 2006, and Mengniu has accounted for a growing
proportion of its sales income ever since. In October 2008, the company entered into a
10-year supply deal with Mengniu. Key provisions are as follows:
Exhibit 13: Important provisions in the supply deal between Modern Dairy and
Mengniu
Purchasing
commitment
Both parties should negotiate and sign a deal within the first 3 months of each
year regarding the purchase amount for the entire year. Otherwise Mengniu is
obliged to purchase all the raw milk produced by Modern Dairy.
Sale to a
third party
Mengniu allows Modern Dairy to sell 30% of daily output to a third party except the
top two competitors designated by Mengiu.
Pricing
mechanism
The base purchasing price is calculated via a formula in reference to Mengnius
purchasing prices for milk of similar quality produced by other medium to large
sized dairy farms. The base price will be raised accordingly if Mengnius
purchasing price for milk sourced from other dairy farms increases. Mengniu will
pay a premium if protein and fat contents of Modern Dairys raw milk are abovepar or if Modern Dairys farms are located within an agreed distance from
Mengnius dairy plants.
Source: company information, Guosen Securities (HK)
2.00
2.50
3.00
3.50
4.00
4.50
Mar/09
May/09
Jul/09
Sep/09
Nov/09
Jan/10
Mar/10
May/10
Jul/10
Sep/10
Nov/10
Jan/11
Mar/11
May/11
Jul/11
Sep/11
Nov/11
Jan/12
RMB/kg
Average raw milk price at major production areas (RMB/kg)
Average selling price of milk produced by Modern Dairy (RMB/kg)
Modern signed a 10-year supply deal
with Mengiu in 2008, which is expected
to create a win-win situation.
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GuosenSecurities(HK)BrokerageCo.,Ltd. 7
Exhibit 14: A vast majority of Modern Dairys sales are to Mengniu
Source: company information, Guosen Securities (HK)
We expect the win-win cooperation between Modern Dairy and Mengniu will be
sustainable. Under the agreement, Modern Dairys sales are largely guaranteed for the
remaining 6-7 years of the contract period. As Modern Dairys raw milk supplies to
Mengniu account for less than 10% of Mengnius total demand, Modern Dairys share in
the companys total raw milk purchase volume may rise as their cooperation deepens.
As for the issue of overdependence on Mengniu, we think Modern Dairy can easily find
other high-end milk purchasers if its cooperation with Mengniu ends, because
high-quality liquid milk is in short supply in China. Besides, Mengniu also plans to use up
to 30% of its milk output to produce self-branded high-end dairy products.
As the largest producer of dairy products in China, Mengniu also needs to co-operate
with large dairy farm operators to ensure ample supply of quality raw milk. Government
regulations stipulate that dairy companies must control 70% of the raw milk source
needed for production. As such, Mengniu, as a going concern, would not have incentives
to cancel the agreement with Modern Dairy. Rather, Mengniu is more dependent on
Modern Dairy for the supply of quality milk to produce high-end dairy products. In addition,
most of Modern Dairys farms are located no more than 100 km away from Mengnius
dairy factories, which we believe can facilitate milk transport and help quality control.
Under such a circumstance, we believe the cooperation between Modern Dairy and
Mengniu will last for a long period.
98.9%
99.6%
97.6% 97.5%
96%
97%
97%
98%
98%99%
99%
100%
100%
2008 2009 2010 2011
Sales to Mengniu as a share of Modern Dairys total sales revenue
Under the agreement wi th Mengniu,
Modern Dairys sales are largely
guaranteed for the remaining 6-7
years of the contract period.
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GuosenSecurities(HK)BrokerageCo.,Ltd. 10
4.3 Milk production is expected to keep growing for a decade
The increasing number of dairy cows wi ll drive up mil k production at Modern
Dairy in the next three years
The 10 to 15-month-old heifers Modern Dairy bought from New Zealand over 2010-11,coupled with the large number of calves bred at Modern Dairys own farms, are expected
to gradually enter their lactation phase around 2012 and 2013. We estimate Modern
Dairys dairy cow population will increase at a CAGR of 29% over FY2011-15 to 129,000
head of cows at the end of 2015. In our opinion, the share of dairy cow population as a
percentage of the companys total herd size will be on an uptrend and peak at around
69% in 2017, before it sides moderately and levels off.
Changes in herd composition wil l boost milk yield
Modern Dairys milk yield is limited, as a large proportion of cattle are too young for first
calving (AFC). However, these calves and heifers will become 3 to 5-year-old dairy cows
ready for lactation between 2112-2014. As more heifers become dairy cows and enter the
peak lactation cycle, we expect raw milk production will increase sharply in the following
three years.
Exhibit 19: The proportion of mature dairy cows wil l gradually
rise
Exhibit 20: The pace of growth in Modern Dairys milk outpu t
will exceed dairy cow population growth
Source: company information, Guosen Securities (HK)
22%
25%
31%
35%33%
36%33%
36%
47%
20%
25%
30%
35%
40%
45%
50%
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
Dairy cow at stage 3 and 4 in their lactation cycle as %
-20%
0%
20%
40%
60%
80%
100%
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
Growth rate of dairy cow population
Growth rate of milk output
We estimate Modern Dairys dairycow population will increase at a
CAGR of 29% over FY2011-15 to
129,000 head of cows at the end o f
2015.
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GuosenSecurities(HK)BrokerageCo.,Ltd. 11
Exhibit 21: The proportion of dairy cows in the companys overall herd size has
been on an uptrend s ince 2010
Source: Guosen Securities (HK)
4.4 Selective breeding will further improve milk yield per head in
the next 10 years
The growth in milk yield of dairy cows comes from the following two sources:
1) The proportion of dairy cows entering the peak lactation cycle (stage 3 and 4) will
rise, as mentioned above.
2) The 2nd and 3rd generation of highly-productive dairy cows bred at Modern Dairys
farms will enter lactation and gradually replace the 1st generation of cows.
We think the latter factor will be the primary force driving the increase in Modern Dairys
milk yield per head. Below are our two core assumptions:
1) Drawing on its advanced breeding technologies, Modern Dairy is able to select
high-quality frozen bull semen before conducting artificial insemination. As a result,
we believe calves bred at Modern Dairys farms will be more productive than the first
generation of dairy cows. We assume the growth in milk output will be boosted by
increase in the milk yield of the 2nd and 3rd-generation cattle, and the milk yield perhead for later generations will remain stable.
2) Modern Dairy has two farms with a large number of mature dairy cows. We expect
some of the 2nd-generation cattle there will gradually enter lactation in 2012. Based
on information provided by Modern Dairy, we assume that around 20,000 dairy cows
in the two farms will be 2nd-generation cows by the end of June in 2012, while the
rest of the dairy cows in the two farms as well as calves and heifers the company
plans to import from overseas are all 1st-generation dairy cattle.
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
50,000
100,000
150,000
200,000
250,000
300,000
2008
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
head
Dairy cow population (head, LHS)
Heifer population (head, LHS)
Share of dairy cows as % of total herd size (RHS)
The rise in proportion of dairy cows
entering the peak lactation cycle
and increase in the number of
highly-productive dairy cows will
drive the growth in milk yield.
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GuosenSecurities(HK)BrokerageCo.,Ltd. 12
Exhibit 22: Annual milk yield per dairy cow will keep growing
for a decade
Exhibit 23: Average annual mil k yi eld per dairy cow in China
was 4.88 tonnes in 2010
Source: company information, Guosen Securities (HK) Source: NBS, USDA, Guosen Securities (HK)
Exhibit 24: A comparison of milk yield of different generations of dairy cows at
different stages in the lactation cyc le
Source: Guosen Securities (HK)
Based on the aforementioned two assumptions and our analysis, the rise in the milk yield
of an average dairy cow at Modern Dairy before 2014 should be aided by the fact that
more cows enter their peak lactation period. We estimate the milk yield per dairy cow to
grow at a faster pace starting from 2015, as the 2nd and 3rd generation of cattle born at
Modern Dairys farms will enter the lactation cycle. We expect that Modern Dairys milk
yield per dairy cow will remain on an uptrend at least in the next 10 years, and the growth
of milk yield will speed up before 2017.
6.10
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7.738.15 8.37 8.46
8.638.90
9.269.63
10.01
5
6
7
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9
10
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2008
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
tonne
Annual milk yield per dairy cow (tonne)
-5%
0%
5%
10%
15%
20%
2.5
3.0
3.5
4.0
4.5
5.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
tonne
Annual milk yield per dairy cow in China (tonne, LHS)
Growth rate of annual milk yield per dairy cow in China (RHS)
0
2
4
6
8
10
12
1 2 3 4 5 6 7
tonne
Age
1st generation 2nd generation 3rd generation
We expect that Modern Dairys milk
yield per dairy cow will remain on an
uptrend at least in the next 10 years.
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Exhibit 25: Genetic improvement will push Modern Dairys milk output to grow at a
rapid pace for a long time
Source: Guosen Securities (HK)
Exhibit 26: Forecast of key data and revenue
As at the end o f Ju ne 2008.06 2009.06 2010.06 2011.06 2012.06 2013.06 2014.06
Survival rate of newborn calves / 89% 89% 89%
Birth rate / 90% 90% 90%
Age 0-1: Weaning period and puberty 19,655 50,098 55,774 49,853
Age 1-2: Age at first calving 41,654 32,088 42,358 49,639
Age 2-3: Stage 1 in the lactation cycle 25,000 29,366 30,162 39,817
Age 3-4: Stage 2 in the lactation cycle 11,267 23,000 27,017 27,749
Age 4-5: Stage 3 in the lactation cycle 10,000 9,915 20,240 23,775
Age 5-6: Stage 4 in the lactation cycle 0 7,800 7,734 15,787
Age 6-7: Stage 5 in the lactation cycle 0 0 6,084 6,032
Age7: Senescence phase 0 0 0 0
Herd size 24,358 43,959 72,191 107,576 152,267 189,369 212,652
Growth rate of herd size 80% 64% 49% 42% 24% 12%
No. of dairy cows 14,964 20,427 26,607 46,267 70,081 91,237 113,160
Growth rate of dairy cow population 0% 37% 30% 74% 51% 30% 24%
Share of dairy cows as % of total herd size 61% 46% 37% 43% 46% 48% 53%
No. of newly purchased heifers 28,000 27,000 27,000 15,000 0
Total milk production (tonne) 55,888 96,306 158,081 288,620 473,942 674,739 864,404
Growth rate of milk production 72.3% 64.1% 82.6% 64.2% 42.4% 28.1%
No. of dairy cows 17,696 23,517 36,437 58,174 80,659 102,199
Assumed milk yield per head (tonne) / 5.44 6.72 7.92 8.15 8.37 8.46
Actual milk yield per head (tonne) 6.10 6.90 7.30 7.73 / / /
Milk price (RMB/kg) 3.29 3.47 3.73 3.86 3.86 3.92 3.98
Sales revenue (RMB 000) 183,882 334,015 589,775 1,113,354 1,829,486 2,643,662 3,437,582
Revenue growth 82% 77% 89% 64% 45% 30%
Source: Guosen Securities (HK)
0 15,212 34,448 50,45679,427 126,681
200,379268,295 309,938
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
tonne
Growth in milk output due to genetic improvement (tonne)
Estimated milk output (tonne)
Milk output excluding the impact from genetic improvement (tonne)
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5 Improved feed formula and better costs
control
5.1 FeedcostsaccountforthemajorityofoverallcostsModern Dairys operating costs consist of feed costs, salary and other costs, which
include depreciation and insurance costs (its cows aged over 14 months are covered
against losses from disease, natural disasters and other incidents, as insurance
companies only insure cows aged above 12-15 months), etc. Feeds account for over
70% of the companys operating costs.
5.2 Optimising feed formula to reduce costs
In order to raise rearing efficiency, Modern Dairy sets different rearing standards and
uses different feeds based on the characteristics of specific herds. It also considers thefluctuation in the prices of feed ingredients to adjust feed formula to minimise costs.
For example, a cow normally consumes at least one tonne of clover in a year on a
Chinese farm. At Modern Dairy, the costs for producing 1 tonne of milk is RMB2,900 and
an average cow produces 7.73 tonnes of milk in a year. Given one tonne of clover
imported from the US costs RMB1,460 on average as in January 2012, clover costs
account for 6.5% of the overall costs. However, a new feed formula on track to be
adopted by Modern Dairy starting from 2012 is expected to enable the company to save
half of its clover costs.
5.3 More efficient use of human resources
As the herd size expands, economies of scale can be achieved in terms of human
resources. Its cow-to-employee ratio is 30:1 in 2010, and we expect the ratio to rise to
60:1 over 2014-15.
We think as the milk yield per dairy cow at Modern Dairy edges up and rearing costs are
under tight control, the costs of producing one tonne of milk at Modern Dairy are
expected to remain stable or to decline slightly.
Feeds account for more than 70% of
operating costs. Replacing
expensive feed ingredients wi th
cheaper alternatives wi ll help lower
costs.
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GuosenSecurities(HK)BrokerageCo.,Ltd. 15
Exhibit 27: Feeds account for 74% of total costs
(December 2011)
Exhibit 28: Cash cos ts per tonne of milk are expected to fall
Source: company information, Guosen Securities (HK)
Exhibit 29: The composition of feed for cow s at Modern Dairy
Feeds Main components Proportion
Concentrated feeds Corn, soybean flour and cottonseed meal 60%
Roughage Sweet corns, silage, guinea grass and clover 40%
Source: company information, Guosen Securities (HK)
6 Earnings forecasts & recommendation
6.1 Earnings forecasts
As Modern Dairy has bought many heifers to expand the herd size since its IPO in 2010,
many of these heifers are expected to enter stage 1 in their lactation cycle in FY2012,
and more dairy cows will enter their peak lactation period. As such, we estimate Modern
Dairy is likely to sell 473,942, 674,739 and 864,404 tonnes of liquid milk and gross
RMB1.83 billion, RMB2.64 billion and RMB3.44 billion in sales accordingly over
FY2012-14 respectively.
6.2 Valuation
Modern Dairys growing herd size and rising milk yield per cow will create economies of
scale. We expect the feed costs will be well controlled in 2H 2012, while the price of raw
milk will slightly rise. We forecast the companys core profits attributable to shareholders
(which factor out the impact from gains arising from changes in fair value less costs
associated with sale of dairy cows) to reach RMB345 million, RMB549 million and
RMB778 million respectively, equivalent to a CAGR of 70%. We forecast EPS to reach
RMB0.072, RMB0.114 and RMB0.162 respectively over FY2012-14, representing a
CAGR of 64%. At the current price level, the stock corresponds to a PE of 22.8x, 14.3x
and 10.1x for the following three years.
We think the next 5-10 years would be a golden era for Chinas dairy industry and
Modern Dairys high growth rate may be sustainable. We estimate its PEG to be 0.35x for
FY2012, based on its latest stock price and our assumption about its EPS growth for the
74%
7%
9%
7%3%
Feed costs
Other farm operating costs
Employee benefits
Depreciation
Other expenses
2,400
2,600
2,800
3,000
3,200
3,400
3,600
Jun/08
Oct/08
Feb/09
Jun/09
Oct/09
Feb/10
Jun/10
Oct/10
Feb/11
Jun/11
Oct/11
Feb/12
Jun/12
Oct/12
Feb/13
Jun/13
Oct/13
Feb/14
Jun/14
RMB
Cash costs per tonne of milk (RMB)
Modern Dairy is undergoing a rapid
expansion phase and we expect it s
growth to remain strong.
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GuosenSecurities(HK)BrokerageCo.,Ltd. 16
next three years. We initiate coverage and applied a target price of HK$2.80, which
corresponds to 38.9x PE for FY2012 and implies 39% upside potential.
6.3 Risk factors
A large-scale outbreak of ser ious diseases: Although Modern Dairy insures its cowsaged over 14 months against diseases, insurance compensation may not cover direct
losses in the event of an outbreak of diseases and will cause disruptions to operations.
Surging feed costs.Feed accounts for 74% of the production costs. Although Modern
Dairy grows some fodder on its own farms, it still needs to buy most of its feed from
suppliers and may struggle to control operating costs if feed costs surge.
Selective breeding measures may fall short of expectation. Modern Dairy breeds
calves through artificial insemination with high-quality frozen sperm imported from
abroad. If the process is disrupted, the breeding of calves will be negatively affected.
Contamination of dairy products: Many procedures at dairy farms face the risk of
contamination. Liquid milk becomes undrinkable once contaminated, which would tarnish
the companys brand reputation.
Exhibit 30: Income statement
RMB 000 2010A 2011A 2012E 2013E 2014E
Sales of milk produced 589,775 1,113,354 1,829,486 2,643,662 3,437,582
Other income 65,371 101,850 100,000 56,444 35,000
Farm operating expenses (437,616)) (730,307) (1,245,450) (1,731,087) (2,209,086)
Employee benefits expenses (66,695) (89,649) (111,767) (150,175) (162,381)
Depreciation (44,174) (67,304) (84,130) (105,163) (126,195)
Share of loss of associates 0 0 (966) 0 0
Net foreign exchange loss (1,174) (17,367) (4,967) 0 0
Other gains and losses 561 (1,197) (840) 0 0
Other expenses (29,474) (61,871) (47,567) (52,873) (58,439)
Profit before finance costs and tax 76,574 247,509 433,799 660,809 916,481
Finance costs (29,765) (59,141) (81,250) (100,500) (122,500)
Profit before tax 46,809 188,368 352,549 560,309 793,981
Income tax charge (73) (8) 0 0 0
Profit and total comprehensive income 46,736 188,360 352,549 560,309 793,981
Owners of the Company 23,130 173,460 345,498 549,103 778,101
Non-controlling interests 23,606 14,900 7,051 11,206 15,880
Note: The profit excludes the impact from the impact from gains arising from changes in fair value less costs associated with sale of
dairy cows.
Source: Guosen Securities (HK)
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Exhibit 31: Balance sheet
RMB 000 2008A 2009A 2010A 2011A
Property, plant and equipment 458,328 947,508 1,578,395 2,221,265
Land use rights 15,970 41,185 63,616 62,863
Goodwill -- 301,354 301,354 310,426
Long-term prepaid rentals -- 259 194 130
Deposit for acquisition of biological assets -- 37,381 13,028 1,094
Biological assets 446,153 936,816 1,742,891 2,651,407
Total of non-current assets 920,451 2,264,503 3,699,478 5,247,185
Current assets -- -- -- --
Inventories 8,527 83,138 139,407 212,719
Trade and other receivables 18,661 78,618 76,772 136,779
Land use rights 709 930 1,184 1,440
Pledged bank balances 48,696 36,350 287,119
Bank balances and cash 6,492 733,720 250,959 1,021,691
Total of current assets 34,389 945,102 504,672 1,659,748
Current liabilities -- -- -- --
Trade and other payables 106,182 188,306 351,050 482,811
Amount due to a related party 2,094 6,622 1,247 --
Interest payable 811 1,424 1,249 --
Borrowings-due within one year 166,000 251,595 384,647 303,797
Deferred income 9,942 -- 3,868 4,943
Total of current liabilities 285,029 447,947 742,061 791,551
Net current assets (250,640) 497,155 (237,389) 868,197
Total assets less current liabilities 669,811 2,761,658 3,462,089 6,115,382
Capital and reserves -- -- -- --
Share capital 202,180 272 272 413,075
Reserves 95,008 1,383,330 1,436,462 4,254,933
Equity attributable to owners of the Company 297,188 1,383,602 1,436,734 4,668,008Non-controlling interests 2,296 1,077,461 1,133,005 54,700
Total equity 299,484 2,461,063 2,569,739 4,722,708
Non-current liabilities -- -- -- --
Borrowings-due after one year 227,088 300,595 840,470 1,219,137
Deferred income 143,239 -- 51,880 100,000
Total of non-current liabilities 370,327 300,595 892,350 73,537
Non-current liabilities and total equity 669,811 2,761,658 3,462,089 1,392,674
Non-controlling interest 23,606 14,900 6,098 6,115,382
Source: Guosen Securities (HK)
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Information Disclosures
Stock ratings, sector ratings and related definitions
Stock Ratings:
Buy:A return potential of 10 % or more relative to overall market within 6 12 months.Neutral:A return potential ranging from -10% to 10% relative to overall market within 6 12 months.
Sell:A negative return of 10% or more relative to overall market within 6 12 months.
Sector Ratings:
Buy: The sector will outperform the overall market by 10% or higher within 6 12 months.
Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 12 months.
Sell: The sector will underperform the overall market by 10% or lower within 6 12 months.
Interest disclosure statement
The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as anofficer of the listed companies covered in this report and has no financial interests in the companies.
Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively Guosen Securities (HK)) has no disclosable
financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities
(HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no
individual employed by the listed companies.
Disclaimers
The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit
made as a result of buying and selling securities.
The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or
dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or
other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed
companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed companies.
This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or completeness
of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular investment
objectives, financial situation or needs of individual clients and does not constitute a personal investment recommendation to anyone.
Clients are wholly responsible for any investment decision based on this report. Clients are advised to consider whether any advice or
recommendation contained in this report is suitable for their particular circumstances. This report is not intended to be an offer to buy or
sell or a solicitation of an offer to buy or sell the securities mentioned.
This report (including any information attached) is issued by Guosen Securities (HK) Brokerage Co., Ltd, a member of Guosen Securities
Co., Ltd. Some parts of the report may have been originally published in Chinese, within the Peoples Republic of China, by Guosen
Securities Co., Ltd. That material has been reviewed, translated and, where applicable, adapted by Guosen Securities (HK) Brokerage
Co., Ltd. This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)s written authorization,
any form of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information and
opinions contained therein are subject to change and may be amended without any notification.
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