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China Dairy Sector:Dairy sector profitability still lacklustre

类型:行业研究  机构:大和证券(香港)有限公司   研究员:Anson Chan  日期:2015-11-03
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Quarterly resultsshowed operating marginsfor downstream players remain under pressure

    Rawmilk costsslowly picking up, while feed costs startingto decline; shouldbenefit upstream players more than downstream

    China Modern Dairy (1117 HK) remains our top pick in 4Q15

    What’s new:Both Yili Industry (600887 CH, not rated) (the No.2 player in China’sdairy industry by volume in 2014) and Bright Dairy (600597CH, not rated)(No.3) announced3Q15 results last week. Both reported substantial net profit declineson arecurring basis(ex the impact of an acquisition forBright Dairy) on operating margin pressure. We believe Mengniu (2319 HK, HKD15.06, Hold[3]) is also at risk of increasing sales expense tomaintain its market share, in particular in the high-end segment.A such, we forecastMengniu’s net profit growth to deceleratesubstantially from 28% YoY for1H15 to 3% YoY for2H15E on increasing selling expenses and the pick-up in raw milk costs.

    What’s the impact: Yili reported a 22% YoY decline in net profit for3Q15 (ex-interest income) on a substantial risein selling expenses (+53% YoY). We believe Yili continued to gain market share (2.2pp YoY gain in UHT milk for1H15)after stepping up its advertising,withits revenue rising by8% YoY for3Q15,faster than industry average growth of 4% YoY, per CEIC data. Based on our latest channel checksand discussionswith Modern Dairy’smanagement, the retail price of UHT milk stabilised in Octoberafter the downtrendin 1Q-3Q15. During our recent supermarket visits, we noticed fewer promotionsand free-gift packsonpremium milk products produced byMengniu, Yili and Modern Dairy(1117 HK, HKD2.34,Buy [1]).However, we believe these fewerfree gift promotions was due to a seasonal pick-upinmilk demandamid a slight decline in raw milk supply in ChinaYTD. To gain market share, thedownstream players will likely continue to relyon brand building as well asdirect price reductions.

    We also notethat corn pricesfell by9-14% in various provinces in China in October (after the beginning of the harvestingseason), implying easing cost pressure for dairy farm operators going forward.

    What we recommend: Due to: 1)intensified competition in the downstream dairy industry in China with consumer demand shifting tohigh-end products, and 2) lower feed costs amid stabilised raw milk prices, we prefer verticallyintegrated players like Modern Dairy to downstream player Mengniu.

    How we differ: Our 2016-17E EPS for Modern Dairyare 1-20% above Bloomberg consensus givenour more optimistic feed cost expectations.

    For details of recent feed cost trendsand Modern Dairy’s 3Q updates, please see:“Lower corn cost to benefit dairy farms”on 14 Sep (click here),and “3Q15 conference call takeaways”on 2 Nov 2015click here).

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