FY19 NP +8% to RMB6,934mn, in line with our estimates and consensus. 1Q20 NP was down 50% due to COVID-19 impact. That said, management said sales recovered 90% currently and expects a full recovery by Jun 2020. We cut our FY20/21E net profit estimates by 17%/5% mainly to reflect lower revenue and GPM. Our TP is revised from RMB34.04 to RMB33.10, based on 28.0x average FY20E and FY21E EPS. We expect Yili would benefit from industry consolidation, reflected by market share gain in 1Q20. Maintain Buy.
- FY19 results in line. Revenue rose 14%, in line, led by liquid milk (+12%) and milk powder (+25%). Key products like Satine and Ambrosial grew by 17-18%, behind MN’s Milk Deluxe and Just Yoghurt’s 20%+ growth. Market share of UHT milk and IMF rose 1.4ppt and 0.4ppt to 37.7% and 6.0%, respectively, in 2019. GPM fell 0.5ppt to 37.3%, slight below our expectation of 37.8%, led by 6.7ppt reduction in GPM of milk powder segment mainly due to margin dilution from the acquisition of Westland Co-operative Dairy. SG&A expenses ratio dropped 0.6ppt to 28.2%, led by 1.6ppt reduction in A&P expenses.
- 1Q20 hit by COVID-19. Revenue dropped 11% led by 19% decline of liquid milk sales as sales affected by COVID-19. Market share of UHT milk and chilled milk up 1.1ppt and 0.3ppt YoY. GPM squeezed by 2.4ppt to 37.5% on more promotion to destock old inventories. SG&A expenses ratio increased 1.6ppt due to operating deleverage. Yili reported RMB67mn net finance cost (vs RMB105 net income) as total borrowing increased from RMB6.8bn in Dec 2019 to RMB12bn in Mar 2020. NP fell 50% to RMB1,143mn.
- FY20E guidance. Yili sets its total revenue and PBT target at RMB97bn and RMB6.1bn in FY20E, representing 7.5% YoY growth and 26% YoY decrease, respectively. This implies 14% YoY growth/13% YoY decline for total revenue/PBT, respectively, during 2-4Q20. That said, excluding government grant and share award expenses, management expects adj. NP to resume growth in 2-4Q20. Going forward, while Yili still focuses on domestic dairy business, it will develop Southeast Asia market and develop healthy drinks business.
- Maintain Buy. Our new TP of RMB33.10 is based on 28.0x average FY20E and FY21E EPS. Our target P/E multiple is unchanged as we expect Yili to resume double-digit revenue growth beginning 2H20E. Catalysts: better-than-expected revenue and margins. Risks: recovery slower-than-expected, raw milk cost pressure, food safety issues.
