MN reported 42% NP decline to RMB1,212mn in 1H20, beating its profit alert range of 45-60% decline on strong Jun sales and CMD results. Mgmt. maintained its 2H20E guidance of not less than low-teens revenue and 0.3-0.5ppt OPM expansion. 3Q20-to-date revenue growth was on track. Maintain Buy because growth momentum resumed to pre-epidemic period, evidenced by strong recovery in 2Q20. 3Q20-to-date revenue growth was on track.Our TP is lifted from HK$37.90 to HK$42.00, representing 28.0x FY21E P/E (vs 28.0x sum of 2HFY20E and 1HFY21E EPS previously).
- Strong recovery seen in 2Q20. Revenue fell 6% to RMB37,534mn in 1H20. If excluding Junlebao’s disposal and Bellamy’s acquisition in 2H19, organic revenue increased by 9% to RMB36,888mn in 1H20. In 1Q20, organic revenue growth was flat and MN recorded net loss of RMB127mn because of donation, extra expenses for marketing and epidemic-related. The business strongly recovered in 2Q20 with 19% organic revenue growth (channel restocking and more milk consumption to improve immunity) and 86% surge of NP on operating leverage (Figure 1).
- Focus on high-end products to improve margins. (1) Milk Deluxe: It achieved 19% growth in 1H20. It launched an upgraded version of 3.8g protein in May. Brand sales growth accelerated to 30%+ in 2Q20. High-margin “DreamCap” sales mix increased to 25% from high-teens in FY19. (2) Chilled fresh milk: Sales up 98% in 1H20 though Wuhan market was hit by COVID-19. High-margin “Shiny Meadow” sales mix rose 10ppt to 35%. (3) IMF: Yashili optimized its product portfolio in 1Q20 and focused on Reeborne new products. 2Q20 revenue +25% (vs -6% in 1H) with NPM improvement. Management targets 20-25% growth in 2H20E. Bellamy’s launched super high-end organic cow and goat milk IMF in Australia in 2Q20 and launched Chinese version organic IMF this month. (4) Profitability of ice-cream and cheese increased significantly YoY in 1H20 due to improved product mix and products upgrade.
- Control selling expenses ratio. The Company will adopt build RTM strength (promote Smart Network system to distributors and channel penetration into town and villages), digitalization (facilitate precise communication with consumers) and consumer-centric full chain cost savings (product innovation and design led by consumer insights, cross-BU cost-cutting project team) to improve efficiency.
Maintain Buy. We fine tuned our FY20/21/22E NP estimates by +2%/1%/1% as we raised FY20/21/22E revenue estimates by 3%/2%/2%. Catalysts: better-than-expected revenue and margins; Risks: slower-than-expected recovery and food safety issues.
