2Q20 NP +72% YoY, strongly beat expectation on better GPM and selling expenses ratio. FY20E adj. NP growth is on track to meet share award scheme requirement. We raised FY20-22E NP by 7-13% and lifted TP from RMB33.10 to RMB45.90, based on 32x FY21E P/E (vs 28x avg. FY20E and 21E EPS previously), which is the avg. of mid-point (28x) and peak (32x) 1-yr forward P/E range since A-share was announced to be included in MSCI Emerging Markets Index on 21 Jun 2017. FY19-22E EPS CAGR is improved from 10% to 13%. We expect Yili would continue to benefit from industry consolidation. Maintain Buy.
- 2Q20 results strongly beat on better margins. 1H20 NP fell 1% to RMB3,781mn (equivalent to 60% of our FY20E NP est. vs 54-56% in 1H17-1H19). 2Q20 NP jumped 72%. Revenue rose 22% led by liquid milk (+17%) and milk powder (+86%). By key products, Satine rose 25% (vs Milk Deluxe 30%+) and Pro-Kido rose 40%. Ambrosial rose 10% in 2Q20 but still fell 5% in 1H20 as consumption pattern shifted from yogurt to milk. 2Q20 GPM widened 1.6ppt to 38.7% on reduced promotions and better product mix. NP jumped 72% on operating leverage and GPM expansion.
- Grabbed more market share. According to Nielsen data, retail sales of ambient liquid milk and chilled liquid milk decreased by 5.1% and 7.8%, respectively, while retail sales of IMF increased by 4.9% in 1H20. Organic liquid milk, chilled fresh milk and UHT milk outperformed the market by growing 12.6%, 12.3% and 7.5%, respectively, in terms of retail sales. During the period, Yili’s market share of ambient products/chilled products increased by 3.2/0.3ppt to 38.8%/15.3%, but market share of IMF fell 0.2ppt to 5.8%.
- 2H20E outlook. Yili maintained its 2020 target of RMB97bn total revenue (+8% YoY). 1H20 adj. NP growth was 14.6% (on share award scheme benchmark), on track to meet 10% growth target in FY20E. Though raw milk cost is expected to increase in 2H20E, Yili expects this trend would limit industry’s promotion activities in 2H. For selling expenses ratio, Yili expects a slight YoY decline trend on precise spending.
- New businesses development. (1) Chilled fresh milk: Current market size is >RMB10bn. Yili recorded around RMB300mn sales in 1H20. Sector growth depends on ongoing consumer education and cold chain development. Management expects ambient milk remains the key growth driver. (2) Cheese: Market size of B2C is around RMB3bn and B2B’s size could be 2-3x of B2C. Yili recorded >RMB200m sales in 1H20 (vs MN’s RMB457mn).
- Maintain Buy. We lifted FY20/21/22E NP by 13%/7%/9% to mainly factor in lower selling expenses ratio. Catalysts: better-than-expected revenue and margins. Risks: Raw milk cost pressure, food safety issues.
