1HFY21 NP/revenue +21%/+11%, both are 2% above consensus. 2QFY21 revenue growth was unexpectedly better than 1QFY21 partly thanks to good reception of new products, showing emerging channels could help the launch of new products. Management expects 2HFY21E GPM would not be lower than 1HFY21 as milk powder price softened. This should ease market concern on 2HFY21E GPM outlook. The stock trades at 14.6x FY21E P/E (at low-end of 13-24x P/E range beginning from FY16). Its 1.5x FY22E PEG is lower than Dali’s 2.0x PEG. We think its valuation is undemanding. Maintain BUY.
- Revenue +11%, 2% above consensus/our est. 2QFY21 revenue growth was surprisingly better than 1QFY21, despite channel restocking in Apr & May. Management attributed good 2QFY21 to three reasons: (1) good reception of new products like lactobacillus beverage, beans and QQ candies; (2) canned milk sales improved led by recovery of food service channel; and (3) family-size snacks were well received by consumers post epidemic.
- GPM to stabilize in 2HFY21E. GPM fell 0.7ppt to 48.2% in 1HFY21 on rising milk powder and sugar prices. Given the retreat of milk powder and sugar prices and increasing sales mix from emerging channels (where mainly sells high-margin new products), management expects 2HFY21E GPM would be not less than that in 1HFY21.
- Emerging channels to learn consumer behaviour. These channels saw rapid sales growth in 1HFY21 and contributed mid-to-high single-digit sales mix. The B2C nature can help the Company better understand consumer behavior and improve accuracy ratio of launching new products (positive result was seen in 1HFY21). Though profit margin of emerging channels now is lower than traditional channel, we think emerging channels could accelerate revenue growth and improve GPM in long term by successfully growing high-margin new products.
- Lift FY21-23E NP by 1-2%. Our earnings revision is mainly due to better-than-expected sales. Looking into 2HFY21E, we forecast revenue to increase by 11% and NP to grow by 10%. NPM will slightly drop by 0.2ppt because the 1.3ppt increase of SG&A expenses ratio (certain A&P spending is delayed from 1HFY21 to 2HFY21E) is more than offset the 0.9ppt expansion of GPM to 48.2%.
- Maintain Buy but trimmed TP to HK$7.36. Our TP was lowered from HK$7.80 to HK$7.36, based on 19.0x FY21E P/E (vs 21.2x previously). The stock has de-rated since its removal from HSI constituent stock was announced on 14 Aug. Catalysts: (1) better-than-expected revenue/margins; (2) share purchase by company or major shareholders. Risks: (1) keen competition; (2) food safety issues; (3) unfavorable raw materials prices.
