FY20 adj. NP soared 48% to RMB6,045mn, 7%/3% above consensus/our estimates due to higher GPM and lower SG&A expense ratio. Feihe further extended its lead in China’s IMF market with market share rising from 12.3% in 2019 to 15.6% in 2020. It will accelerate development of functional kids and adult milk powder and upgrade its super-premium portfolio. The further product segmentation and premiumization should help Feihe to achieve its revenue target of RMB35bn in 2023E. Furthermore, the new food national standards (become effective in Feb 2023) would raise the requirements of infant foods, which should accelerate sector consolidation. Our TP was lifted from HK$24.00 to HK$27.10.
- Set long-term growth targets. Feihe targets to grow its revenue to RMB35bn in 2023E (23% CAGR in FY20-23E) and achieve revenue CAGR of 15% from 2024E to 2028E based on China’s IMF market and future pipeline products. Amid China’s declining number of newborns, Feihe will accelerate its development in functional kids (Stage 4 milk powder) and adult milk powder and continue to gain market share to keep its revenue growth.
- Stage 4 milk powder a sensible move. Its Stage 3 milk powder, which accounted for 53% of its IMF sales, is the largest IMF category. Stage 4 milk powder could extend IMF product life-cycle. Also, China’s number of new borns peaked in 2016, and 2017 brings opportunity for Stage 4 milk powder. Management said that market size of Stage 4 milk powder was RMB13bn and it is estimated to grow by >40% this year. Through in-depth cooperation with maternity and baby stores (MBS), Feihe could educate parents about the advantages of Stage 4 milk powder.
- Launch premium adult milk powder in 2H21. Feihe will launch two new products (produced domestically and made in Canada) in 2H21 to capture opportunities from aging population. Management said that market size of adult milk was RMB20bn and it is expected to grow at 10% YoY.
- New product pipeline. Apart from kids and adult milk products, Feihe will launch a super-premium plus Astrobaby Platinum in Aug 2021. Also, it will upgrade the formula of Zhenzhi Organic in 1H21 and launch a super-premium goat milk IMF in Jan 2022 (Figure 2).
- Maintain Buy. We lift FY21/22E adj. NP by 2% to factor in better GPM and SG&A expenses ratio. Our TP was lifted from HK$24.00 to HK$27.10, which is based on 26.1x FY21E P/E, at 50% premium (vs 40% before) on Chinese IMF peers’ average of 17.4x P/E in FY21E. Feihe will develop kids and adult milk powder to accelerate its growth. We think Feihe deserves a higher valuation premium over peers because of stronger revenue growth (26% CAGR in FY20-22E vs peers’ 9%). Key risks: (1) weaker-than-expected sales; (2) slump of China’s newborns; (3) keen competition and (4) food safety issues.
