MN reported 14% drop of NP to RMB3,525mn in FY20, 6%/9% above consensus/our est. due to comparable business OPM beat in 2H20 and profit of associate companies. MN targets to achieve 12%+ revenue growth and 0.5ppt+ OPM improvement in FY21E vs. its comparable business in FY19. MN proposed an incentive scheme to incentivize key employees to achieve its Five-year Plan, which sets revenue to grow at 15% CAGR in FY20-25E. Our TP was lifted from HK$42.00 to HK$50.10.
- GPM expanded in 2H20 despite rising raw milk price. Excluding Junlebao and Bellamy’s, comparable business’ revenue rose 12% YoY in 2H20, in-line with guidance. OPM improved 0.6ppt to 5.4%, beating guidance of 0.3-0.5ppt improvement. GPM widened 0.2ppt to 36.2% in 2H20 led by reducing discount and product mix improvement (vs Yili -1.3ppt in 3Q20). Revenue of high-margin Milk Deluxe and chilled fresh milk rose 19% and doubled respectively in FY20.
- FY21E guidance. MN targets to achieve higher than 12% revenue growth and not less than 0.5ppt OPM expansion versus 5.5% OPM of comparable business in FY19. Amid rising raw material prices, OPM expansion would mainly come from decline of selling expenses ratio. To keep a stable GPM in FY21E, MN had raised prices of certain room temperature products and chilled yogurt. It would further enhance product mix and reduce discount. According to our channel in Hunan KA channel, retail price of Milk Deluxe (250mL*12) has been RMB58.8 in Mar (higher than RMB49.9 during period most of 2H20). Further product price hikes could be considered if raw milk cost pressure aggravates.
- Five-year Plan. MN laid down a five-year plan called “Creating a new Mengniu by 2025” to serve 2bn target customers. Management targets to double its revenue and net profit in five years which implies a 15% CAGR of revenue (same as growth rate in FY18 and FY19). The growth would be driven by accelerating growth of new businesses (each of chilled fresh milk, milk powder and cheese reach RMB10bn), continuing market share gain of room temperature products and developing Southeast Asia market.
- Incentive scheme. MN announced an incentive share for selective employees to subscribe certain financial products, whose return is derived from performance of a proposed CB (5-year RMB4bn CB, 3.5% of issued shares when converted) and share price performance. The scheme would cover >400 senior management. The scheme would incentivize these employees to achieve 2025 strategic target.
Maintain Buy. We raised FY22E adj. NP est. by 2% to factor in higher revenue assumptions. We lifted our TP from HK$42.00 to HK$50.10, based on 28x average FY21E and FY22E adj. EPS. Catalysts: better-than-expected revenue and margins; Risks: cost pressure, keen competition and food safety issues.
