Event overview:
We updated our investment views on Yili and Mengniu in combination with the recent industry tracking.
Analysis and judgment:
The demand for dairy products fluctuates in the short term and is generally stable
We track the output of the National Bureau of statistics and Nielsen retail data to judge the short-term prosperity of the dairy industry. In October and November 2021, the output of dairy industry was + 8.3% and + 7.5% year-on-year respectively, and the year-on-year growth rate of Q3 was + 0.3% ~ + 1.9%. The output growth rate in the fourth quarter was higher than that of Q3. This is similar to the rhythm of enterprise delivery. We judge that the growth rate of Q4 liquid milk delivery of Yili and Mengniu is higher than that of Q3, so as to make up for the low inventory caused by repeated natural disasters and epidemic situations in some areas of Q3. The growth rate of terminal retail sales monitored by Nielsen was weaker in October and November than that in the early stage. We judge that the demand side of Q4 is still disturbed by repeated epidemic factors, and the inventory of Q4 channel may be slightly higher than that of Q3. The peak season of the Spring Festival is coming. The early date of the Gregorian calendar of the Spring Festival this year is more favorable for the Q4 report end. In terms of dynamic sales, we need to pay attention to the epidemic situation, and it is expected to be stable year-on-year. From the perspective of one-year dimension, we believe that the improvement trend of dairy consumption remains unchanged, and the improvement of average product price and market share will still ensure the steady growth of Yili and Mengniu’s income.
In 2022, focus on the improvement of profit margin of the two top dairy companies
Whether the profit margin improvement logic of head dairy enterprises in 2022 will be fulfilled is the main concern of the market. We believe that the certainty is high. The reasons are as follows:
1) in 2022, the pressure of expected cost rise will be reduced, and the product structure will be better, which will benefit the gross profit end. According to the monitoring of the Ministry of agriculture, the average price of raw and fresh milk in the main producing areas in China remained at a high level of 4.2-4.4 yuan / kg in 2021, and the year-on-year increase had narrowed to + 2.4% by the end of the year. Hebei, Heilongjiang and other major dairy producing areas have released the reference prices of raw and fresh milk transactions in the first quarter of 2022, with a year-on-year increase of + 2.5% and + 1.3% respectively. We expect the year-on-year increase of raw milk prices in 2022 to be narrower than that in 2021; The price of packaging materials also rises in 2021 and is expected to fall in 2022; It is expected that the pressure of overall cost rise will be reduced. We observed that under the pressure of high cost in 2021, the head dairy enterprises accelerated product upgrading. For example, Yili Zhennong quickly achieved a volume of several billion yuan from its launch in 2020 to 2021, taking advantage of the strong demand for white milk to quickly promote product upgrading; During the year, there were many new concepts such as high protein content, organic and 0 sucrose; We expect that the upgraded product structure in 2022 will have a stronger ability to absorb the pressure on the cost side.
2) in 2022, the strategic demands of the two top dairy companies are consistent, which is good for the cost side. According to Nielsen data, Yili and Mengniu have a market share of 60% in the liquid milk market. In 2021, Yili proposed to increase the annual net interest rate by + 0.5pct in the next 3-5 years, and it is expected to stably reach the target of 9-10% by 2025; As early as 2019, Mengniu has begun to seek to improve its profit margin year by year. We expect the company’s revenue to maintain steady growth and profit margin to continue to improve in 2022. The reason behind this is that after the competition between the two companies in 2018-2019, the strategic level has changed, paying more attention to the efficiency matching between competition and scale, and the growth depends more on the power of other extension or new business. Considering that the company conveys the expectation of profit margin improvement, on the one hand, the contribution of gross profit margin is expected to be controlled, on the other hand, the sales expense is expected to be controlled. In particular, Mengniu’s issuance of HKD convertible bonds of no more than 4 billion yuan as employee equity incentive will increase financial and management expenses, and it is more necessary to control the sales expense. Therefore, in 2022, under the background of reducing the pressure on the cost side, the room for profit margin improvement also comes from the contraction of sales expenses. According to Kaidu data, Yili and Mengniu reached 1 billion brand consumers + and penetration rate was 90% + in 2020. We expect that there is room for contraction in brand related expenses. Under the two strong competition game of dairy industry, the expected cost strategy converges.
3) growth business assistance. Yili milk powder has made a series of adjustments since 2019, such as upgrading product formula, strengthening investment in mother and baby channels and paying attention to brand construction. In 2021, the harvest increased against the trend, and 3q21 revenue increased by + 48.2% year-on-year. We expect Q4 to maintain a rapid growth trend; In addition, Yili’s acquisition of Aoyou also reflects Yili’s determination to win the first place in the future in the field of milk powder. Nielsen data show that the market share of Yili cheese will increase rapidly in 2021. Mengniu fresh milk nearly doubled from January to September 2021; Bellamy organic milk powder is expected to recover in the second half of the year; Shanghai Milkground Food Tech Co.Ltd(600882) continue to strengthen the first position in the cheese industry in 2021. We believe that supplementing the short board business and developing the growth business are the main starting points for the top two dairy companies to realize the revenue doubling plan in the next five years.
Investment suggestions:
In combination with the recent industry and company tracking situation, and considering the adverse impact of local epidemic and flood on shipment in the second half of 2021, we adjusted Mengniu’s profit forecast. It is estimated that the revenue in 2021-23 will be RMB 87.8/98.7/109.5 billion, the net profit attributable to the parent company will be RMB 5.2/61/73 billion, and eps1.5 billion 31 / 1.55/1.86 yuan. Previously, the revenue was 911 / 1024 / 113.7 billion yuan and the net profit was 53 / 64.8/7.71 billion yuan in 2021-23. Maintain Inner Mongolia Yili Industrial Group Co.Ltd(600887) profit forecast. Combined with the industry tracking analysis, we believe that the income growth of the top two dairy companies in 2022 is highly deterministic, and the improvement of profit margin focused by the market is also expected to be fulfilled. In 2022, compared with other food sectors, the dairy industry has stable income growth, flexible profits and high certainty of performance growth. On January 11, 2022, the P / E corresponding to the share prices of Yili and Mengniu is still lower than the central level in the past three years, with cost performance and maintaining the industry recommended rating.
Risk tips
The spread of the epidemic leads to lower demand than expected, short-term cost investment fluctuations interfere with expectations, food safety incidents, etc
