Business Summary:

China Mengniu Dairy manufacture and distribute quality dairy products in China. It is one of the leading dairy product manufacturers in China, with MENGNIU as its core brand. Mengniu offers diverse products including liquid milk products, ice cream, milk formula and cheese.

In 2019, Mengniu made it again on the “Global Dairy Top 10” list published by Rabobank for the third consecutive year. Mengniu made it among Brand Finance’s list of the top 500 most valuable brands of the world. By the end of June 2019, the Group’s annual production capacity reached 10.27 million tons.  In March 2014, Mengniu became a Hang Seng Index constituent, making it the first blue chip Chinese dairy product manufacturer.

Business Summary and Prospect:

For the six months ended 30 June 2019, revenue rose 15.6% from  RMB34,474.3 million to RMB39,857.2 million, when compared with the same period last year. The revenues of liquid milk and milk formula businesses recorded an increase of 14.4%, and 43.8% respectively; offsetted by a decrease of 2.4% from ice-cream revenues.

Despite the raw milk price increases, profit attributable to owners of the company rose 33.0% year-on-year to RMB2,076.9 million (2018: RMB1,562.0 million). Net cash flows from operating activities decreased 22.4% from  RMB3,400 million to RMB2,640 million. Basic earnings per share increased by 32.8% to RMB 53.1 cents. Gross profit margin slightly narrowed by 0.1 % to 39.1%.  No interim dividend was issued.

Risk:

(a) the outbreak of coronavirus may have affected the sales of  dairy product.

(b) sales may be affected by news about dairy food safety issues

(c) gross profit margin may be affected by raw material price volatility

(d) Mengniu ranks the highest P/E ratio of 33 among major food diary company, just next to Yashili (01230.HK) of ratio: 50. Besides, Mengniu ranks the third highest P/B (ratio: 4); just behind other competitors of H&H Intl Hldg (01112.HK) and Ausnutria (01117.HK)

(e) higher-than-expected cost for material sourcing, production cost & network expansion may occur.

Technical Analysis:

The stock prices hit historic high of $34.6 on 28 August, 2019. The price has dropped by 20% to recent-low of $27.55.  It is suggested to buying at the price around $29.0. The target price for medium term is $32. Cut-loss price will be $27.0.

References

www.hkex.com.hk

www.etnet.com.hk

www.afe-solutions.com

I, Gary Tam, am a licensed person under the Securities and Futures Commission. Until the date this commentary was published, neither I and/or my affiliates are the beneficiary of the securities mentioned herein or are entitled to any financial interests in relation thereto.