Expanding Into Southeast Asia With Aice Will Strengthen Dairy Operations

Key Takeaways

• Digitization and fine management aim to optimize dairy supply-demand, boosting operational efficiency and future net margins.
  
• Expansion into Southeast Asia and product innovation could drive revenue growth through capturing higher-value segments.
  
• Intense competition and decreased operating cash flow could hinder market share growth and reduce the company's future revenue and earnings potential.

Catalysts

An investment holding company, engages in the manufacture and distribution of dairy products under the MENGNIU brand in the People’s Republic of China and internationally.

• The company aims to optimize the supply-demand imbalance within the dairy industry through digitization and fine management, potentially increasing operational efficiency and future net margins.
  
• Expanding into high-growth overseas markets, particularly in Southeast Asia, with strong performance of brands like Aice, could drive revenue growth.
  
• Focus on upgrading and innovating its product offerings, including high-end and functional dairy products, which could enhance revenue through capturing higher-value segments.
  
• Continued commitment to dividends and a share buyback program is aimed at enhancing shareholder returns, which could improve earnings per share (EPS).
  
• Efforts to control capital expenditures and enhance free cash flow are intended to improve financial stability, thereby supporting long-term earnings growth.

China Mengniu Dairy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming China Mengniu Dairy's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 6.5% in 3 years time.
• Analysts expect earnings to reach CN¥6.3 billion (and earnings per share of CN¥1.61) by about April 2028, up from CN¥104.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥6.9 billion in earnings, and the most bearish expecting CN¥5.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, down from 696.8x today. This future PE is greater than the current PE for the HK Food industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

China Mengniu Dairy Future Earnings Per Share Growth

Risks

• The company's revenue declined by 12.6% in the first half of 2024 due to weak consumer confidence and overall demand, which could negatively impact future revenue growth.
  
• The price decline of raw milk and inventory losses have led to increased discounting, resulting in a 19% drop in net profit, which could pressure future earnings.
  
• The company has faced challenges with oversupply and lower-than-expected demand, which may continue to affect net margins.
  
• Operating cash flow decreased by 44% compared to the previous year, impacting the company's ability to generate free cash flow and potentially affecting dividend payouts and shareholder returns.
  
• The company faces intense competition in various segments and markets, which may limit its market share growth and hinder revenue expansion.

Valuation

• The analysts have a consensus price target of HK$22.617 for China Mengniu Dairy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$28.37, and the most bearish reporting a price target of just HK$15.65.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥96.8 billion, earnings will come to CN¥6.3 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.5%.
• Given the current share price of HK$19.76, the analyst price target of HK$22.62 is 12.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.