Bright Dairy Alert:2016result in line;cost control and declining raw milk drive earnings

2016: expanding gross margin drives earnings growth

    Bright reported 2016 result with 4.3% sales growth to Rmb20.2bn and 35%earnings growth to Rmb563mn. The sales and net profit were 2% and 1%higher than our expectation. Recurring net profit increased 37% yoy toRmb590mn in 2016.

    By category, its sales are mainly contributed by 18% growth in dairy farmingsegment on expanding scale and 45% growth from oversea segment, whichare mainly due to increasing IMF sales from its New Zealand subsidiarySynlait. Yet as we had forecast, domestic branded milk business only recordedflattish growth, due to increasing competition in UHT yoghurt.On margin, its gross margin expands 2.5ppt yoy on lower raw milk price andlower high-priced milk powder inventory in 2016. Thanks to newmanagement’s strong cost control, its SG&A/sales ratio is stable at 31.6%. Thenet margin expanded 0.6ppt to 2.8%, which is the main driver for 35%earnings growth.

    4Q16: Sales growth speeds up; but raw material turns into headwinds

    Bright reported 11% sales growth but 18% earnings decline to Rmb138mn,which is 4% higher than our forecast at Rmb133mn. The sales growth isimproving compared to 6% yoy in 3Q16 and flattish in 1H16, likely onrecovering on less competitive market. Yet the net profit decline on 5.3pptssqueezed in gross margin, which is possible due to rising raw material price.Targeting 6.4% sales growth and 6.6% earnings growth in 2017The company guided a 6.4% sales growth to Rmb21.5bn and 6.6% yoy netprofit growth to Rmb600mn. It expects Rmb979mn Capex for 2017. Themanagement expects the key sales drivers to be increasing channelpenetration and branding spending. It aims to improve operating efficiency byinternal company restructuring.

    Maintaining Hold

    We revise up our 2017-18E earnings by 1%-3%, and forecast 6% sales CAGRand 9.7% earnings CAGR in 2016-19E. We raised our target price by 3% toRmb14.0 based on a DCF model, factoring in 9.5% WACC (3.9% RFR, a 5.6%equity premium, a 1.0 beta) and 2% TG. We are maintaining our Hold rating,given that the stock is trading at 25x 2017E P/E, compared to the peers’average of 20x, and there is limited upside. Upside risk: successful newproduct launches. Downside risk: increasing competition.