Yili :Top 5questions from investors during Europe NDR
A quality growth stock
Sales growth remains good in near-term Yili attended Deutsche Bank’s global consumer conference in Paris and also visited investors in the UK last week. We summarize investors’ top 5 questions on page 2. Investors generally agreed on the good growth potential for China’s dairy sector and were impressed by Yili’s strong execution capability. We think Yili is a good proxy for investing in China’s consumption trade-up trend in nutritional products. We reiterate our Buy rating.
Sales growth remains good in near-term
Management expects sales growth in 2Q17 to improve vs. 1Q17 (it was 3% yoy in 1Q17), helped by stabilizing competition and a lower base (it disposed of Youran farm in April 2016). Meanwhile, major raw material costs, i.e. packaging and sugar, are also stabilizing in 2Q17 vs 1Q17, albeit partly offset by less use of low-cost raw material inventory. We forecast gross margin to be stable vs. 1Q17. For the full year, management maintains its guidance at 7% sales growth and 6.5% PBT decline (on lower government subsidy income).
Multiple drivers to achieve Rmb100bn sales in long-term
In the long term, management maintains its target of achieving Rmb100bn sales and becoming a global top five dairy company. Firstly, it expects to achieve higher-than-peers growth in basic dairy products. Secondly, the major driver will come from plant-based milk (it will launch soy milk in 2H17), organic milk (it is bidding for US Stonyfield), and chilled yoghurt. Thirdly, it is also open to entering the non-dairy healthy food category. On EBIT margin, Yili is already higher than most global peers, but it thinks there is still expansion potential through better product mix and the launch of high-margin categories.
We reiterate Buy
We like Yili for its experienced management team, strong distribution network, and good track record in new product launches. We expect it to achieve higher-than-peers growth through gaining market share, category expansion and M&A. We reiterate our Buy on Yili with TP of Rmb22, based on DCF model, factoring in 9.5% WACC (3.9% RFR, 5.6% ERP, 1.0 beta, debt-free structure) and 2% TG.. Key downside risks: higher-than-expected raw material increases, food safety incidents and worse-than-expected competition.