Start era of “New Domestic products”, looking forward earnings recovery

Please Refer to the Last Page for Important Disclosure Overseas Research In-depth Research Report Equity Research Report ＃industryId＃ Consumer ＃investSuggestion＃ Outperform ( ＃investSuggestionChange＃ In i ti ation ) Target Price: HK$2.2 Current Price: HK$1.8 Projected Growth: 22% ＃mark etData＃ Mark et Data Date 2015.05.17 Closing Price (HK$) 1.80 Total Shares (Mn) 4,746 Market Cap (HK$/Mn) 8,542 Net Assets (CNY/Mn) 5,981 Total Assets (CNY/Mn) 7,664 BVPS 1.26 Source:Wind ＃relatedReport＃ Related Report Yashili(1230.HK)_2015earnings results notes_20160324 Overseas Research- Consumer Analy st: Lu Hengjun luhj@xy zq.com.hk SFC：AZF126 SAC：S0190515010004 ＃assAuthor＃ Contact: Wang Jiahui wangjiahui@xy zq.com.cn Contact: Wang Jiahui ＃dy Stockcode＃ 01230 .HK ＃dy Comp any＃ Yashili International ＃title＃ Start era of “New Domestic products”, looking forward earnings recovery ＃createTime1＃ May 17, 2015 Key Financial Indicators ＄zycwzb|主要财务指标＄ FY 2015A 2016E 2017E 2018E Revenue (M n/CNY) 2,762 3,447 4,024 4,713 YoY (%) -22.30% 4.8 % 16.73% 17.12% Net Profit (M n/CNY) 118 240 290 341 YoY (%) -64.40% 102.68% 20.83% 17.79% Gross M argin (%) 50.78% 51.32% 51.34% 51.70% Net Profit M argin (%) 4.28% 6.95% 7.20% 7.24% ROE (%) 1.98% 3.66% 3.72% 3.74% EPS (CNY) 0.03 0.05 0.06 0.07 Dividend y ield (%) 0.35 0.68 0.82 0.96 Source: Company Disclosure, Indust rial Securit ies Research Inst itut e Investment Highlight ＃summary＃  We initiate Yashili with Outperform rating and TP of HKD 2.20: Company adjusted products portfolio and sales distribution network during last three years, and has begun the era of ―New Domestic Products‖ with its new production capacity, new products mix and new sa les distribution network since 2016. New products from New Zealand factory has launched this year, and company will focus on improving sales of maternal &child channe ls. Yashili, as the sole platform of Mengniu’s milk powder business, will long-term benefit from the industry consolidation. We forecast revenue and net profit CAGR from 2015 to 2018 is 20% and 42%. Our target price of HKD2.20 implies 2016/17 P/E of 35x and 30x, suggesting 22% upside.  Revenue to increase due to sales volume recovery: New products from New Zealand factory has launched, which will be new drivers of earnings. We forecast maternal & child stores/e-commerce channels to contribute over 40%/15% of total revenue for 2016, and adults milk powder sales is expected to rise 20% YoY. We forecast 2016 revenue to increase 24.8% YoY to RMB 3.4bn.  Profitability to improve: 2016 raw milk price is likely to maintain low. Thanks to the global purchase and products mix improvement, company’s 2016 overall GM is expected to improve 0.5ppts to 51.3%. Employee layoff compensation and expenditure on distribution network expansion are likely to decline, and we expect opex to revenue ratio to decline 4.7ppts YoY. 2016 net profit is expected to rise 102% YoY to RMB 0.24bn, with net profit margin up 2.7ppts.  Risk: Lower –than-expected sales of ma ternal and child stores, dramatic raw materials prices, huge expenditure, negative earnings of Dumex China Please Refer to the Last Page for Important Disclosure - 2 - In-depth Research Report Catalogue 1 Company profile .................................................................................... - 5 - 1.1 Company business overview .......................................................... - 5 - 1.2 Development history....................................................................... - 5 - 1.3 Shareholder structure ..................................................................... - 6 - 2 Industry analysis _ Consolidation likely to begin ............................... - 7 - 2.1 Demand of baby formula in China kept upward trend................ - 7 - 2.2 Chinese consumers have more confidence with overseas brands of baby formula .......................................................................................... - 9 - 2.3 Traditional sales channels transferred to mom & baby stores and e-commerce channels......................................................................... - 10 - 2.4 Market structure of baby formula in China .................................- 11 - 2.5 Administrative Measures for the Registration of Recipes of Infant Formula will push the sector consolidation ...................................... - 12 - 3 Investment thesis................................................................................. - 12 - 3.1 Looking forward earnings recovery............................................. - 12 - 3.2 New production capacity — to supply high-quality raw milk... - 13 - 3.3 New products mix ........................................................................