FY19 adj. NP (excl. one-off disposal gain of Junlebao and impairment loss of Yashili) rose 31% to RMB3,867mn, in line with our estimates and consensus. FY19 Adj. OPM +0.4ppt (vs +0.5ppt in 1H19) though raw milk cost growth rose 8% YoY in 2H19. We cut FY20/21E adj. net profit by 25%/9% to reflect COVID-19 impact. Our TP is adjusted from HK$37.00 to HK$34.20, based on 28.0x average FY20E and FY21E EPS. MN would benefit from continuing sector consolidation. We expect MN to deliver OPM expansion thanks to continuing momentum of high-margin products (Milk Deluxe and Just Yoghurt) and improvement of non-A&P selling expenses ratio.
- FY19 results in line. Revenue rose 15%, led by liquid milk (+14%), milk powder (+45%). Key products achieved strong growth (Milk Deluxe +24%, Just Yoghurt >20%). Chilled yogurt and probiotics beverages achieved high single-digit sales growth, beat industry’s low single-digit decline. Fresh milk sales reached RMB700mn. Shiny Meadow became No.1 high-end fresh milk brand. If excluding Junlebao’s contribution, MN achieved 14% revenue growth and 0.4ppt EBIT margin improvement for its organic business.
- COVID-19 impact. COVID-19 outbreak mainly affected sales in Feb and Mar, especially UHT milk. Chilled milk and fresh milk is expected to resume normal growth beginning Apr. Because of extra marketing expenses for inventory destocking in channels, expenses for epidemic prevention as well as cash and supplies donation (~RMB740mn), we expect 1H20E net profit to be affected.
- Enhance brand equity. Mengniu’s donation amount ranked No.1 in FMCG sector. It also initiated a campaign with National Association of Healthy Industry and Enterprise Management to propose drinking milk everyday to strengthen immunity. Such investments should enhance consumers’ recognition of MN’s brand and its sales.
- FY20E outlook. Management expects revenue to drop slightly in 1H20E and then resume YoY low-teens growth and OPM improvement in 2H20E, excluding contribution from Bellamy’s Organic and Lion Dairy. Management also targets to achieve double-digit revenue CAGR next five years.
