Jinwu Financial News | BOC International released a research report that sales of Mengniu Dairy (02319) in 2023 increased 6.5% year on year, and net profit fell 9.3% year on year to 4.809 billion yuan. Due to lower raw milk costs, gross margin increased 185 basis points to 37.2%, resulting in an operating profit margin rising 40 basis points to 6.3%, but non-operating expenses, associated company profits fell 78% year on year, and impairment caused the net profit margin to drop 85 basis points to 4.9%. The payout ratio increased from 30% to 40%.
According to the bank, management expects the year-on-year increase in sales in 2024 to be “low to middle single digits”, lower than the bank's forecast of 7.5%, and the expansion of operating profit margin by 30-50 basis points is in line with expectations. The bank expects gross margin to expand, as raw milk prices may continue to fall, but since promotions are needed to drive sales, the increase in sales costs will partially offset the increase in gross margin. Consumption seems to be polarized and high-end continues, but weak basic products have put pressure on discounts.
The bank continued that despite the weak market, Mengniu's high-end products continued to expand their share, and cheese and milk powder were also improving. The bank lowered the company's earnings per share forecast and lowered the target price to HK$21.5 (previously HK$34.7), based on 13.4 times the 2024-25 average price-earnings ratio (originally 17 times the 2024 price-earnings ratio) and 1.3 times PEG, corresponding to a three-year compound annual growth rate of 10% of earnings per share to maintain a “buy”.