CITIC Lyon released a research report saying that Hyundai Animal Husbandry (01117)'s sales and net profit in 2023 increased 9% and decreased 69% year on year, respectively, in line with the profit warning issued earlier.
The Zhitong Finance App learned that CITIC Lyon released a research report stating that Hyundai Animal Husbandry (01117)'s sales and net profit in 2023 increased 9% and decreased 69% year on year, respectively, in line with the profit warning issued earlier. Due to weak consumer demand, the bank expects the downward cycle of raw milk prices to continue in the short term. Despite this, the bank believes CMD can outperform its upstream dairy peers through close cooperation with downstream partners, feed procurement optimization, and efficiency improvements. The bank maintains a “buy” rating and maintains a target price of HK$1.00.
2023 fiscal year in review
Raw milk/new business sales (feed and digital platforms) increased by 3% and 36%, respectively, in fiscal year 2023. The average selling price of raw milk fell 6% year on year, and sales increased 9% year on year (production increase: 3% year on year to 12.6 tons). Gross profit per ton fell 14% year over year due to weak raw milk prices and rising feed costs. The ratio of sales and management expenses to revenue increased by 0.2 percentage points year-on-year to 9.1%. The adjusted pre-tax profit before interest, tax, depreciation and amortization (Cash Ebitda) decreased 9% year over year to RMB 2.5 billion. The reported net profit decreased 69% year over year to RMB 175 million.
Raw milk prices are likely to maintain a downward trend
The average price of raw milk in China fell 8% year on year in 2023, affected by weak demand, while the decline was even greater in 2024, with raw milk prices falling 11% year on year. Management anticipates a possible reversal in the third quarter of 2024. The bank believes that the rebound in demand, feed costs, and the price of dairy cows (that is, the price of beef) are key factors in determining the price of raw milk in the short term. CMD's raw milk price movement (down 6% year on year in 2023) was relatively stable compared to the market (down 8% year over year) during the raw milk price decline cycle, thanks to its high quality milk and the support of key customers.
Continuously optimize procurement and improve efficiency
CMD plans to reduce feed costs per kilogram of milk production by 10% year-on-year in 2024, and has now completed about 65% of feed procurement in 2024. In addition, CMD will start producing specialty raw milk (organic milk, A2 milk) in 2023, and plans to sell it 10%/20% of raw milk sales, which will drive the increase in gross margin. The bank also welcomed continued improvements in production and operational efficiency, making it more capable of dealing with external challenges.
Maintain a “buy” rating, and the target price does not change to HK$1.00
The bank raised sales by 0-2% for FY24-25 and net profit by 15-42% for FY24-25 to take into account the outlook for raw milk prices, increased production, new business growth, and locked in lower feed costs. The bank's target price remains at HK$1.00, based on a discounted cash flow valuation method with a constant capital weighted average cost ratio (WACC) of 9.6% and a sustainable growth rate of 1.0%. Maintain a “buy” rating.