Dairy oligarchy — Mengniu Dairy (02319) is being “voted with their feet” by investors.

The management “exchanged blood”, and the stock price fell sharply

The Zhitong Finance App noticed that on March 27, Mengniu's stock price experienced a huge shock. At one point, it fell by more than 10% during the intraday period. Subsequently, Mengniu's stock price fluctuated downward. On April 16, it fell to HK$15.32 during the intraday period, the biggest drop of 27% during the year, compared to the record high of HK$52.63, and the biggest drop of more than 70%.

After many rounds of decline, Mengniu currently has a market value of less than HK$61 billion, a price-earnings ratio (TTM) of less than 12 times, and a net market ratio of less than 1.3 times. However, investors still chose to “flee”. One direct factor is that Mengniu made the most significant personnel changes in the past 8 years.

On the evening of March 26, Mengniu issued an announcement. Starting from March 26, 2024, Lu Minfang will step down as the company's president and be appointed as the vice chairman of the board of directors to continue to serve as the company's executive director. Gao Fei, former senior vice president of Mengniu and head of the Room Temperature Division, was appointed as the company's president and executive director. Zhang Ping resigned as the company's executive director and continued as chief financial officer. On March 27, at Mengniu's performance conference, Lu Minfang and Gao Fei shook hands cordially to show the capital market that the “scepter” had successfully completed the handover. However, what Mengniu's decision left to investors was a “mixed bag.”

2016 was a year of internal and external difficulties in Mengniu's development history. Externally, the company was hit head-on by major competitors such as Yili in the competition. In 2016, Yili achieved revenue of 60.61 billion yuan, and net profit to mother reached 5.662 billion yuan. Internally, Mengniu's revenue in 2016 was 53.779 billion yuan, net profit loss to mother was 751 million yuan (RMB, same below), and the company's net profit to mother in 2015 was 2,367 billion yuan.

In the face of the decline, Lu Min was put at risk. He became president of Mengniu in 2016, and immediately launched a package of reforms. In 2017, Mengniu's revenue broke through the 60 billion mark for the first time, up 11.86% year on year, and net profit to mother reached 2,048 billion yuan. Since then, Mengniu's revenue scale has maintained steady growth every year except 2020. To a certain extent, the significance of Lu Min for Mengniu is equivalent to Kazuo Inamori's to Japan Airlines.

Unfortunately, for Lu Minfang, who advocates a culture of wolves and has “ambition” for Mengniu's career, “handing over” the position of president at this point is hard to say that he has retreated. In 2017, Lu Minfang set his first three-year goal during his tenure: Mengniu achieved the “double 100 billion” target of 100 billion dollars in both revenue and market capitalization in three years. At the end of 2020, Lu Minfang made another high-profile announcement of Mengniu's next five-year plan, which is to “create another new Mengniu” in five years, doubling revenue and profits by 2025 compared to 2020. This means that in 2025, Mengniu's revenue will break the 150 billion yuan mark, and net profit will exceed 7 billion yuan.

The question now is, can Mengniu, the “wolf of the prairie,” successfully complete Lu Min's unfinished career as president?

The growth rate of the dairy industry is slowing

Looking back at Mengniu's 2023 performance data, the company achieved revenue of 98.62 billion yuan during the period, up 6.51% year on year; net profit to mother was 4.809 billion yuan, down 9.31% year on year.

Revenue of 98.6 billion dollars a year is enough to make more than 90% of companies envy, but it is quite “embarrassing” for Mengniu, because this figure should have been completed three years ago. If Mengniu's revenue were to break through the 150 billion yuan mark in 2025, it would require a compound annual growth rate of over 23% in 2024 and 2025, while the company's last annual revenue growth rate of more than 20% was in 2013.

Looking at the dairy market as a whole, revenue growth of more than 10% is already “unattainable.” The Zhitong Finance App combed through the 2023 results of major listed dairy companies and found that neither industry giants such as Yili Co., Ltd., Guangming Dairy, or companies focusing on the upstream of the industry, such as Hyundai Animal Husbandry and Youran Animal Husbandry, had a revenue growth rate of more than 10%.

As one of the few companies whose revenue increased by more than 10%, Tianrun Dairy's net profit declined markedly due to more rapid increases in expenses such as sales expenses during the period. Mengniu's net profit declined in 2023, partly due to sales and distribution expenses reaching 25.192 billion yuan, a year-on-year growth rate of 12.73%.

Mengniu's large sales expenses had a limited impact on revenue. One major external reason was the slowdown in consumer demand in the dairy market. Guangfa Securities quoted Nielsen data in the research report. In 2021, 2022, and 2023, dairy omnichannel revenue increased by 7.90%, decreased 6.50%, and decreased by 2.40% year-on-year, respectively. Judging from the pace of the whole year, demand for liquid milk showed a trend of high and low in 2023.

In terms of liquid milk consumption, on the one hand, the recovery in consumption power has been weak since the beginning of 2023, and residents' willingness to spend is insufficient. When choosing dairy products, consumers pay more attention to their nutritional and health properties, and demand for liquid milk categories with stronger optional properties, such as yogurt and milk drinks, is decreasing.

Consumption of liquid milk is concentrated on white milk; on the other hand, passenger traffic in large supermarkets and stores, which are the main channels for liquid milk, has declined, and individual efforts are under pressure, leading to a decline in the penetration rate of liquid milk channels.

In this context, some major banks have lackluster expectations for Mengniu's performance growth over the next two to three years. For example, Damo released a research report stating that for Mengniu's “outperforming the market”, the target price was lowered by 13.3% from HK$30 to HK$26. Damo said that Mengniu Dairy's 2024 and 2025 earnings forecasts per share will be lowered by 8%-9%, because the lukewarm demand situation in 2024 is likely to continue, and it will take time for new products to drive growth, so sales forecasts for 2024 and 2025 will be lowered by 2% and 3%, respectively.

Haitong International said in the research report that maintaining Mengniu's “superior to the market” rating, the target price was lowered from HK$41.5 to HK$29.8. Haitong International expects Mengniu's revenue from 2024 to 2026 to be 101.49 billion yuan, 105.53 billion yuan and 109.6 billion yuan, up 2.9%, 4% and 3.9% year on year; net profit of 5.42 billion yuan, 6.220 billion yuan and 6.75 billion yuan, up 12.7%, 14.7% and 8.6% year on year.

“Buy” a new Mengniu?

According to a compound revenue growth rate of less than 5%, Mengniu will reach 150 billion dollars in annual revenue in the distant future. Mengniu also mentioned in the 2023 results announcement that in 2024, the group will firmly implement the “create another new Mengniu” strategy. The difference is that Mengniu never mentioned this as its five-year strategic goal.

Perhaps after a long period of practice, Mengniu discovered that “wolf culture” and “leopard speed” are not compatible. In the end, they chose not to race against time, but to be friends with time. Anyway, “creating another new Mengniu” is still a must-answer question for Mengniu. How can it be achieved? One answer may be: Endogenous growth is insufficient, and epitaxial mergers and acquisitions are “compact.”

When it comes to mergers and acquisitions, Mengniu can be described as a veteran player. Milk powder brands Junlebao and Yashili were acquired successively in 2010 and 2013. Among them, Yashili's development has been tepid for a long time. In 2016 and 2019, Mengniu calculated goodwill impairment of Yashili by 2.25 billion yuan and 2.3 billion yuan, respectively. In 2023, Yashili was privatized and delisted by Mengniu. The last financial report left by the company in the Hong Kong stock market showed that in 2022 it achieved revenue of 3,738 billion yuan, a year-on-year decrease of 15.7%; shareholders' losses amounted to 231 million yuan, an increase of 183.4% over the previous year.

Compared to Yashili, Junlebao is probably “uneasy” in the minds of many Mengniu investors. In 2016-2019, benefiting from the rapid release of Junlebao's milk powder, Mengneng's milk powder business continued to improve and grow rapidly. In 2018, Junlebao reached a total of 13 billion yuan, of which sales revenue from the milk powder business exceeded 5 billion yuan. However, Mengniu chose to sell Junlebao's business in 2019, giving it an opportunity to become a “long board” milk powder business, which once again became a “shortcoming.” According to market information, in 2021, Junlebao's revenue reached 201 billion yuan, which is equivalent to 23% of Mengniu's revenue for that year.

In the same year that Junlebao was “released”, Mengniu bought Australian organic infant formula manufacturer Bellamy in a big way. The price Mengniu paid to buy Bellamy was 7.1 billion yuan, a 50% premium. In the past five years, in addition to performance figures, Bellamy left a “prudent principle” in Mengniu's earnings report.

The Zhitong Finance App notes that in 2021, due to a decline in the performance of Bellamy's cash generating units, Mengniu's directors decided to confirm a goodwill impairment loss of 621 million yuan directly related to Bellamy's cash generating units; in 2022, Bellamy confirmed goodwill impairment losses of 742 million yuan for the same reason.

In addition to the milk powder business, Mengniu has also been developing diversified businesses such as ice cream and cheese in recent years. An important method of layout is also through “buy buy”. For example, in the ice cream market, Mengniu bought the Southeast Asian brand Ai Xue founded by founder Niu Gensheng; in the cheese sector, it held the A-share listed company Miocellanduo.

Overall, Mengniu's ice cream, milk powder, and cheese business contributed little to Mengniu's performance growth. In 2023, the above three businesses achieved revenue of 6.026 billion yuan, 3.802 billion yuan, and 4.357 billion yuan respectively, accounting for only 14.4% of total revenue. Among them, the key brand in the cheese business, Miocolanduo, achieved revenue of 4,049 billion yuan in 2023, a year-on-year decrease of 16.16%, and net profit to mother of 63 million yuan, a year-on-year decrease of 53.9%.

Many people will probably remember the past. If Junlebao were still around, Mengniu's goal of “double 100 billion” might have already been achieved, and the pace of “creating another new Mengniu” might have taken a more solid step. However, there is no wrong in history; the wheel of history will only roll forward. How Mengniu is steady and far-reaching in the future depends on how the new president writes the answers.