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Industry Focus
China Dairy Sector
Table of Contents
Upstream dairy farms – Margin pressure from raw milk price decline 10
Appendix 70
Page 2
Industry Focus
China Dairy Sector
Dairy growth to outperform overall F&B sector attractive in the F&B universe, helped by the following key
drivers:
While the dairy sector has not been immune to the overall
slowdown seen in the China consumption market facing most (i) Still room to grow on consumption per capita
F&B players in general, the sector’s growth has nonetheless
Despite the strong growth in the past with China already
displayed stronger momentum than most. The
becoming the third largest market for dairy products, China’s
outperformance has also been apparent for listed dairy
per capita consumption remains well below the global average.
companies, which saw higher growth in general against players
Even compared with other Asian countries with more similar
in other sectors.
dietary preferences (such as Taiwan, where per capita
consumption of milk is c.40% higher than in China), China’s
Dairy sector growth vs. other F&B beverages – 2014 current level still represents abundant room for growth.
2014 sales growth – key F&B players Source: ilat.il, DBS Vickers
Mengniu
Bright
CMD
(20) 0 20 40 60
Page 3
Industry Focus
China Dairy Sector
2015E
2016E
2017E
2018E
2012
2013
2014
(iii) China consumer’s changing appetite
Yogurt Fresh milk UHT milk
While not a traditional diet for Chinese, dairy consumption has
been rising on government support and shifting of food
Source: Frost & Sullivan, DBS Vickers
consumption patterns as incomes rise. As consumers are now
more health conscious, the strong nutritional value of dairy
While the overall outlook for the dairy sector remains positive
products perceived by most is also one reason for rising
in the medium to longer run, there are also many challenges
popularity of dairy products.
facing the industry, including the sharp volatility of raw milk
prices in the past 1-2 years, the significant change in
Chinese consumption patterns trends distribution channels and the intensifying competition from
both domestic and global plays. Meanwhile, heightened food
100% 3% 3% 4% safety concerns means the Chinese government would also be
90% 11% 10% 11%
more incentivised to encourage market consolidation.
80% 10% 14%
3% 17%
70% 10% 4% Against this backdrop, not all players will be able to benefit
6%
60% 14% from the growth trend. In our view, liquid milk and milk
15%
50% beverage players should see the best potential on margin
40% expansion, while upstream and infant formula players may see
30% 63% more pricing pressure down the road.
54%
47%
20%
10%
0%
1991 2001 2011
Grain Produce Dairy & Eggs
Meats Sugar & Fat Others
Page 4
Industry Focus
China Dairy Sector
Liquid milk and milk beverages – product upgrades are … but there is still abundant room for market share gains
keys
With already a strong lead over its smaller players, leading
players like Mengniu and Yili should continue to gain market
Relatively high market concentration with leaders shares given their strong scale, established supply chain and
dominating… extensive market penetration. In fact, their combined market
share has been growing in the past few years, with the trend
Among the three dairy segments that we covered in this report,
likely to continue.
downstream liquid milk and beverage segment has the highest
market concentration. The top three players, Mengniu, Yili
and Bright Dairy account for over 42% share in the liquid milk Market share trend
market in China. Despite this, compared with other F&B
segments, the concentration is not particularly high, indicating %
there is room for leaders to grow market shares further. 50
45
40 6.3 7.1
Dairy - Market shares of top players 5.1 5.5 5.7
35 5.2
4.1
30
Nestlé SA Hebei 16.2 18.1 17.9 17.8 18.3
Wahaha 25 14.4
5% 4% Yangyuan 14.2
Zhihui Want Want 20
4% 4% 15
Bright
7% 10 18.8 19.7 18 18.2 18.7 18.9
Coca-Cola 15.8
5
Yili Co, The
2% 0
18%
Beijing San 2006 2008 2010 2012 2013 2014 2015
Yuan
2% Mengniu Yili Bright Dairy
%
100
90 2.3
80 29
70
60 10.8
50 14 13.6
13.2
40 7.1
30 63.3 18.4 16.8 18.3
20 39.4
10 23.2 23.3 18.9
0
1 2 3
Page 5
Industry Focus
China Dairy Sector
Intense competition at the mass-end, yet a necessity Growth to be driven by new products…
While we expect top players to maintain their leading positions To tackle this, domestic leaders have been increasingly focusing
in the UHT plain milk category, the real growth drivers should on newer and valued-added products. Following the success
come from new and value-added products or new categories. of Mengniu’s Milk Deluxe, which created a whole new
The mass market UHT plain milk category, although still a big premium milk market in China (market size now estimated at
component of dairy sales, is already a commoditised market c.Rmb35bn), the good market reception of UHT yogurt, first
where even key players are not having much pricing power. launched by Bright Dairy in 2010, is another such example.
This is also a market where we see increasing, and viable,
competition coming from imported UHT milk through the e- Bright Dairy – market share in yogurt had double since
commerce channel. launch of UHT yogurt Momchilovtsi
%
China UHT milk imports
25 23
Launch of 22
MT % Momchilovtsi
40,000 250 20 18
35,000 15
200
30,000 15 13
150 12 11
25,000 11
10
20,000 100 10
15,000
50
10,000 5
0
5,000
0 (50) 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
Oct-13
Feb-14
Oct-14
Feb-15
Apr-14
Apr-15
Aug-14
Dec-13
Dec-14
Jun-14
Source: WIND, DBS Vickers … an area where domestic players have clear advantages
Page 6
Industry Focus
China Dairy Sector
RMB/kg Powder
4.50 Milk
5% Yoghurt
Milk - UHT
and Sour Other
28%
4.00 Milk Drinks Dairy
26% 1%
3.50
Cheese
1%
3.00
2.50
Flavoured
2.00 Milk - Milk Drinks
Fresh 31%
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
8%
Page 7
Industry Focus
China Dairy Sector
Key financials
Page 8
Industry Focus
China Dairy Sector
Mengniu – FY14 sales breakdown (%) Yili – sales FY14 breakdown (%)
Liquid milk
Milk 78%
beverages
26%
Source: Company data, DBS Vickers Source: Company data, DBS Vickers
Others
6%
Milk powder
Momchilovtsi
and others
29%
19%
Ubest
6%
Other liquid
milk
39% Changyou
1%
Page 9
Industry Focus
China Dairy Sector
MT %
What happened to raw milk prices? 180,000 200
160,000
One of the key concerns facing upstream dairy farms in the 150
140,000
past one year or so is the sharp decrease in raw milk prices. 120,000 100
Following the strong surge in 2013, raw milk prices in China 100,000
50
have fallen by c.20% from its peak in early 2014, alongside 80,000
with the volatility seen in the international price. Fonterra’s 60,000 0
WMP prices, a key benchmark of dairy prices, plunged c.60% 40,000
(50)
during the same period, on increased supply from EU as well as 20,000
0 (100)
weaker demand from China due to overstocking of milk
May-13
May-14
May-15
Mar-13
Mar-14
Mar-15
Sep-13
Sep-14
Jan-13
Jan-14
Jan-15
Jul-13
Nov-13
Jul-14
Nov-14
powder.
Imported milk powder prices versus China raw milk Milk powder % yoy
price*
RMB/kg Source: CEIC, DBS Vickers
5.0
4.5
4.0 As such, we expect raw milk prices to remain at a low level for
3.5 most of 2015, with full year average estimated to record a
3.0 20% decline y-o-y. In 2016, we believe dairy prices may start
2.5
to normalise as excess inventory of milk powder in China
2.0
1.5 should have been largely exhausted.
1.0
0.5 Was there an over-supply of raw milk in China?
0.0
Despite strong growth in production capacity from major dairy
May/10
May/15
Oct/10
Feb/14
Mar/11
Sep/13
Apr/13
Jan/12
Aug/11
Dec/09
Dec/14
Jun/12
Nov/12
Jul/09
Jul/14
farms during the past few years, China’s milk demand remains
well above domestic supply. But the supply gap has been
Fonterra raw milk (RMB/kg)
easily filled by imported milk powder, especially considering the
China raw milk (RMB/kg)
abundant supply overseas as well as pricing differences
Source: CEIC, DBS Vickers (Fonterra’s WMP prices are at a 47% discount to China prices).
Page 10
Industry Focus
China Dairy Sector
Estimated supply gap in China Dairy farms distribution in China (based on herd size)
100%
m tonnes
10% 15%
90% 19%
80 10%
80% 10%
69
13% 11%
70 63.7 70% 17%
58.6
60 54.8 60% 24%
52.3
49 50%
50
38.5 39.6 40.8 40%
35.3 37.3 37.7
40 67%
28.2 30% 59%
30 24.1 47%
20.1 20%
15 17.1
20 13.7 10%
10 0%
2009 2014 2018E
0
2013 2014 2015E 2016E 2017E 2018E <100 heads 100-499 heads
Supply Demand Gap 500-999 heads >1000 heads
Source: Euromonitor, DBS Vickers Source: MoA, Frost & Sullivan, DBS Vickers
Page 11
Industry Focus
China Dairy Sector
Is funding a necessity?
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
2012/13 2013/14 2014/15
Page 12
Industry Focus
China Dairy Sector
Page 13
Industry Focus
China Dairy Sector
120%
A battlefield for all
100%
Among the various segments in the dairy supply chain, infant 4%
20%
formula commands the highest margins, but also attracts the 80% 6%
strongest competition from both domestic and global players. 43% 3%
60%
We expect price competition will continue to intensify in this
segment, due to the following: 40% 64%
74%
(i) Low market concentration. The infant formula market 48% 8%
20% 9%
in China is relatively fragmented. The top three players
command only 33% of the market whereas in 12% 14%
0%
developed markets, the top three typically account for New Zealand Philippines India China
75%+ of the market. This suggests that there is lots of Nestle Mead Johnson Abbott
room for market consolidation. In fact, it is also the Danone Heinz Beingmate
government’s intention to consolidate the market by
encouraging M&A activities. Source: Coriolis, DBS Vickers
China infant formula – market share (ii) High ASP risk imminent. Infant formula products in
China are in general commanding on average a 30% -
American 90% premium over the same product overseas. It is
Dairy
Abbott 3% also one of few IMF markets where a premium segment,
4% in which products are selling at more than double the
Mengniu mass market products, exists. Price promotions have
5% Others
33% been more aggressive in recent months, partly a result
Biostime of certain brands preparing for product upgrades. We
5%
expect aggressive promotions and price cuts to
Friesland continue across all segments, helped by highly
6%
favourable raw material costs.
Yili
6% Nestle
14% Going forward, we expect the infant formula category
Mead to transform into a two tier structure – the first as
Beingmate Johnson
9% locally manufactured & locally manufactured with
7% Danone
imported sources targeting mass market, and the
8%
second as imported packaging focusing on a more
Source: Euromonitor, DBS Vickers premium segment. The price difference between the
two tiers is likely to narrow in due course.
R M B p ric e Premiu m
B ased B ran d V o l (g )
O v erseas Ch in a (% )
Page 14
Industry Focus
China Dairy Sector
Last time when there was a change in the one-child policy was
As such, we expect a continual pressure on product pricing, and back in late 2013, when the government relaxed the rules and
hence further margin pressure going forward. In fact, EBIT allows couples to have a second child if one of them is an only
margins have declined across the board for both domestic and child.
global players in 2014. To drive growth, infant formula players
would have to rely more on volume and product mix. While a policy relaxation is positive, we believe it is unlikely to
cause a sharp surge in birth rates and the impact would likely
to be gradual. For example, following the relaxation in 2013,
new births in 2014 rose only mildly by 3%. There were only
on average 80-90k couples applying for second birth
applications every month since the relaxation, with total
application representing less than 10% of total eligible. As
economy expands, there are also more cost concerns on raising
a second child in China.
Page 15
Industry Focus
China Dairy Sector
Birth rates The bad – Apart from a slower economy, China’s State Council
aims to raise the breast feeding rate, targeting 50% by 2020
from less than one-third at the moment. This could potentially
(%)
dampen demand growth stemming from new births and
12.50
income growth. There is also recent news that China is
12.40 considering a ban on advertisements for infant formula, a
12.30 move which illustrates the government’s intention to promote
12.20 breastfeeding.
12.10
12.00
Cautious outlook, but M&A possibilities exist
11.90 Based on the above, we are cautious on the IMF market, as we
11.80 believe in terms of price competition, it is likely to be the most
11.70 intense along the dairy supply chain. At the same time,
11.60 however, there are lots of M&A and partnership opportunities.
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Overseas partnerships
St ak e In t ' l Ex is t in g b ran d s
D at e* D o mes t ic Paid D esc rip t io n
(% ) p lay er o w n ed b y in t ' l p lay er
* date of completion
Page 16
Industry Focus
China Dairy Sector
Page 17
Industry Focus
China Dairy Sector
Stock recommendation earnings expected to grow at 14.2% CAGR for FY14-16F. Its
JV with Danone, despite limited scale but growing fast, could
be a more significant driver in the medium term considering
To conclude, our preferences in the dairy industry chain are the
the strong know-how of Danone and Mengniu’s strength in
downstream dairy giants. Amid competition, we expect their
branding and distribution. The stock is currently trading at 19x
strong market dominance, extensive distribution and product
FY16F PE, below its historical (24x) as well as sector average
innovation efficiency will enable them to gain further market
valuation (25.5x). Our TP is now rolled over to HK$47.1 (Prev.
share and drive out smaller regional players. There is also room
HK$45.8/sh), based on 24x FY16F PE. BUY.
for margin improvement as product mix improves, while raw
material costs remain generally favourable in the near term. Yili (600887: CH, NR). An even fiercer competitor than
We maintain our BUY rating on Mengniu, and initiate coverage Mengniu, Yili has consistently outperformed its peers through
on Bright Dairy with a BUY. Meanwhile, we believe Yili (Not improving product mix and strong operating efficiency. We
Rated) would also be a strong performer under this trend. believe Yili will likely beat its own guidance of 12% and 15%
growth on FY15 sales and profit respectively, via stronger
We are cautious on the infant milk formula sector, as we
contribution from high-margin products such as Satine, QQ
expect price competition to intensify, which coupled with the
Star, Ambrosial and Chang Qing. Based on consensus
shift in distribution channel will put pressure on margins. We
estimates, Yili trades at 17.7x FY16F PE, undemanding against
expect the high-end market will continue to be dominated by
its peers.
global brands but there could be potential for domestic players
at the mass market end. China Modern Dairy (1117: HK, Buy). Weaker earnings in
FY15, a 17% decline under our estimates, should have been
As for the upstream dairy farms, the key concern would be on
largely priced in at the current valuation, with possible
raw milk prices which dictate profitability. But in the longer
resumption of earnings growth in FY16. In the medium term,
run, we continue to see market consolidation potential for
we believe leading upstream players should continue to benefit
major farms, with growth expected to be more driven by top
from rising demand from downstream, in particular pasteurised
line. Despite weakness in near-term earnings, we maintain
operations, as well as market consolidation. Our new TP is
BUY on China Modern Dairy on possible bottoming out of milk
HK$3.35 (Prev. HK$3.45ps), based on DCF valuation. BUY.
prices towards the year end and on valuation ground.
Yashili (1230: HK, NR). A leading domestic infant milk formula
Bright Dairy (600597: CH, Buy). We like Bright Dairy for its manufacturer, Yashili holds a 5.4% market share in China as of
solid positioning as the market leader in Shanghai. As of end-
FY14. With the introduction of Mengniu and Danone as its
FY14, it also has a dominant market share in pasteurised milk
controlling and second largest shareholders respectively in the
(53%) and low-temperature yogurt (31%) nationwide, which
past couple of years, Yashili is undergoing restructuring and
suggests some immunity from rising competition in the UHT
changes in strategy. While Yashili is unlikely to see a
dairy segment. Although Bright Dairy’s profitability and
turnaround in FY15, we expect Mengniu and Yashili’s potential
operating efficiency lags behind peers Mengniu and Yili, we
investment in Danone’s Dumex China, as well as opportunities
believe its’ product mix, coupled with expanding distribution
to leverage on Danone’s existing online platform, could be
network will help margins to catch up over the medium run. In
potential re-rating catalysts. Valuation is at 18.8x FY16F PE
addition, the pending acquisition of Israel’s Tnuva Foods via a
(based on consensus estimates), a premium to Biostime, owing
new share placement should help transform Bright Dairy as an
to distortion in earnings from the restructuring in addition to
integrated dairy player with a solid overseas footprint. However,
heavy competition. However, with the backing of two giants,
it will take time for benefits from restructuring and integration
Yashili will be a strong contender in the domestic market in the
to materialize. Bright Dairy offers the highest earnings CAGR of
long run.
25% among its peers. Initiating coverage with BUY, TP at
Rmb19.7/sh, pegged to 27.5x FY16F PE, equivalent to 1.1x Biostime (1112: HK, NR). Biostime is a major domestic infant
PEG. milk formula player in China with a 7.6% market share in FY14.
Since late 2014, Biostime has been clearing its old core-infant
China Mengniu (2319: HK, Buy). Product mix upgrades formula inventory, paving the way for a re-launch of upgraded
(yogurt and milk beverages) and margin expansion will be key
products (new packaging) in Jul-15. There should also be
drivers to decent earnings growth in the next 1-2 years. We
some margin benefits from lower raw material costs, partly
expect China Mengniu to continue gaining market share with
offset by higher marketing expenses associated with the
Page 18
Industry Focus
China Dairy Sector
upgraded product launches. With rising competition and rapid upstream margins in China. However, Huishan’s FYMar15
distribution channel changes within the infant formula sector, profitability was still affected by the decline in raw milk prices
Biostime’s product ASP faces the largest downside. Despite and weaker than expected downstream sales. It is yet to be
relatively cheap valuation at 11x FY16F PE based on consensus determined whether Huishan is able to successfully venture out
estimates, there is no re-rating catalyst in sight in the near term. of NE China into East China, a strong foothold of Bright Dairy.
On a positive note, Huishan’s Chairman purchased c.427m
Huishan (6863: HK, NR). A vertically integrated dairy player, shares in the open market, in addition to Huishan’s own share
Huishan’s key cost advantage is its ability to command lower buyback of 338m since August-14, providing some support to
feed costs against peers, hence enjoying the strongest share price.
Dairy F arm
China Modern Dairy * 1117 HK HKD 2.53 1,730 11.0 9.1 0.0 0.5 0.7 0.6 8.2 6.9
China Huishan Dairy # 6863 HK HKD 2.17 4,009 17.4 16.1 1.2 1.4 1.7 1.5 9.8 10.7
Yuanshengtai Dairy F arm 1431 HK HKD 0.71 358 4.7 4.0 0.0 0.0 0.5 0.4 8.5 8.3
A v erage 11.0 9.7 0.4 0.6 0.9 0.9 8.9 8.6
Page 19
Industry Focus
China Dairy Sector
Dairy Sec t or
China Mengniu Dairy * 2319 HK 38.35 Buy 75,216 Dec 22.3 19.5 1.0 1.1 2.5 2.3 11.9 12.3
China Modern Dairy * 1117 HK 2.53 Buy 13,421 Dec 11.1 9.1 0.0 0.5 0.7 0.6 8.2 6.9
Biostime Intl.Holdings 1112 HK 21.60 NR 13,162 Dec 12.0 11.3 3.8 4.0 3.1 2.7 28.1 25.2
China Huishan Dairy # 6863 HK 2.17 NR 31,075 Mar 17.4 16.1 1.2 1.4 1.7 1.5 9.8 10.7
Yashili Intl.Holdings 1230 HK 2.27 NR 10,772 Dec 23.6 18.8 1.3 1.9 1.2 1.2 6.8 7.0
Yuanshengtai Dairy 1431 HK 0.71 NR 2,775 Dec 4.7 4.0 0.0 0.0 0.5 0.4 8.5 8.3
A v erage 15.2 13.1 1.2 1.5 1.6 1.4 12.2 11.7
Slaught er Sec t or
China Yurun* 1068 HK 2.5 Hold 4,557 Dec n.a. 37.0 0.0 0.0 0.3 0.3 (0.1) 0.8
WH Group 288 HK 5.46 NR 77,878 Dec 11.5 10.4 2.7 3.0 1.8 1.6 16.0 16.0
A v erage 11.5 23.7 1.3 1.5 1.0 0.9 8.0 8.4
HK - list ed av erage (ex Y urun,CRE) 22.8 19.0 1.4 1.6 2.4 2.2 12.4 12.4
Page 20
Industry Focus
China Dairy Sector
Page 21
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Bloomberg: 600597 CH Equity | Reuters: 600597.SS Refer to important disclosures at the end of this report
1 7 .3
peers. Coupled with a larger scale and a favourable input cost
188
environment, there should be abundant room for margin improvement.
1 2 .3 138
www.dbsvickers.com
ed- JS / sa- AL
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
INVESTMENT THESIS
Profile Rationale
Listed on the Shanghai Stock Exchange in 2002, Bright Dairy We estimate Bright Dairy’s sales to grow at FY14-17F CAGR
is one of the largest downstream dairy players in China. As of 13%, with organic growth driven by cultivation of its
of 2014, Bright Dairy held a 22% market share in dairy core, high margin brands, through expansion of its
products in East China, where it has a dominant foothold in distribution network into South and Central China, where its
Shanghai with a market share of 46%. penetration lags behind peers.
Valuation Risks
Our TP is at RMB19.7/sh, pegged to 27.5x FY16F PE, Food safety issue is a key concern to the dairy sector, and
equivalent to 1.1x PEG, but still below its historical 8-year Bright Dairy is subject to policy and regulatory changes. With
average of 35.5x the inclusion of Israeli-based Tnuva Food, currency risks will
become a potential risk. Lastly, fluctuation in raw material
costs such as raw milk prices and milk powder costs may
have an impact on the company’s margins.
Page 23
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
SWOT Analysis
Strengths Weakness
State-owned background with strong presence in the Lack of scale against dairy giants such as Mengniu and
Shanghai region, where the company is the top player with Yili
>40% market share in liquid milk products
The smaller scale also translates into weaker OP
Established market position and brand reputation in the margins against its bigger peers
pasteurised milk segment
Weaker market penetration compared with major peers
Strong product innovation, as demonstrated by its success in with strong nationwide coverage
UHT yogurt Momchilovtsi
Relatively low ROE
Comprehensive product mix including liquid milk, yogurt,
milk powder as well as dairy-based products such as butter
Improving product mix with rising skew towards higher-
margin products. Its five key products are estimated to
account for 60% of its liquid milk sales in FY14, vs 40%
previously
Opportunities Threats
As the first mover in the UHT yogurt category, Bright’s star Rising competition from domestic and international
product Momchilovtsi should have more room to grow as it players
expands into other regions and into lower tiered cities
Profitability could fluctuate on raw milk and milk
powder price volatility
Extending product offerings by rolling out other high-margin
products into Momchilovtsi’s existing distribution channel Food safety scares
Weaker consumer demand due to slower macro
Huge potential for pasteurised milk segment which Bright environment
already has an strong market position and expertise
Page 24
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Company background
Dominant market player in East China. Listed on the Shanghai Part of SOE reform initiatives. The acquisition of Tnuva Food
Stock Exchange in 2002, Bright Dairy is one of the largest has been well anticipated by the market as Parent Company
downstream dairy players in China. As of 2014, Bright Dairy Bright Food had already announced its intention for the
held a 22% market share in dairy products in East China, where injection after acquiring Tnuva in Jun-14. This is also part of the
it has a dominant foothold in Shanghai with a market share of SOE reform initiatives that aims to (1) bring in strategic
46%. shareholders and introduce a mixed ownership scheme; (2)
consolidate assets to form a clearer and well defined corporate
Strong SOE backing. Bright Dairy has a strong state-owned structure, i.e. use Bright Dairy as the sole platform for dairy-
background with Shanghai Municipal Government as its related business.
principal shareholder. Bright Dairy is one of the four publicly
listed platforms for Bright Food. Other affiliated companies In addition to acquiring Tnuva Foods, Bright Dairy has been
include Shanghai Jinfeng Wine (600616.SH, alcohol related), consolidating the Group’s upstream assets. In 2014, Bright Dairy
Shanghai Maling Aquarius (600073.SH, canned products & purchased the remaining 20% stake in its upstream subsidiary,
other products), and Shanghai HaiBo (600708.SH, Shanghai Bright Holstan from Parent Company Bright Food. In
transportation & logistics). Feb-14, Bright Dairy formed a 55%/45% JV with PE fund RRJ
Capital to develop its upstream capabilities. As of end-14, Bright
In Jun-15, Bright Dairy announced its intention to place out no Dairy owns 14 farms with approximately 15,000 cows, and is
more than 559m shares for Rmb16.1/share to six strategic looking to expand to 20 farms in the next 3-5 years. With the
shareholders. The gross proceeds of Rmb9bn will be used to potential acquisition from Shanghai Dairy in the pipeline as well,
acquire a 77% stake in Israeli-based Tnuva Food from Parent this should consolidate Bright Dairy’s control on upstream raw
Company, as well as Shanghai Dairy’s upstream assets. As one milk sourcing. Shanghai Dairy holds c.35,000 cows under 24
of the strategic shareholders in the placement, Bright Food’s dairy farms.
effective controlling stake will be lowered to 40.8% (from
54.4%). The new shareholders will be subject to a 3-year
holding period.
B ef o re A f t er
Shares (m) % Shares (m) %
Bright F ood 669 54.4% 669 37.4%
Yimin Group (益 民 集 團 )* 0 0.0% 62.1 3.5%
B rig ht F o od 669 5 4.4 % 73 1 4 0.8%
Xin Cheng Inv estments (信 晟 投 資 ) 0 0.0% 217.4 12.1%
Cheng Chuang Inv estments (晟 創 投 資 ) 0 0.0% 186.3 10.4%
Shangqi Inv estments (上 汽 投 資 ) 0 0.0% 31.1 1.7%
Guosheng Inv estments (國 盛 投 資 ) 0 0.0% 31.1 1.7%
Puke Yuanfuday i (浦 科 源 富 達 壹 ) 0 0.0% 31.1 1.7%
Other inv estors 562 45.7% 562 31.4%
Page 25
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
2,000 50
Pre mium ca te gory Bra nd Es t. la unch
0 0
Pastuerised milk U+ (优倍) Sept-06 2010 2011 2012 2013 2014 2015F2016F2017F
Fresh yogurt; kid's Momchilovtsi % yoy
AB100 (健能) July-10
yogurt
UHT Yogurt Momchilovtsi (莫斯利 Dec'10 Source: Company data
Fresh yogurt 安)
Changyou (畅优) Apr-12
Plant-based bacteria (ii) Market leader in pasteurised milk
Zhiwuhuoli (植物活力) Mar-13
drink
As of FY14, Bright is the market leader in pasteurised milk with
a 53.6% market share, of which it holds a dominant market
share of 84% in East China. Within fresh yogurt, Bright Dairy
holds a nationwide market share of 31.2%, with a 53% market
share in East China. We expect Bright Dairy in a better position
vs. its competitors as further competitions enters into the UHT
segment.
Page 26
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
The success of Momchilovtsi, which is a UHT product with Parent Company, Bright Food, has been in the process of
further reach compared to low-temperature or pasteurised dismantling and streamlining existing assets for a number of
products, had enabled Bright Dairy to extend its distribution years through management incentives, inviting strategic
network beyond its traditional stronghold in Eastern China. shareholders and lately acquiring overseas assets. As a key
With POS reaching 650K in FY14, the company plans to expand subsidiary of Bright Food, Bright Dairy should remain under the
it further to 1m POS in FY15. This also opens up opportunities spotlight, given dairy sector’s stronger-than-industry growth
for the company to roll out other products using Momchilovtsi’s and significant overseas acquisitions recently.
existing channel, and provides an established distribution
platform for future product launches. The latest share placement of 559m shares will generate gross
proceeds of Rmb9bn, which will be allocated in exchange for (1)
We expect South and Central China regions to exhibit stronger c.77% controlling stake in Israeli-Tnuva Food, estimated to be
growth, with increasing capacity expansion directed at both worth c. Rmb6.87bn (implying c. 13.3x FY14 PE or 1.89x
regions. As scale picks up, we see room for improvement in P/NAV), and (2) Shanghai Dairy’s upstream dairy operations (no
operating leverage. In fact, Bright Dairy’s SG&A expense to financial details have been released yet).
sales ratio has been on a declining trend in the past two years,
but remains higher than bigger peers, an indication of its With the expected injection of Tnuva Foods, Bright is well
smaller scale but also implies lots of room for improvement. positioned to become a diversified dairy player over the long
term. In addition, we expect Bright Dairy to spin-off its
upstream assets in due time after the consolidation of Shanghai
SG&A expense % to overall sales versus peers
Dairy’s upstream assets. If we include Tnuva’s earnings
assuming flat earnings growth y-o-y, we expect the potential
32% impact on EPS will be milder at 8%/3%/0% in FY15-17F
inclusive of the enlarged share base.
30%
28%
26%
24%
22%
20%
2013 2014 2015F 2016F 2017F
Page 27
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Page 28
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Financial analysis
Cost of sales breakdown % (FY14)
Revenue breakdown. The bulk of Bright Dairy’s revenue is
derived from Momchilovtsi. The company is now ramping up its
product offerings towards higher margin brands including UHT
Labour Production
yogurt Momchilovtsi, pasteurised products UBEST, and low- costs
3%
temperature yogurt Changyou. Higher margin products account 14%
for approximately 45% of overall sales.
Direct
Others materials
6% 83%
Milk powder
Momchilovtsi
and others
29%
19%
Source: Company data Financial health. In 2014, capex was 65% higher y-o-y owing
to completion of processing plant capacity expansion, as well as
Gross margin expansion. Continued improvement in product building of new dairy farms. Capex in 2015 would continue to
mix and a favourable raw material cost environment are the key remain high as Bright Dairy continues to expand its production
drivers to profitability. We expect overall gross margins to edge base and distribution network. After its recent new share
up modestly by 1.1ppt from 2014 to 2017F. Compared to 2010, placement which raised gross proceeds of Rmb9bn in exchange
just before Momchilovtsi was launched, liquid milk gross margin for Tnuva Foods (for no more than Rmb6.87bn) and upstream
had expanded 7ppts up to FY14 on the back of higher margin assets from Parent Company, Bright Dairy should have sufficient
product contribution. capital in the near term. If we exclude recent new share
placement and pending acquisitions, we estimate Bright’s net
Overall gross margin gearing to be 35%.
38.0% Earnings risk. Food safety issue is a key concern to the dairy
sector, and Bright Dairy is subject to policy and regulatory
37.0%
changes. With the inclusion of Israeli-based Tnuva Food,
36.0% currency risk will become a potential risk. Lastly, fluctuation in
raw material costs such as raw milk prices and milk powder
35.0%
costs may have an impact on the company’s margins.
34.0%
33.0%
32.0%
31.0%
30.0%
2013 2014 2015F 2016F 2017F
Source: Company data
Page 29
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
1Q15 analysis. In 1Q15, revenue grew 8.1% while net profit The stock is currently trading at 25.2x FY16F PE, representing a
expanded 39.2% y-o-y to Rmb98m. This was on the back of premium over other downstream dairy players such as Mengniu
improvement in product mix as well as a favourable raw and Yili. This is likely due to Bright Dairy’s higher than industry
material environment. Gross margins expanded 0.85ppt to growth rate, and potential earnings re-rating from its recent
34.7%, a decent performance but much slower than Yili’s 1Q15 acquisitions.
GP margin expansion of 3.4ppts. This is likely a reflection of
Bright’s higher-cost milk powder inventory which had yet to be We peg our TP at 27.5x FY16F PE, which is equivalent to 1.1x
fully digested. In terms of seasonality, 1Q is typically a low PEG, but still below its historical 8-year average of 35.5x. This
season for dairy product sales, while 2H normally reports much translates into a fair value of Rmb19.7 per share.
stronger sales.
Page 30
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Page 31
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
State-owned; beneficiary of reforms Possible spin-offs with recent overseas privatisations. Bright
Food has highlighted its intention to (1) spin-off its Weetabix
Overseas ambitions. Bright Foods’ Vice-President, Ge Junji, acquisition while retaining a controlling stake, similar to Synlait
announced Bright’s intention to increase the proportion of its Dairy, (2) combination of asset spin-off with existing domestic
overseas assets to 25% (2014:12%) over the next few years. private assets, and lastly (3) the injection of assets into existing
Bright Foods has been one of the most aggressive Chinese listed entities. For example, Bright Foods plans to inject DIVA, a
players embarking on an M&A spree. There were a few bordereau specialised French distributor, into Jinfeng Wine, to
unsuccessful deals (United Biscuits, GNC). Bright Foods is mainly broaden its existing wine operations.
focused on consumer brand names, with similar businesses
relating to its existing assets. In total, we estimate Bright Foods
has spent over Rmb3bn on purchasing overseas assets.
M ay -12 Weetabix UK Cereal Bright F oods Whole-w heat grain breakfast cereal under Weetabix
J un-12 Div a F rance A lcohol Bright F oods Export oriented w ine broker, mainly know n for Bordeaux
Bright F oods; Largest food company in Israel specialising in milk and dairy
M ay -14 Tnuv a Israel Dairy -related pending injection products, Tnuv a accounts for 70% of the dairy market in the
into BrightDairy sale of meat, egg and packaged food.
Page 32
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
K ey T it le O t h er d irec t o rsh ip s
Mr. Zhuang Guow ei Chairman Bright F oods Group Co. Ltd: party member and v ice president; F ormer Shanghai F arming
(庄 國 蔚 ) (Group) Co. Ltd: V ice President & F ormer Shanghai Haibo Co.
Mr. Shen Weiping Director Shanghai Milk (Group)'s Director, General Manager; Shanghai A gri-business Inv estment
(沈 偉 平 ) Company : General Manager
Mr. Dong Zongbo CF O Serv ing since 2006, Mr. Dong used to serv e as a finance manager for its fresh product
(董 宗 泊 ) business.
Mr. Hu Kaiming Superv isor of F ormer Shanghai Yimin F ood, Party Secretary and Deputy Minister
(胡 凱 明 ) Company
Mr. Zhang Daming Chairman of Chairman of Superv isory Board, Bright F ood, V ice-Chairman of the Superv isory Board';
(張 大 鳴 ) Superv isory Board Shanghai Haibo Co. Chairman
Mr. Pan F ei (潘 飛 ) INED V ice President & Professor of Shanghai Univ ersity of F inance and A ccounting
Mr. Zhang Guangsheng INED J ilin prov inicial gov ernment economic adv isor; honorary director of Shanghai Institute of
(張 廣 生 ) Economic Research; former Shanghai Pudong Dev elopment Bank Co. Chairman
Mr. Gu Xiaorong INED Shanghai A cademy of Social Sciences research at the Institute of Law
(顧 肖 榮 )
Co mp an y T ic k er Cat eg o ry St ak e D es c rip t io n
Shanghai Maling Canned products including processed meat, seasoning, seafood, v egetable
Processed
A quarius 600073 37.79% as w ell as national brands under " 冠 生 園 "," 大 白 兔 "," 蘇 食 "," 梅 林 ", "
products
(上 海 梅 林 正 廣 和 ) 佛 手 "," 華 佗 "," 正 廣 和 ","SF "," 愛 森 ","96858"
Page 33
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Milk
Infant formula Pure Canterbury; You; Bright Dairy
pow der
(c.18%
of FY15 Adult Bright
l )
Ot hers
(c. 6% of Butter; cheese;
Bright Juice; Little Bright
FY15 juice
s ales )
Page 34
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
OIivia
Source: Company data, DBS Vickers
Page 35
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Page 36
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
5%
Exceptional Gain/(Loss) 0 0 0 0 0 0
Pre-tax Profit 52 367 187 522 282 432
Tax 4 (88) (63) (170) (58) (73)
Minority Interest (4) (20) (8) (61) (31) 16
Net Profit 97 215 148 258 209 359
Growth
Revenue Gth (%) 16.5 17.2 15.2 21.0 32.6 18.8
Opg Profit Gth (%) 100.9 58.6 78.1 54.3 28.7 6.7
Net Profit Gth (%) 31.9 30.4 53.0 20.2 41.5 38.9
Margins
Gross Margins (%) 25.6 34.6 20.3 26.7 34.3 34.0
Opg Profit Margins (%) 2.0 3.9 3.2 5.0 3.1 4.5
Net Profit Margins (%) 1.5 2.9 2.0 2.9 2.1 3.4
Page 37
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
6%
Growth
Revenue Gth (%) 35.1 30.6 28.1 10.3 8.1
Net Profit Gth (%) 42.8 40.8 23.3 64.5 39.2
Margins
Gross Margins (%) 33.8 34.8 33.2 34.9 34.7
Opg Profit Margins (%) 3.0 3.1 3.0 6.1 4.0
Net Profit Margins (%) 1.5 2.6 3.6 3.2 2.0
Page 38
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Page 39
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Page 40
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Page 41
China / Hong Kong Company Guide
China Mengniu
Edition 1 Version 1 |Bloomberg: 2319 HK EQUITY | Reuters: 2319.HK Refer to important disclosures at the end of this report
46.3 203
full-year contribution from Danone’s Bio+ (FY14: Rmb200m).
41.3 183 Coupled with solid momentum in other high-margin products
36.3
163 such as premium milk, we expect Mengniu’s double-digit
31.3
143
growth in top line to be sustainable, with room for margin
expansion given the enhancement in product mix and
123
26.3
103
21.3 83 favourable raw material costs.
16.3 63
China Mengniu (LHS) Relative HSI INDEX (RHS) UHT milk market to face tougher competition. But with its
Forecasts and Valuation strategy to place more promotional efforts on this category,
FY Dec (RMB m) 2014A 2015F 2016F 2017F there could still be some growth with the cheaper raw material
Turnover 50,049 55,784 61,750 67,723 costs (avg. raw milk prices and Fonterra milk powder prices have
EBITDA 4,241 4,372 4,944 5,694 fallen 15% and 40% yoy respectively) providing a cushion on
Pre-tax Profit 3,150 3,469 4,004 4,658 margins.
Net Profit 2,351 2,694 3,066 3,526
EPS (RMB) 1.22 1.38 1.57 1.80 Valuation:
EPS (HK$) 1.52 1.72 1.96 2.25
The stock is currently trading at 19.6x FY16F PE, below its
EPS Gth (%) 35.1 12.9 13.8 15.0
Diluted EPS (HK$) 1.52 1.72 1.96 2.25 historical (24x) as well as sector average valuation (25.5x). Our
DPS (HK$) 0.36 0.39 0.44 0.51 TP is now rolled over to HK$47.1(previously HK$45.8), based on
BV Per Share (HK$) 13.93 15.10 16.67 18.48 24x FY16F PE (prev. c.26x FY15 PE), pegged to its historical
PE (X) 25.2 22.3 19.6 17.0 average.
P/Cash Flow (X) 19.2 13.2 14.2 13.2
P/Free CF (X) 398.5 29.4 35.3 29.4 Key Risks to Our View:
EV/EBITDA (X) 15.9 15.3 13.1 10.8
Demand, cost, competition and food safety the key risks.
Net Div Yield (%) 0.9 1.0 1.1 1.3
P/Book Value (X) 2.8 2.5 2.3 2.1 Slower than expected demand, raw material cost fluctuation,
Net Debt/Equity (X) 0.2 0.1 0.0 CASH rising SG&A on increased A&P efforts, surging competition
ROAE (%) 12.8 11.9 12.3 12.8 (both domestic and global players) and food safety concerns
Earnings Rev (%): Nil Nil New would be key risks.
Consensus EPS (RMB) 1.43 1.69 2.03
Other Broker Recs: B: 22 S: 1 H: 8 At A Glance
Source of all data: Company, DBSV, Thomson Reuters, HKEX Issued Capital (m shrs) 1,961
Mkt. Cap (HK$m/US$m) 75,216 / 9,705
Major Shareholders
COFCO, Arla, Danone (%) 31.5
Commonwealth Bank of Australia 8.0
Free Float (%) 60.4
3m Avg. Daily Val. (US$m) 28.9
ICB Industry : Consumer Goods / Food Producers
Yogurt
Earnings Drivers: 15%
Yogurt – leader in driving stronger product mix. Yogurt accounted
for 15% of FY14 sales. We expect sales growth to reach 25% in UHT milk
Milk 47%
FY15 (FY14: 37%), led by higher margin star products such as beverages
Champion, Yoyi C, and full-year contribution from Danone’s Bio+ 24%
(FY14. RMB200m). Mengniu has launched smaller packaging
formats for Yoyi C with more varieties of flavours, while it
continues to extend the products’ shelf-life to improve profitability. Yogurt sales & % yoy
RMB m
10,000 70%
Recovery in infant formula sales. Despite the tough operating 9,000
60%
environment in the infant formula market, we see potential 8,000
7,000 50%
catalysts coming from (i) a likely recovery in Yashili’s topline 6,000 40%
growth; (ii) injection of the remainder of existing infant formula 5,000
4,000 30%
operations from Mengniu to Yashili; and (iii) potential investment 3,000 20%
into Danone’s Dumex China, which is one of the fastest growing 2,000
10%
1,000
imported brands. Mengniu became a controlling shareholder of 0 0%
Yashili last year. In FY14, Yashili accounted for c.5% of its sales 2009 2010 2011 2012 2013 2014F 2015F
Sales Growth (%)
and net profit. Following the acquisition, Yashili has been
undergoing restructuring and is refining its distribution network. Yashili net profit contribution as % of total sales
%
We expect impact from these efforts to start kicking in gradually. 6.0
5.0
Given the typically higher GP margin for infant formula, a recovery 5.0
in Yashili would enhance Mengniu’s margin in the medium term. 4.0
3.0
Seeking to improve distribution channels. Mengniu will continue 2.0
1.2
to streamline its distribution channels, shifting from distributor- 1.0
0.2
based to direct selling. This will be implemented in 2015 in first
0.0
tier and key provincial cities, where the company aims to switch to 2H13 1H14 2H14
cash flow (est. >Rmb3bn p.a.), this should be more than 0.40
1.3
sufficient to cover its upcoming capex (est. Rmb2.5bn), with net 0.30 1.3
0.10 1.2
Market share gains. We expect one of the key drivers of Mengniu Gross Debt to Equity (LHS) Asset Turnover (RHS)
will be its ability to further expand its distribution network, Capital Expenditure
thereby improve its market share nationwide. RM
3,000.0
2,900.0
Stronger than expected margin expansion. Persistent soft raw 2,800.0
milk prices and milk powder prices could offer further room for 2,700.0
margin improvement. 2,600.0
2,500.0
Key Risks: 2,400.0
6.0%
Raw material price volatility. Mengniu’s profitability would be
affected by volatility in raw material costs, in particularly raw milk 4.0%
0.0%
2013A 2014A 2015F 2016F 2017F
COMPANY BACKGROUND
One of the key leading giants. Mengniu is one of the leading Forward PE Band (x)
(x)
dairy giants in China. China Mengniu, through its subsidiaries,
32.4
manufactures and distributes dairy related products (UHT milk,
30.4
yogurt, and milk beverages), ice cream, and other dairy products, 28.4 +2sd: 28.4x
such as infant formula powder. The company markets its 26.4
+1sd: 25.4x
products under its MENGNIU core brand. 24.4
22.4 Avg: 22.5x
20.4
‐1sd: 19.6x
Key listed companies. China Mengniu has controlling stakes on 18.4
two listed companies - Yashili (51% stake) and China Modern 16.4 ‐2sd: 16.6x
chain as well as improving its infant formula capabilities. It also PB Band (x)
holds minor equity stakes in other upstream players such as 4.2
(x)
Shengmu and YST Dairy. As for downstream operations,
Mengniu holds a 51% stake in Junlebao, a private company, 3.7
+2sd: 3.65x
which is known for its affordable infant formula powder. +1sd: 3.26x
3.2
Avg: 2.87x
Partnerships with international players. Mengniu has formed 2.7
Margins
Gross Margins (%) 24.7 26.7 27.2 32.4 29.1
Opg Profit Margins (%) 3.5 4.4 4.3 4.7 6.0
Net Profit Margins (%) 3.4 3.6 3.9 4.1 5.4
Source: Company, DBS Vickers
May-15
Jul-14
Jul-15
Oct-14
Feb-15
4.4
212
total) to KKR and CDH with a 3-year lock-up period, in
192
3.9
172
exchange for the remaining 82% stake in its two JV farms
3.4
152 which holds 16,268 cows. Based on the 5M15 net profit of
Rmb44.6m, we estimate the potential earnings enhancement to
2.9
132
2.4 112
1.9 92
be 3-5% in FY15/16.
5.0
Production volume to drive upstream sales growth. We 4.8
expect sales volume, driven by improving milk yields and organic
4.6
herd size growth, to be the key drivers to upstream earnings.
4.4
Demand will be mostly absorbed by Mengniu, with a 10-year
offtake agreement until 2018. We maintain our view that large- 4.2
scale dairy farms such as CMD will be the key beneficiaries of the 4.0
market consolidation in the upstream dairy sector, as large-scale 2013 2014 2015F 2016F 2017F
players should have stronger cost competitiveness vs smaller Milk yield (tonne/annum)
players. In the longer run, the increasing popularity of pasteurised RMB/tonne
9.20 9.08
dairy products would further drive the demand for locally
8.99
produced quality milk. In terms of herd size, we expect the 9.00 8.90
company to grow at 9% organically. Inclusive of its two JVs, we
8.80
expect herd size to grow 17% this year.
8.60 8.50
Milk yield to grow. With the inclusion of the two JVs, we expect
8.40
milk yield to be softer this year on average. We estimate milk
yield to grow by 1% to 9 tonnes per annum this year (FY14: 8.20
2013 2014 2015F 2016F
+7% y-o-y). This should improve as the herd matures.
Sales volume ('000 tonnes)
'000 tonne
Point of sales expansion key to downstream growth.
2,000 40%
Downstream sales will be primarily driven by distribution network
expansion to improve CMD’s visibility in the market. CMD’s liquid 1,500 30%
milk products are currently sold in 28 provinces, with decent sales 1,000 20%
coverage at modern trade channels such as large supermarkets
including Carrefour, Walmart, Meetall, Shiji Hualian, C.P Lotus, 500 10%
Mar/13
Mar/14
Mar/15
Sep/11
Sep/12
Sep/13
Sep/14
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
WMP
US$/ton
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
Oct/11
Feb/12
Oct/12
Feb/13
Oct/13
Feb/14
Oct/14
Feb/15
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Rebound on raw milk prices. A rebound in raw milk prices will 0.00
2013A 2014A 2015F 2016F 2017F
0.2
lift upstream sales, as well as margins. As the largest upstream Gross Debt to Equity (LHS) Asset Turnover (RHS)
2.0%
A pioneer in large-scale dairy farming. CMD is among the first to 15.7 Avg: 15.7x
adopt a free-stall dairy farming business model in China to ensure 10.7 ‐1sd: 11x
higher yields and cost efficiency compared with small-scale
5.7 ‐2sd: 6.3x
backyard farmers. CMD previously relied on imported heifers Jul-11 Jul-12 Jul-13 Jul-14
from Australia to ensure higher productivity as well as faster herd PB Band (x)
size growth; this has since been halted as CMD has reached a (x)
3.2
sustainable herd size.
2.7 +2sd: 2.65x
Expand operations downstream. CMD expanded its operations
2.2 +1sd: 2.21x
downstream under the brand Modern Farming, primarily sold in
Shanghai region. In FY15, CMD will expand its product offerings 1.7 Avg: 1.76x
‐2sd: 0.87x
0.7
Jan-12 Jan-13 Jan-14 Jan-15
Growth
Revenue Gth (%) N/A 47.4 74.0 86.2 28.5
Opg Profit Gth (%) N/A 19.8 117.5 108.3 (37.0)
Net Profit Gth (%) N/A 8.3 163.4 228.9 21.6
Margins
Gross Margins (%) 30.8 35.2 40.4 38.9 35.2
Opg Profit Margins (%) 22.3 22.9 27.8 25.6 13.6
Net Profit Margins (%) 13.0 13.3 19.7 23.5 18.7
Source: Company, DBS Vickers
May-15
Jul-14
Jul-15
Oct-14
Feb-15
Page 4
www.dbsvickers.com
ed- JS / sa- AL
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
Yashili International Holdings
One of the top domestic players in China. Yashili is engaged Recovery in topline growth. Since Mengniu became Yashili’s
in the production and sales of paediatric milk formula controlling shareholder, the Group has invested in information
products and nutrition food. It held a market share of 4.5% in platforms to improve its communication access with
China’s infant formula market in 2014. Headquartered in consumers. As at FY14, the Group had 27,000 membership
Guangdong province, Yashili operates plants in Guangdong, stores with 1.1m members. Yashili will place more effort on
Shanxi and Heilongjiang, with a new plant in New Zealand communicating and understanding consumers’ needs through
expected to commence operations in 2015. face-to-face marketing events, increasing promotional events,
upgrading technology and infrastructure, as well as leveraging
In Nov-13, Mengniu made a general offer to become Yashili’s on shareholders’ strength in sales and distribution.
controlling shareholder at HK$3.5/share. Danone
subsequently joined as the second largest shareholder in Feb- Leveraging on key shareholders’ expertise. Based on the MOU
15 through a new share placement at HK$3.7/share. Currently, which has been entered between Mengniu, Yashili and
Mengniu and Danone have 51% and 25% stakes respectively. Danone t o inject Danone’s Dumex China operations into
Yashili, Danone intends to sell all its interest in Dumex China
Yashili has an extensive range of infant formula brands, with to Yashili, of which the proceeds will be used to subscribe for
its two core brands, Yashily and Scient, targeting mid- to Mengniu’s shares through COFCO Dairy Investment (CDI).
high-end consumers. Yashily Super α-Golden series, the Combining Danone’s market share of 2.8% based on
Ambery Golden series and the Arla Merla series (cooperation Euromonitor, Mengniu-Yashili’s infant formula market share
with Arla foods) target high-end consumers, while Yashily will propel to second position with 7%, after Nestle. While no
Newwitt series and Scient’s Ordinary Pack Series focus on mid- financial details are released at this stage, this clearly
end consumers. Lastly, Yashily New Formula focuses on low- strengthens Yashili’s position in the infant formula market.
to mid-end consumers. The Group also sells nutrition food, Synergies include leveraging on Danone’s sales and
such as adult milk powder and nutritious paediatric rice cereal. distribution network as well as product technology to further
improve on its existing product offerings.
FY14 sales breakdown
E-commerce presence to grow. E-commerce is the fastest-
growing sales channel for infant formula, in which
international brands have dominant presence due to their
Yashily
stronger brand reputation. This trend should likely continue.
Nutritions Despite this, Yashili should still be able to benefit, given
19% opportunities to leverage on Danone’s existing online platform,
as well as potential for its imported brands such as Arla Merla.
Yashili will also have dedicated products (Le Pei Jian” [樂培健])
Scient to target its maternity channel.
Formula Yashily
16% Formula
65%
Page 55
China Dairy Sector
Yashili International Holdings
100%
90%
80%
53% 50%
70%
60%
50%
40%
30% 37% 44%
20%
10%
10% 7%
0%
Yashily Scient
1st tier 2nd tier 3rd and lower
Page 56
China Dairy Sector
Yashili International Holdings
Income Statement (RMB m) Balance Sheet (RMB m)
FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A
Turnover 2,958 3,655 3,890 2,816 Net Fixed Assets 730 744 803 613
Cost of Goods Sold (1,420) (1,693) (1,810) (1,371) Invts in Assocs & JVs 76 418 985 939
Gross Profit 1,538 1,962 2,080 1,445 Other LT Assets 234 407 342 196
Other Opng (Exp)/Inc (1,234) (1,407) (1,601) (1,191) Cash & ST Invts 2,762 2,273 1,056 2,090
Operating Profit 304 554 479 254 Inventory 578 653 886 718
Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 52 27 32 43
Associates & JV Inc 0 0 0 0 Other Current Assets 212 1,048 413 330
Net Interest (Exp)/Inc 71 92 97 56 Total Assets 4,644 5,570 4,517 4,929
Dividend Income 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 31 331 154 141
Pre-tax Profit 375 646 577 310 Creditors 720 1,029 346 234
Tax (67) (176) (137) (61) Other Current Liab 55 91 834 735
Minority Interest (2) (2) (2) 0 LT Debt 0 0 47 621
Preference Dividend 0 0 0 0 Other LT Liabilities 33 37 25 23
Net Profit 306 468 438 249 Shareholder’s Equity 3,803 4,079 3,110 3,174
Minority Interests 1 3 0 0
EBITDA 383 636 565 348 Total Cap. & Liab. 4,644 5,570 4,517 4,929
Sales Gth (%) 0.1 23.6 6.4 (27.6)
EBITDA Gth (%) (42.1) 66.0 (11.2) (38.4) Non-Cash Wkg. Cap 68 608 150 122
Opg Profit Gth (%) (48.1) 82.2 (13.5) (47.0) Net Cash/(Debt) 2,730 1,942 854 1,327
Net Profit Gth (%) (39.0) 53.0 (6.6) (43.1)
Effective Tax Rate (%) 17.8 27.2 23.8 19.7
Cash Flow Statement (RMB m) Rates & Ratio
FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A
Pre-Tax Profit 375 646 577 310 Gross Margins (%) 52.0 53.7 53.5 51.3
Dep. & Amort. 79 82 86 94 Opg Profit Margin (%) 10.3 15.2 12.3 9.0
Tax Paid (82) (127) (196) (78) Net Profit Margin (%) 10.4 12.8 11.2 8.8
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 8.1 11.9 12.2 7.9
(Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 6.7 9.2 8.7 5.3
Chg in Wkg.Cap. 123 242 (257) 75 ROCE (%) 6.4 9.7 9.4 5.6
Other Operating CF (37) (72) (69) (137) Div Payout Ratio (%) 65.3 298.9 30.0 30.0
Net Operating CF 458 772 141 264 Net Interest Cover (x) NM NM NM NM
Capital Exp.(net) (107) (208) (255) (704) Asset Turnover (x) 0.6 0.7 0.8 0.6
Other Invts.(net) (340) (1,283) (222) (832) Debtors Turn (avg days) 15.1 3.9 2.8 4.9
Invts in Assoc. & JV 0 0 0 488 Creditors Turn (avg days) 66.8 75.3 76.4 77.3
Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 124.5 132.6 155.2 213.5
Other Investing CF 217 346 309 (4) Current Ratio (x) 4.5 2.8 1.8 2.9
Net Investing CF (229) (1,145) (168) (1,052) Quick Ratio (x) 3.8 2.3 1.1 2.2
Div Paid (235) (200) (1,408) (131) Net Debt/Equity (X) CASH CASH CASH CASH
Chg in Gross Debt (127) 300 (15) 559 Capex to Debt (%) 339.7 62.9 126.6 92.3
Capital Issues (16) 0 31 0 Z-Score (X) N/A N/A N/A N/A
Other Financing CF (26) (230) (53) (5) N.Cash/(Debt)PS (RMB) 0.97 0.69 0.30 0.47
Net Financing CF (404) (130) (1,445) 423 Opg CFPS (RMB) 0.10 0.15 0.11 0.05
Currency Adjustments (45) (78) 10 (7) Free CFPS (RMB) 0.10 0.16 (0.03) (0.12)
Chg in Cash (220) (581) (1,462) (372)
Interim Income Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions
FY Dec 1H2013 2H2013 1H2014 2H2014 FY Dec 2011A 2012A 2013A 2014A
Turnover 2,153 1,737 1,546 1,271 Revenues (RMB m)
Cost of Goods Sold (961) (849) (726) (646) Yashily Formula 1,826 2,478 2,661 1,833
Gross Profit 1,192 888 820 625 Scient Formula 609 653 661 438
Other Oper. (Exp)/Inc (819) (779) (607) (583) Yashili Nutritions 473 489 546 534
Operating Profit 373 109 212 43 Other 50 34 23 12
Other Non Opg (Exp)/Inc 0 0 0 0
Associates & JV Inc 0 0 0 0 Total 2,958 3,655 3,890 2,816
Net Interest (Exp)/Inc 38 57 26 28
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 410 166 239 71
Tax (115) (22) (29) (32)
Minority Interest (2) 0 0 0
Net Profit 294 144 209 39
Page 57
China Dairy Sector
Inner Mongolia Yili Industrial-A
Bloomberg: 600887 CH Equity | Reuters: 600887.SS Refer to important disclosures at the end of this report
Page 58
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additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
Inner Mongolia Yili Industrial-A
through TV, radio, promoters, celebrities and large exhibitions
Growth drivers (Olympic, World Expo)
Star products to drive profitability. Yili derives 78% of its sales SG&A expenses comparison
from liquid milk (UHT milk, yogurt & milk beverages), while
milk powder and ice-cream account for 11% and 8% %
respectively. In FY14, Yili’s liquid milk posted over 14% 40
growth y-o-y, helped by ASP hike in 2H14, as well as success 35
in its star products such as Satine, Ambrosial and Chang Qing, 30
leading to an improvement in product mix towards the
25
higher-margin products. Milk powder sales also grew 9.1%
mainly from product mix upgrade from Pro-Kido brand and 20
imported milk powder brand, Tofer. Going forward, star 15
products, which command higher margins than its original 10
brands, will continue to be the key driver for profitability.
5
0
FY14 sales mix
2009 2010 2011 2012 2013 2014
Page 59
China Dairy Sector
Inner Mongolia Yili Industrial-A
Income Statement (RMB m) Balance Sheet (RMB m)
FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A
Turnover 37,451 41,991 47,779 54,436 Net Fixed Assets 8,662 10,419 11,897 14,083
Cost of Goods Sold (26,719) (29,754) (34,317) (36,585) Invts in Assocs & JVs 0 0 0 0
Gross Profit 10,733 12,236 13,462 17,851 Other LT Assets 2,540 3,190 4,513 4,410
Other Opng (Exp)/Inc (9,036) (10,571) (10,836) (13,306) Cash & ST Invts 3,921 2,004 8,173 14,273
Operating Profit 1,697 1,665 2,626 4,545 Inventory 3,310 2,995 3,683 5,008
Other Non Opg (Exp)/Inc 390 471 401 396 Debtors 1,116 937 670 903
Associates & JV Inc 0 0 0 0 Other Current Assets 381 271 3,941 817
Net Interest (Exp)/Inc 49 (49) 33 (155) Total Assets 19,930 19,815 32,877 39,494
Dividend Income 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 2,985 2,578 4,086 8,072
Pre-tax Profit 2,136 2,087 3,060 4,786 Creditors 7,431 6,960 8,539 7,444
Tax (304) (351) 141 (619) Other Current Liab 2,449 1,940 2,892 3,241
Minority Interest (23) (19) (14) (22) LT Debt 7 5 0 704
Preference Dividend 0 0 0 0 Other LT Liabilities 751 808 1,047 1,212
Net Profit 1,809 1,717 3,187 4,144 Shareholder’s Equity 6,024 7,335 16,125 18,634
Minority Interests 282 190 188 188
EBITDA 2,160 2,274 3,324 5,265 Total Cap. & Liab. 19,930 19,815 32,877 39,494
Sales Gth (%) 26.2 12.1 13.8 13.9
EBITDA Gth (%) 113.3 5.2 46.2 58.4 Non-Cash Wkg. Cap (5,074) (4,697) (3,137) (3,956)
Opg Profit Gth (%) 190.1 (1.9) 57.7 73.1 Net Cash/(Debt) 929 (578) 4,087 5,497
Net Profit Gth (%) 132.8 (5.1) 85.6 30.0
Effective Tax Rate (%) 14.2 16.8 N/A 12.9
Cash Flow Statement (RMB m) Rates & Ratio
FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A
Pre-Tax Profit 2,136 2,087 3,060 4,786 Gross Margins (%) 28.7 29.1 28.2 32.8
Dep. & Amort. 731 915 1,143 1,479 Opg Profit Margin (%) 4.5 4.0 5.5 8.3
Tax Paid (100) 0 (458) 139 Net Profit Margin (%) 4.8 4.1 6.7 7.6
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 35.3 25.7 27.2 23.8
(Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 10.3 8.6 12.1 11.5
Chg in Wkg.Cap. 1,321 (350) 1,539 (3,714) ROCE (%) 16.3 13.2 16.2 15.7
Other Operating CF (418) (243) 190 (253) Div Payout Ratio (%) 22.1 30.5 51.3 59.2
Net Operating CF 3,670 2,409 5,475 2,436 Net Interest Cover (x) NM 33.9 NM 29.3
Capital Exp.(net) (3,789) (3,102) (3,241) (3,946) Asset Turnover (x) 2.1 2.1 1.8 1.5
Other Invts.(net) 260 25 (178) 33 Debtors Turn (avg days) 12.7 8.9 6.1 5.3
Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 90.8 90.1 84.1 81.3
Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 41.0 39.5 36.2 44.2
Other Investing CF 52 20 (2,841) 2,915 Current Ratio (x) 0.7 0.5 1.1 1.1
Net Investing CF (3,476) (3,057) (6,260) (999) Quick Ratio (x) 0.4 0.3 0.6 0.8
Div Paid (88) (530) (606) (1,807) Net Debt/Equity (X) CASH 0.1 CASH CASH
Chg in Gross Debt 194 (411) 1,496 4,690 Capex to Debt (%) 126.6 120.1 79.3 45.0
Capital Issues 1 0 6,118 0 Z-Score (X) N/A N/A N/A N/A
Other Financing CF (238) 37 242 0 N.Cash/(Debt)PS (RMB) 0.58 (0.36) 2.00 1.79
Net Financing CF (131) (905) 7,251 2,883 Opg CFPS (RMB) 1.47 1.73 1.93 2.01
Currency Adjustments (1) 0 (5) 0 Free CFPS (RMB) (0.07) (0.43) 1.09 (0.49)
Chg in Cash 63 (1,553) 6,460 4,320
Interim Income Statement (RMB m) Segmental Breakdown (RMB m)
FY Dec 1H2013 2H2013 1H2014 2H2014 FY Dec 2011A 2012A 2013A 2014A
Turnover 24,021 23,758 27,471 26,966 Revenues (RMB m)
Cost of Goods Sold (16,761) (17,556) (18,379) (18,206) Liquid milk 26,933 32,271 37,116 42,406
Gross Profit 7,260 6,202 9,092 8,759 Ice-cream 4,222 4,294 4,243 4,284
Other Oper. (Exp)/Inc (5,955) (4,882) (6,640) (6,666) Milk powder & dairy related 5,642 4,484 5,512 6,013
Operating Profit 1,306 1,320 2,451 2,093 Others 469 687 583 1,733
Other Non Opg (Exp)/Inc 182 219 181 215
Associates & JV Inc 0 0 0 0 Total 37,266 41,736 47,454 54,436
Net Interest (Exp)/Inc 7 26 52 (207)
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 1,495 1,565 2,684 2,101
Tax 251 (110) (378) (241)
Minority Interest (8) (6) (13) (9)
Net Profit 1,738 1,449 2,293 1,851
Page 60
China Dairy Sector
Inner Mongolia Yili Industrial-A
Page 61
China Dairy Sector
Biostime International Holdings
Bloomberg: 1112 HK Equity | Reuters: 1112.HK Refer to important disclosures at the end of this report
59.2
422
372
the company markets its products under two key brands -
49.2 322 Biostime and Adimil. Apart from infant formula, Biostime is also
39.2
272 involved in other products including probiotic supplements,
29.2
222
dried baby food and baby care products. With baby specialty
172
19.2 122
stores being its key channel, the company generated the
9.2 72 majority of its sales (77% in FY14) from its members of
Jul-11 Jul-12 Jul-13 Jul-14
Biostime International Holdings (LHS)
Jul-15
MaMa100, its loyalty membership program.
Relative HSI INDEX (RHS) Clearing old inventory to pave way for launch of new
Forecasts and Valuation packaging. Since late 2014, Biostime has been clearing its old
FY Dec (RMB m) 2011A 2012A 2013A 2014A infant formula inventory to pave way for the launch of
Turnover 2,189 3,382 4,561 4,732 upgraded products (with new packaging) in end-June. While
EBITDA 710 1,032 1,116 1,154 there have been some market share gains, partly helped by
Pre-tax Profit 714 1,051 1,162 1,121 aggressive promotions (buy-1-get-1-free), 4M15 infant formula
Net Profit 527 743 821 810 sales posted a slight decline. With ASP expected to remain
EPS (RMB) 0.86 1.22 1.60 1.31
EPS (HK$) 1.08 1.52
largely unchanged, there should be some margin benefits in
2.00 1.63
EPS Gth (%) 48.7 40.7 32.0 (18.4) FY15 from lower raw material costs, partly offset by higher
Diluted EPS (HK$) 1.08 1.52 2.00 1.63 marketing expenses associated with the upgraded product
DPS (HK$) 0.95 1.35 1.51 0.84 launches. On the distribution front, Biostime is working to
BV Per Share (HK$) 4.10 4.84 5.21 6.00 expand its MaMa100 platform to cross-sell third-party products
PE (X) 20.0 14.2 10.8 13.2 and offer assistance to parties seeking to enter its offline
Core PE (X) 19.8 13.9 12.7 13.0 distribution channels, with plans to list its e-commerce platform
P/Cash Flow (X) 20.2 10.9 15.8 10.8 in the A-share market in the future.
P/Free CF (X) 21.8 11.4 19.9 12.5
EV/EBITDA (X) 12.1 8.7 8.5 8.3 Challenging competition landscape with rising margin
Net Div Yield (%) 4.4 6.2 7.0 3.9 risk. Biostime issued a profit warning expecting 1H15 sales and
P/Book Value (X) 5.3 4.5 4.1 3.6 profit to decline by 11% and 36% respectively on the back of
Net Debt/Equity (X) CASH CASH CASH CASH heavy promotional activities. In the medium term, pricing risk is
ROAE (%) 29.0 34.6 33.9 29.8 high given rising competition and distribution channel changes,
with premium brands like Biostime likely to face most pricing
pressure. Hence, despite its current valuation, at 11.3x FY16 PE
based on consensus estimates, the share price is already below
both its historical and peers’ average, there are no near-term re-
ICB Industry: Consumer Goods rating catalysts in sight.
ICB Sector: Food Producers
At A Glance
Principal Business: One of the top infant formula companies in
Issued Capital (m shrs) 609
China with products marketed under Biostime and Adimil
brands Mkt. Cap (HK$m/US$m) 13,161 / 1,698
Source of all data: Company, DBSV, Thomson Reuters, HKEX Major Shareholders
Biostime Pharmaceuticals (China) Limited (%) 73.9
Free Float (%) 26.1
3m Avg. Daily Val. (US$m) 7.0
Page 62
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DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
Biostime International Holdings
Page 63
China Dairy Sector
Biostime International Holdings
Page 64
China Dairy Sector
Biostime International Holdings
Page 65
China Dairy Sector
China Huishan Dairy Holdings
Bloomberg: 6863 HK Equity | Reuters: 6863.HK Refer to important disclosures at the end of this report
3.1
199 Huishan brand. In late 2014, the company formed a 50-50 JV
179
159
with FrieslandCampina to introduce one of
2.6
139 FrieslandCampina’s existing brands (excluding Friso) into
119
2.1
99
China. There is also a commitment from FrieslandCampina to
1.6 79 purchase US$30m worth of shares in the open market after
59
1.1 39 completion of the JV deal.
Sep-13 Feb-14 Jul-14 Dec-14 May-15
Focus on downstream operations. Excluding biological asset
China Huishan Dairy Holdings (LHS) Relative HSI INDEX (RHS)
and other fair value gains, Huishan FYMar15 net profit
Forecasts and Valuation declined 27% yoy, mainly hampered by the decline in raw
FY Mar (RMB m) 2012A 2013A 2014A 2015A milk price, a delay in the ramp up of liquid milk capacity, as
Turnover 1,333 2,552 3,530 3,923
EBITDA 537 1,291 1,664 1,512 well as an increase in A&P costs to expand outside of NE
Pre-tax Profit 397 1,081 1,294 967 China. We expect Huishan will continue to focus on
Net Profit 386 1,014 1,249 908 downstream sales with the expansion of its low-temperature
EPS (RMB) 0.03 0.09 0.10 0.06
yogurt and pasteurised milk products into new regions. This
EPS (HK$) 0.04 0.11 0.12 0.08
EPS Gth (%) N/A 162.7 9.7 (34.4) will be aided by its new factory located in Jiangsu. We also
Diluted EPS (HK$) 0.04 0.11 0.12 0.08 expect its partnership with FrieslandCampina to be a potential
DPS (HK$) 0.00 0.00 0.03 0.02 driver in the longer run.
BV Per Share (HK$) 0.10 0.64 1.27 1.19
PE (X) 52.1 19.8 18.1 27.5 Supporting share price via various methods. We expect
Core PE (X) 52.1 19.8 18.1 27.5 FYMar16 capex to remain high at approximately Rmb2bn,
P/Cash Flow (X) 26.7 13.9 21.8 177.6 owing to commitment on construction of dairy farms, hence
P/Free CF (X) nm 21.1 nm nm
EV/EBITDA (X) 39.6 16.7 13.7 19.1 making it difficult to generate positive free cash flow in the
Net Div Yield (%) 0.0 0.0 1.4 0.9 near term. However, Huishan continues to pay dividends with
P/Book Value (X) 22.8 3.4 1.7 1.8 FYMar15 final dividend at Rmb0.0153/share (FYMar14:
Net Debt/Equity (X) 1.3 0.3 0.0 0.3 Rmb0.0216), implying a dividend payout of 28.3% (FYMar14:
ROAE (%) 60.8 30.0 13.1 6.8
22.4%). Since June, Huishan’s Chairman purchased c.427m
shares in the open market, in addition to Huishan’s own
share buyback of 365m since Aug-14 (implying c.2.6% of
ICB Industry: Consumer Goods share capital prior to share repurchase.)
ICB Sector: Food Producers
At A Glance
Principal Business: Integrated dairy player primarily in Northeast
China Issued Capital (m shrs) 14,320
Source of all data: Company, DBSV, Thomson Reuters, HKEX Mkt. Cap (HK$m/US$m) 31,075 / 4,009
Major Shareholders
Champ Harvest Limited (%) 64.2
Norges Bank 5.9
Free Float (%) 29.8
3m Avg. Daily Val. (US$m) 23.8
Page 66
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additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
China Huishan Dairy Holdings
thereafter moving into East China as the premium UHT
Growth drivers product market is highly penetrated by dairy giants such as
Mengniu and Yili. As of Mar-15, Huishan has 373 distributors,
Growing its own feed. One of the key attractions of Huishan and 408 direct sales stores in malls and supermarkets. While
Dairy is its feedstock plantation. Huishan currently leases topline is likely to grow strongly, we expect profitability could
480,000mu of land, of which 140,000mu is for alfalfa be partly offset by A&P costs at the initial stages of expansion.
plantation. The remainder leased land will be used to develop
oat and corn silage. This will continue to keep its cost of In Nov-14, Huishan and Alpha Spring (Nantong Zongyi
breeding cows lower than the sector average. For example, Investment Co) agreed to invest up to Rmb650m together in a
Huishan’s feed cost per tonne is c.30% below market leader JV to further replicate its dairy farm operations in East China
CMD. (Shanghai, Jiangsu, Zhejiang, Shandong, Anhui). Nantong
Zongyi Investment is a listed company which specialises in
Improvement in sales volume and milk yields partly offset by software and solar cell production in Jiangsu province.
raw milk price decline. As of end Mar-15, Huishan Dairy has a
herd size of 180,331 cows, of which 74,389 are milkable Expanding into milk powder operations. As of Mar-15,
cows. In total, Huishan has 69 dairy farms in Liaoning Province, Huishan has three milk powder production facilities
and management expects the herd to grow organically by manufacturing infant formula products under its own brand
10%. The company will halt importing dairy cows this year. Gold Queen and Huishan Red. Its other product offerings
While there was a slight improvement in milk yields to include whole milk powder, D90 whey powder, and non-dairy
9.1tonnes/annum (FYMar14: 9tonnes/annum), raw milk prices creamer.
declined by 6% y-o-y to Rmb4.87/kg. We expect the impact
from raw milk price decline to be partly offset by sales volume In Oct-14, Huishan formed a JV with FrieslandCampina to
growth in FYMar16. produce and work together to start a new IMF brand with
FrieslandCampina. Huishan received an Rmb700m investment
from FrieslandCampina in a 50/50 JV inclusive of its Shenyang
Downstream sales volume
plant. In addition, FrieslandCampina will acquire USD30m
worth of shares in the open market within six month of the
Tonnes completion of the JV. Essentially, this JV will be able (1) to
160,000 build on existing partnership in the production of non-dairy
141,374
140,000 creamers, (2) secure more demand for Huishan’s raw milk,
123,707
120,000 and lastly (3) to utilise FreislandCampina’s existing sales and
100,000 91,244 distribution network.
77,097
80,000 66,654 75,257
Page 67
China Dairy Sector
China Huishan Dairy Holdings
Income Statement (RMB m) Balance Sheet (RMB m)
FY Mar 2012A 2013A 2014A 2015A FY Mar 2012A 2013A 2014A 2015A
Turnover 1,333 2,552 3,530 3,923 Net Fixed Assets 2,840 3,637 4,317 6,356
Cost of Goods Sold (783) (1,174) (1,326) (1,663) Invts in Assocs & JVs 0 0 0 0
Gross Profit 550 1,378 2,205 2,261 Other LT Assets 2,695 4,733 9,420 10,171
Other Opng (Exp)/Inc (5) (64) (335) (561) Cash & ST Invts 1,094 1,522 6,147 4,149
Operating Profit 500 1,223 1,500 1,289 Inventory 413 447 915 1,582
Other Non Opg (Exp)/Inc 5 42 9 34 Debtors 148 173 220 271
Associates & JV Inc 0 0 0 0 Other Current Assets 0 0 0 1,805
Net Interest (Exp)/Inc (103) (142) (206) (323) Total Assets 7,190 10,511 21,020 24,334
Dividend Income 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 362 909 1,641 2,867
Pre-tax Profit 397 1,081 1,294 967 Creditors 524 910 738 1,401
Tax (11) (67) (45) (60) Other Current Liab 3,280 473 540 986
Minority Interest 0 0 0 (1) LT Debt 1,917 2,103 4,679 5,140
Preference Dividend 0 0 0 0 Other LT Liabilities 224 233 227 255
Net Profit 386 1,014 1,249 908 Shareholder’s Equity 882 5,883 13,195 13,686
Minority Interests 0 0 0 (1)
EBITDA 537 1,291 1,664 1,512 Total Cap. & Liab. 7,190 10,511 21,020 24,334
Sales Gth (%) 256.3 91.5 38.3 11.1
EBITDA Gth (%) 373.8 140.6 28.8 (9.1) Non-Cash Wkg. Cap (3,244) (764) (142) 1,271
Opg Profit Gth (%) 459.2 144.5 22.7 (14.0) Net Cash/(Debt) (1,185) (1,489) (174) (3,858)
Net Profit Gth (%) N/A 162.7 23.2 (27.4)
Effective Tax Rate (%) 2.7 6.2 3.5 6.2
Cash Flow Statement (RMB m) Rates & Ratio
FY Mar 2012A 2013A 2014A 2015A FY Mar 2012A 2013A 2014A 2015A
Pre-Tax Profit 460 1,012 1,294 967 Gross Margins (%) 41.2 54.0 62.4 57.6
Dep. & Amort. 37 69 164 222 Opg Profit Margin (%) 37.5 47.9 42.5 32.9
Tax Paid (9) (54) (70) (45) Net Profit Margin (%) 29.0 39.7 35.4 23.1
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 60.8 30.0 13.1 6.8
(Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 6.1 11.5 7.9 4.0
Chg in Wkg.Cap. 230 228 (537) (2,415) ROCE (%) 15.9 18.3 10.0 5.8
Other Operating CF 34 187 185 1,412 Div Payout Ratio (%) 0.0 0.0 24.9 24.1
Net Operating CF 752 1,442 1,036 141 Net Interest Cover (x) 4.8 8.6 7.3 4.0
Capital Exp.(net) (841) (488) (1,671) (4,279) Asset Turnover (x) 0.2 0.3 0.2 0.2
Other Invts.(net) (84) (50) (2,600) 0 Debtors Turn (avg days) 39.2 22.9 20.3 22.9
Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 242.9 236.8 258.8 270.9
Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 150.5 141.9 213.9 316.4
Other Investing CF (759) (829) (1,652) 0 Current Ratio (x) 0.4 0.9 2.5 1.5
Net Investing CF (1,685) (1,367) (5,923) (4,279) Quick Ratio (x) 0.3 0.7 2.2 0.8
Div Paid 0 0 0 0 Net Debt/Equity (X) 1.3 0.3 0.0 0.3
Chg in Gross Debt 149 386 3,315 1,687 Capex to Debt (%) 36.9 16.2 26.4 53.4
Capital Issues 0 0 5,976 0 Z-Score (X) N/A N/A N/A N/A
Other Financing CF 1,276 (124) (195) 0 N.Cash/(Debt)PS (RMB) (0.13) (0.16) (0.02) (0.34)
Net Financing CF 1,425 262 9,096 1,687 Opg CFPS (RMB) 0.05 0.11 0.12 0.18
Currency Adjustments (13) (12) (44) 0 Free CFPS (RMB) (0.01) 0.08 (0.05) (0.29)
Chg in Cash 479 325 4,166 (2,452)
Interim Income Statement (RMB m) Segmental Breakdown (RMB m)
FY Mar 1H2014 2H2014 1H2015 2H2015 FY Mar 2012A 2013A 2014A 2015A
Turnover 1,534 1,997 1,995 1,929 Revenues (RMB m)
Cost of Goods Sold (644) (682) (857) (806) Raw milk 672 681 989 1,028
Gross Profit 890 1,314 1,138 1,123 Liquid milk 564 1,707 2,288 2,422
Other Oper. (Exp)/Inc (301) (404) (467) (518) Milk powder 0 88 254 473
Operating Profit 590 911 671 618 Grain products 97 77 0 0
Other Non Opg (Exp)/Inc 4 6 21 13
Associates & JV Inc 0 0 0 0 Total 1,333 2,552 3,530 3,923
Net Interest (Exp)/Inc (107) (98) (156) (167) Gross profit (RMB m)
Exceptional Gain/(Loss) 0 0 0 0 Raw milk 326 399 614 614
Pre-tax Profit 482 812 516 451 Liquid milk 217 922 1,499 1,499
Tax (16) (29) (32) (28) Milk powder 0 53 92 92
Minority Interest 0 0 0 (1) Grain products 7 3 0 0
Net Profit 467 783 484 424
Total 550 1,378 2,205 2,205
Gross profit Margins (%)
Raw milk 48.5 58.7 62.0 59.7
Sales Gth (%) N/A N/A 30.0 (3.4) Liquid milk 38.4 54.0 65.5 61.9
Opg Profit Gth (%) N/A N/A 13.9 (32.1) Milk powder N/A 60.6 36.2 19.4
Net Profit Gth (%) N/A N/A 3.6 (45.8) Grain products 7.2 4.2 N/A N/A
Gross Margins (%) 58.0 65.8 57.1 58.2
Opg Profit Margins (%) 38.4 45.6 33.7 32.0 Total 41.2 54.0 62.4 56.2
Net Profit Margins (%) 30.4 39.2 24.2 22.0
Page 68
China Dairy Sector
China Huishan Dairy Holdings
Page 69
Industry Focus
China Dairy Sector
Appendix
Co u n t ry o f
D at e A c q u irer T arg et Cat . T y pe
T arg et
J an-15 Consortium of Taiw anese inv estments A usnutria Dairy Dairy M &A China
Dairy F arm of
Nov -14 Yili Dairy Strategic USA
A merica
Nov -14 New Hope Group F reedom F oods Dairy Strategic A ustralia
Page 70
Industry Focus
China Dairy Sector
Company Y ashili M engniu Biost ime Y ili Bright Beingmat e Nest le Mead F rieland Danone A bbot t
(M engniu) J ohnson Campina
Code 1230 HK 2319 HK 1112 HK 600887 CH 600597 CH 002570 CH Nestle MJ N US DANONE ABBOTT
Origin China China China China China China Swissland USA Netherlands France USA
Mark et 5.4 7.6 6.4 0.6 9.4 12.4 11 4.7 5.8 4.2
share (2014)
Domest ic Scient, Milex Oushi Biostime, Yili Xinhuo; Bright, Yao+ Beingmate Nestle-NAN, Enfamil F riso; Friso- Dumex Similac
Yashili, Series Adimil Pro-Kido (Love +) S-26 Gold
A SP
Domest ic Guangdong, IM Guangdong Inner Shanghai, Heilongjiang, Shuangcheng, Guangdong Shenyang Shanghai Zhejiang;
product ion Shanxi, (Mengniu) Mongolia, Heilongjiang, Zhejiang Tianjin, (Huishan J V ) J iaxing
base Heilongjiang, Xinjiang, Inner Suzhou (nutrition
Heilongjiang Mongolia plant)
Import Arla-Merla Baby&Me Biostime Pure Annum Nestle-NAN Enfamil, F risolac- Aptammil Similac,
Canterbury (Fonterra) HA, Illuma, S- Enfagrow, Gold, Hero- Eleva,
26 Gold Enfakid Baby Pediasure
A SP
Int l base New Zealand Holland France, New New Zealand Kerry Ireland Ireland, Netherlands, Holland Germany EU
Denmark Zealand, US collaboration Germany Singapore
, as well as
Fonterra
Part nerships Mengniu Danone, None Dairy Farmers Synlait Dairy Fonterra None Huishan Fonterra
IM F Arla of America Dairy
Milk 55% Sy nlait, 20% incl. Isigny Partnership Self-owned Contracted Holland,
pow der Fonterra, 7% OCD; (10-20%), with DFA, milk farms in farmers in New
sourcing Imported from Europe for Laiterie de NZ plants, Shanghai Heilongjiang Zealand,
infant formula; Montaigu own farms and & Expanding Australia and
(60-70%), & Heilongjiang, dairy sources Netherlands
Arla (10- Synlait Dairy in China
20%)
Page 71
Industry Focus
China Dairy Sector
RMB m % RMB m %
700,000 20 450,000 25
18 400,000
600,000
16 350,000 20
500,000 14 300,000
400,000 12 15
250,000
10
300,000 200,000
8 10
6 150,000
200,000
4 100,000 5
100,000 50,000
2
0 0 0 0
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2016F
2017F
2018F
2016F
2017F
2018F
Dairy (LHS) YoY growth (RHS) Drinking Milk Products (LHS)
Market size – Yoghurt and sour milk products Market size – Milk formula
RMB m % RMB m %
160,000 30 250,000 25
140,000
25 200,000 20
120,000
20
100,000 150,000 15
80,000 15
60,000 100,000 10
10
40,000
5 50,000 5
20,000
0 0 0 0
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2016F
2017F
2018F
2016F
2017F
2018F
Yoghurt and Sour Milk Products (LHS) Milk Formula (LHS) YoY growth (RHS)
Southwest
China
13%
East China
28%
South
China
22%
Mid China
14%
North and
Northwest Northeast
China China
7% 16%
Source: Euromonitor
Page 72
Industry Focus
China Dairy Sector
Nestlé SA
Wahaha Yili 5%
Yili Bright 6% 20% Mengniu Wahaha
Nestlé SA 18%
18% 7% 4% 5%
Mengniu Yangyuan Yangyuan
19% Zhihui Zhihui
4% 5%
Want Want Want
Want 5%
4%
Coca-Cola
3%
Coca-
Cola
Others 2%
Others
37% 37% Bright
2%
Market share – Yoghurt and sour milk products Market share – Infant formula
Source: Euromonitor
Page 73
Industry Focus
China Dairy Sector
Wahaha
7%
Tingyi
Coca Cola
12%
14%
Yangshengtang
5%
CRE
5%
Others
53% UPC
4%
Yantai Weilong ,
Henan COFCO , 3.0 0.9
Changyu, 3.0
Nanjiecun , Citic Guoan , 0.9 Vats, 0.9
1.5
Others, 19.0 Castel Group,
Nisson 0.7
Foods , 2.0
Tingyi, 39.4
Henan Si Mei Macrolink, 0.6
Te, 4.1
Baixiang
Food,
10.0
Page 74
Industry Focus
China Dairy Sector
RMB/kg US$/ton
4.4 5,500
5,000
4.2
4,500
4.0 4,000
3.8 3,500
3,000
3.6
2,500
3.4 2,000
3.2 1,500
1,000
3.0
Oct/11
Feb/12
Oct/12
Feb/13
Oct/13
Feb/14
Oct/14
Feb/15
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Mar/12
Mar/13
Mar/14
Mar/15
Sep/11
Sep/12
Sep/13
Sep/14
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
RMB/ton RMB/ton
8,000 13,000
12,500
7,000 12,000
11,500
6,000 11,000
10,500
5,000 10,000
9,500
4,000 9,000
8,500
3,000 8,000
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Page 75
Industry Focus
China Dairy Sector
US$/ton Rmb/ton
550 2,600
500 2,500
450 2,400
400 2,300
350 2,200
300 2,100
250 2,000
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
US$/ton
360
340
320
300
280
260
240
220
200
Dec/12
Dec/13
Dec/14
Jun/12
Jun/13
Jun/14
Jun/15
Page 76
Industry Focus
China Dairy Sector
Sep
Jan
Jul
Mar
Nov
Page 77
Industry Focus
China Dairy Sector
20 7x
20 2.1x
10
0 0
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Bright Dairy (600597 CH) Bright Dairy (600597 CH)
Share Price (RMB) Share Price (RMB)
45 57x 35
40 7.9x
30
35 48x
25 6.4x
30
39x
25 20 4.8x
20 30x 15
15 3.2x
21x 10
10 1.6x
5 5
0 0
Jan-06
Jan-06
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
45
24x 2.7x
40 40
20x 2.3x
35
30 30 1.8x
16x
25
20 20
15
10 10
2010
2011
2011
2012
2013
2013
2014
2015
2010
2011
2011
2012
2013
2013
2014
2015
Page 78
Industry Focus
China Dairy Sector
China Modern Dairy (1117 HK) China Modern Dairy (1117 HK)
1.0 2.0
0.0 0.0
Jun-12
Jul-13
Jul-14
Jul-15
Oct-13
Oct-14
Mar-12
Sep-12
Mar-13
Apr-14
Apr-15
Jan-14
Jan-15
Mar-13
Dec-12
Aug-12
Dec-14
Jul-15
Oct-13
May-14
China Huishan Dairy (6863 HK) China Huishan Dairy (6863 HK)
3 23x
3.0 2.3x
17x
2 1.8x
11x 2.0
1 1.4x
1.0x
0 1.0
Jun-14
Jun-14
Jul-15
Jul-15
Feb-14
Oct-14
Feb-14
Oct-14
Sep-13
Sep-13
Mar-15
Mar-15
Inner Mongolia Yili (600887 CH) Inner Mongolia Yili (600887 CH)
30 30
24x
25 25
5.4x
20 19x 20
4.2x
15 14x 15
3.0x
10 10
8x 1.8x
5 5
3x 0.5x
0 0
Jan-06
Jan-06
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Page 79
Industry Focus
China Dairy Sector
Mar-12
Mar-13
Mar-14
Mar-15
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Source: Thomson Reuters, DBS Vickers
Page 80
Industry Focus
China Dairy Sector
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Industry Focus
China Dairy Sector
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