YILI INDUSTRIAL(600887)：POISED FOR ACCELERATING GROWTH IN 2H AFTER 2Q HITS A LOW OF THE YEAR

Yili recorded revenue/ex-one-off attributable net profit (ANP) growth of +12%/+18% YoY in 2H22 and +11%/+9% YoY in 2Q22 alone, basically in line with expectations. Under the influence of the pandemic, revenue from liquid milk declined in 2Q22, but that from milk powder and ice cream posted rapid growth, driving up the overall top-line growth. Excluding the consolidation of Ausnutria Dairy (01717.HK) in 2Q22, its profitability is basically flat, the optimization of the product mix pushed up the gross profit margin (GPM), and promotions and the integration of Ausnutria bring about an increase in selling and management expenses. Back by demand recovery, Ausnutria's return to growth and the low base in 2H21, we expect Yili to register double-digit growth in organic revenue in 2H22, with the profitability of its organic businesses to remain stable. Meanwhile, Ausnutria’s earnings will resume low double-digit growth.
Revenue/ANP increased by +12%/+15% YoY in 1H22, with 2Q22 earnings largely meeting expectations.
In 1H22, the company achieved a revenue of Rmb63.46bn(+12.3% YoY), and the ANP/ex-one-off ANP increased by +15.2%/+17.5% YoY to Rmb6.13bn/Rmb5.89bn, showing a steady performance; Among them, in 2Q22, the company's revenue was Rmb32.42bn(+11.2% YoY), and the ANP/ex-one-off ANP increased by +4.9%/+9.1% to Rmb2.61bn/Rmb2.60bn respectively. The performance basically met market expectations. Excluding the consolidated statement of Ausnutria, the company's revenue in 2Q22 increased by +4.8% YoY to Rmb30.53bn, and the ANP/ex-one-off ANP increased by +4.2%/+8.3% YoY to Rmb2.60bn/Rmb2.58bn respectively.
2Q22 earnings overview: In 2Q22, liquid milk shrank under pressure, milk powder maintained fast growth, and ice cream was eye-catching; the upgraded product mix pushed up the GPM and the expense ratios; the overall earnings remained stable YoY.
On the revenue side: ① Liquid milk: Revenue reached Rmb42.89bn (+1.1% YoY) in 1H22 and Rmb20.58bn(-4.5% YoY) in 2Q22 alone. Under the impact of the pandemic in 2Q22, liquid milk revenue shrank YoY. In a breakdown, we estimate that in 1H22, plain UHT milk recorded 20% growth; Satine posted high single-digit growth; Ambrosial decreased by single digits; flavored milk drinks and low-temperature yoghurt came under pressure YoY. ② Milk powder & dairy products: Revenue amounted to Rmb12.07bn (+58.3% YoY) in 1H22 and Rmb6.68bn (+83.5% YoY) in 2Q22 alone. Excluding the consolidation of Ausnutria in 2Q22, the organic revenue of Yili milk powder and dairy products in 2Q22 was Rmb4.79bn (+31.7% YoY). In 1H22, Yili ranked first in the industry by growth in infant milk formula (IMF) powder and by market share in adult milk powder, and the growth rate of the cheese business exceeded 40%, achieving leapfrog growth. ③ Ice cream: Revenue totaled Rmb7.30bn (+31.7% YoY) in 1H22 and Rmb4.5bn (+29.4% YoY) in 2Q22 alone. In 1H22, the revenue growth rate of Yili’s Chocliz series products was as high as 33.3%, making it the top ice cream brand worthy of the name.
On the profit side: Under the adverse environment of the pandemic, Yili’s profitability in 2Q22 remained stable YoY, and its ANP/ex-one-off ANP increased by +5.6%/+9.1% YoY to Rmb2.61bn/Rmb2.60bn, respectively. After excluding the impact of recalibrating the financial data, Yili's GPM in 2Q22 increased by +1.3ppts YoY, which mainly benefited from the upgrading of the product mix and the higher proportion of higher-margin milk powder and ice cream products. The administrative/selling expense ratio rose by +0.7ppts/ +0.8ppts YoY, respectively. We estimate Yili bumped up promotion expenses in 2Q22, and the consolidation of Ausnutria also brought about an increase in administrative expenses. The net profit margin (NPM) in 2Q22 decreased by 0.5ppts YoY to 8.1%. Excluding the consolidation of Ausnutria, the NPM of Yili’s organic businesses was flat YoY. In 1H22, Yili’s blended GPM increased by +1.7ppts YoY, while the GPM of liquid milk/milk powder/ice cream changed by +0.6ppts/+3.1ppts/-1.7ppts YoY, respectively; the administrative/selling expense ratio increased by +0.3ppts/+0.9ppts YoY, respectively.
We expect earnings in 2H22 to accelerate on the back of demand recovery, Ausnutria's return to growth and the low base in 2H21.
Although liquid milk revenue in 2Q22 posted negative growth due to the impact of regional Covid flare-ups, we expect Yili’s liquid milk revenue to gradually resume normal growth with the pandemic brought under control. In the context of 1) the low base of liquid milk; 2) the sustained rapid growth of Yili’s organic milk powder products; 3) the prospects of Ausnutria's revenue resuming double-digit growth after the channel inventory returns to normal, we expect that Yili's organic revenue will return to double-digit growth in 2H22, and its revenue after consolidation is likely to significantly accelerate from 2Q22. On the expense side, as the channel inventory returns to the normal level, we expect that the intensity of promotion expenses will gradually weaken, and Yili's organic profitability will remain stable YoY in 2H22. Looking ahead to the next 2-3 years, we believe that the demand of the dairy industry will be stable, the milk price will gradually drop, the competition will remain healthy, and the expense ratio will steadily decline. We remain bullish Yili will deliver double-digit revenue growth and continuously improve its profitability.
Potential risks
Food safety hazards; policy changes; a decline in industry prosperity decline; the scattered resurgence of Covid-19; intensified industry competition; sharp rises in raw material prices.
Investment recommendation Considering the impact of regional Covid flare-ups, we trim our 2022E-24E EPS forecasts to Rmb1.60/1.94/2.29 (from Rmb1.62/1.98/2.35), implying 21x/17x/15x 2022E-24E PE at the current price. Considering the valuation of its comparable peer Mengniu Dairy (02319.HK), which is currently trading at 20x 2022E PE based on CITICS earnings estimates, as well as the leading position of Yili and its long-term prospects of steady growth, we assign 30x 2022E PE to derive a target price of Rmb49 and reiterate the "BUY" rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。