Feihe: Another Year of Muted Sales Growth Ahead; Fair Value Estimate Reduced to HKD 5.90

We lowered narrow-moat Feihe's 2023-24 earnings forecasts by 10% to 23% following a review of the infant formula sector and China's new births growth outlook. We expect Feihe's second-half 2023 net profit to decline by 19% year on year, largely driven by elevated sales and marketing expenses as well as a declining birth rate. While China's 2023 new births of 9.02 million did beat our expectation, it was still 5% lower year on year and we believe infant formula industry sales even declined at a mid-teens rate in 2023. Consequently, we cut our fair value estimate to HKD 5.90 per share, from HKD 6.40 per share. This implies a 12 times 2024 P/E and is below its historical average of 14 times since 2019. We think the company's shares are undervalued, with attractive 2024 dividend yield of 8% currently. However, we believe a near-term earnings headwind could weigh on investors' sentiment and its share price performance.