Mengniu Earnings: Liquid Milk Weakness Drags on Results; Reducing Fair Value Estimate by 22%

Narrow-moat China Mengniu Dairy’s first-half revenue and net profit trailed our estimates. Sluggish demand was seen in all major segments, with total revenue falling 13% and net profit falling 17% year on year. Operating margin, however, improved by 60 basis points year on year to 7% due to favorable raw milk prices. While the top-line decline was notable, we think the company made the right move to control promotional expenses and protect profitability amid falling volumes, especially for its liquid milk business. We expect soft demand in Mengniu's major segments to persist through the second half and hence cut our 2024 net profit estimate by 18%. We also lowered our 2025-28 net profit forecasts by 12%-15%. As a result, our fair value estimate is reduced to HKD 21 per share from HKD 27, implying 18 times 2024 price/earnings and 12 times enterprise value/EBITDA. Management announced a share-buyback plan of no more than CNY 2 billion over the next 12 months and a dividend payout ratio of 50% for 2024-25. We think the shares are currently undervalued, supported by a 2024 dividend yield of 4.4%.