Company Reports

China Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

Narrow-moat China Feihe’s first-half revenue and net income exceeded our estimates thanks to the strong momentum of the new premium products. Management noted that channel inventory has returned to a healthy level and is optimistic about faster revenue growth in the second half. This is directionally consistent with our expectations, but we still raised our second-half sales and net income projections by 2% and 9%, respectively, to account for the better-than-expected performance of its premium lineups.

We maintain our 2024 revenue and net income projections for narrow-moat China Feihe after reviewing our assumptions ahead of the release of its interim results. We retain our fair value estimate at HKD 5.40 per share, which implies 12 times 2024 price/earnings, 7 times EV/EBITDA, and a 5.5% dividend yield. We continue to see shares as undervalued as earnings headwinds from the industry downturn and pricing disorder should have been largely priced in, while the dividend yield remains attractive.

China Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

Narrow-moat China Feihe’s 2023 results were mixed but in line with its preliminary profit guidance. Revenue of CNY195.3 million was slightly short of our estimate of 196.3 million while operating margin was in line. Higher nonoperating income drove better-than-expected net profit. Management’s focus in 2024 is to maintain the price stability of its flagship classic Astrobaby products following the inventory clearance last year. We moderately trim our 2024-27 revenue projections to account for a softer 2023 number but raise our net profit estimates by 1%-6% to factor in slightly higher margins from 2025 onward as Feihe executes on digitalizing its distribution network to achieve better efficiencies and lower expenses ratio.

Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

Narrow-moat China Feihe’s profit warning was disappointing, but the sizable drop in 2023 earnings was directionally consistent with our view, as highlighted in the most recent note on Feb. 6. The company expects revenue to decline by 6.7%-9.5% year on year to CNY 19.3 billion-CNY 19.9 billion in 2023, with net profit ranging between CNY 3.13 billion and CNY 3.43 billion, a fall of 30.6%-36.7%. After factoring in the weak guidance, we reduce our 2023-28 revenue forecasts by 8%-10% and net income estimates by 9%-22%. As a result, we reduce our fair value estimate to HKD 5.40 per share, from HKD 5.90. Although the shares are currently undervalued, we think investors would stay sidelined due to the absence of near-term earnings drivers and growth headwinds amid the subdued birthrate in China.

Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

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.

Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

Wide-moat Inner Mongolia Yili and narrow-moat China Feihe posted interim results that were broadly in line with our estimates. Sales growth for both was hurt by soft demand in the infant milk formula, or IMF, sector, due to low birthrates and inventory clearance of products under the old national standards. This is consistent with earlier results revealed by a2 Milk Company. Yili and Feihe management teams are optimistic about the second-half trend. Feihe said its excess inventory was mostly cleared in the first half, while Yili updated its full-year top-line and net margin guidance to mid-single-digit growth and 30 basis points of improvement, respectively. Top-line guidance is consistent with our estimates, but we continue to see difficulty in reaching the guided margin.

Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

Narrow-moat China Feihe issued a profit warning announcement for first-half 2023, with net profit expected to fall between 23.2% and 36.4% versus first-half 2022. We think subdued birthrate is the primary reason for the lackluster profit. The pandemic and soft economic outlook likely dragged birthrates in 2022 and through first-half 2023. We had expected new births to stay flattish this year, but actual numbers may finish lower than our estimates. We still project a rebound in birthrate next year as macro economy improves and potentially more favorable policies to encourage new births.

Feihe strives to be a topnotch domestic infant milk formula, or IMF, producer in China. It has been able to price its products at a premium comparable with imported products, and is marketed as tailored for Chinese babies. The company has invested considerably in building out its sales network in maternity stores across China, as the category is mainly sold through this channel. Feihe possesses a scalable distributing and retail outlet network in the country.

We initiate China Feihe with a narrow moat rating, which we think originates from the company’s premium pricing and entrenched retailer relationship. Our fair value estimate of HKD 7.10 per share implies 11 times 2023 P/E, which is below its three-year average of 14 times and reflects slowing industry growth. We believe Feihe’s moat remains intact despite a potentially lower birthrate in China. Near-term sentiment for the stock could continue to be suppressed as industry headwinds linger. But we think the market may have underappreciated Feihe’s ability, as the market leader, to maintain its margin level as it maneuvers on mix and distribution over the longer term.