Mengniu Earnings: Navigated Adverse Operating Environment With Lower Costs and Higher Margins

Narrow-moat China Mengniu posted first-half 2023 results that beat consensus, with higher gross margin flowing through to operating profit. It attributed gross margin expansion to lower raw milk costs. We think Mengniu’s share gain in liquid milk and smaller exposure to UHT yogurt led to faster growth versus Yili. Mengniu maintained its 2023 guidance of high-single-digit sales growth, including Milkground, and 50 basis points operating margin expansion. While we think the company can deliver the guided top-line growth, we are more cautious on our operating margin assumption as soft consumer sentiment could require higher channel expenses.