China Mengniu: Near-Term Sales Pressure Remains as Competition Stays Fierce; HKD 27 Fair Value Kept

We think near-term sales pressure for ultra-high-temperature, or UHT, milk products will remain the primary headwind for narrow-moat Mengniu’s 2024 earnings. In addition, the firm is set to incur impairment charges due to the subdued raw milk price, hence reducing income from its upstream dairy subsidiaries. However, we have factored these into our model, and we keep our revenue and net income forecasts for 2024. We maintain our fair value estimate at HKD 27 per share, which implies 19 times 2024 price/earnings, 12 times enterprise value/EBITDA, and 2.3% dividend yield. Although shares are currently undervalued, our preferred pick in the sector is Yili, with a higher return on equity of over 20% versus Mengniu’s 10%, as well as a higher implied dividend yield of 5.7% at the current share price.