China Mengniu Dairy Offered Cautious Guide Amid Gradual Demand Recovery

Narrow-moat China Mengniu Dairy 02319 reported 2022 results that met Refinitiv consensus and our estimates on the top line and moderately outperformed our expectations on operating margin. But the stock reacted negatively following earnings likely due to the below-consensus top-line guidance for 2023, which may have caused concern about the growth outlook of its liquid milk business.

We think there is moderate upside to the company’s revenue guidance and its operating margin target should be achievable. As a result, we maintain our fair value estimate at HKD 39 per share and think the shares remain undervalued, with an implied 2023 P/E of 17 times (below historical average of 25 times).

Sales in 2022 grew 5% year on year, as liquid milk growth slowed toward the fourth quarter. But Mengniu was able to control selling and marketing expenses in the second half, which drove full-year operating margin to increase 40 basis points year on year to 5.9% (above management’s guide of 20-30 basis points).

Management, however, offered a high-single-digit year-on-year revenue growth guidance for 2023 (excluding Milkground), with the full-year operating margin guided to expand by 30-50 basis points. Mengniu indicated a shift in strategy and now intends to take a more balanced approach to sales growth and profitability. The recovery in demand for liquid milk could be gradual entering 2023, but as gifting demand revives for premium UHT milk and retail outlets no longer face closure from pandemic control measures, we believe there is moderate upside to Mengniu’s guidance.

Ahead of earnings, we already projected a high-single-digit growth (9%) for the liquid milk segment. We retain our projection and expect a 10% organic revenue growth for 2023 (excluding Milkground), with other smaller segments outpacing the liquid milk business.