Overview of China Mengniu Dairy

China Mengniu Dairy, a leading player in the Chinese dairy market, is renowned for its extensive range of dairy products, including liquid milk, ice cream, and milk powder. The company aims to enhance shareholder returns and maintain a strong financial position.

Current Market Performance and Share Price

With a current share price of HK\$17.14, China Mengniu Dairy is poised for a significant upside, with a target price set at HK\$23.50, reflecting a 37.1% increase. This optimistic forecast underscores the company’s potential for growth and profitability.

Key Financial Indicators and Projections

The company has shown stable liquid milk sales volume and a slight price increase since the third quarter of 2024. Despite competitors completing their inventory clearance, consumer demand has not significantly improved, prompting management to target a flattish to slight positive growth in shipments for the second half of 2024.

China Mengniu Dairy is strategically positioned to benefit from the anticipated balance in raw milk supply and demand by the second quarter of 2025. Larger, more established players like Mengniu are expected to gain from this equilibrium, as smaller competitors face financial pressure due to the prolonged low raw milk price environment.

Strategic Focus on Margin Improvement

The company is targeting a 30-50 basis point improvement in operating margin in the second half of 2024, while simultaneously reducing capital expenditure. This focus on enhancing profit margins and operational efficiency is prioritized over mere revenue growth. Key strategies include upgrading high-margin products such as yogurt, ice cream, and milk powder, and optimizing marketing spending by focusing on large-scale, high-quality branding events.

Capital expenditure is projected to be under Rmb3 billion in 2024, stabilizing around Rmb2 billion in the subsequent years, reflecting a prudent approach to managing financial resources.

Financial Projections and Analyst Recommendations

For the fiscal year ending December 2024, China Mengniu Dairy’s net profit is anticipated to be Rmb 4,708 million, with a projected increase to Rmb 5,848 million by 2025 and Rmb 6,676 million by 2026. The company’s earnings per share (EPS) is forecasted to be 119.0 fen in 2024, rising to 147.8 fen in 2025 and 168.8 fen in 2026.

The report maintains a “BUY” recommendation, with the target price raised by 1% to Rmb23.50. This valuation implies a 17.8x 2024 forward price-to-earnings (PE) ratio and a 14.3x 2025 forward PE ratio, highlighting the stock’s attractive valuation at the current trading levels of 13.4x 2024F PE and 10.8x 2025F PE.

Enhancing Shareholder Returns

In a bid to enhance shareholder value, China Mengniu Dairy plans to maintain a 40% dividend payout ratio for 2024, with an ambition to increase it to 50% within the next two years. The company has also initiated a HK\$2 billion share repurchase program, which commenced in August 2024, with all repurchased shares set to be canceled.

Earnings Revision and Risk Assessment

The report raises the 2025/26 earnings forecasts by 1% and 2%, respectively, while maintaining revenue and gross margin projections. The slight adjustments in selling and administrative expenses reflect anticipated cost-saving and efficiency improvements. Key risks identified include a slower-than-expected economic recovery and intensified promotional activities.