Feihe’s 1H24 NP was up 11% YoY to RMB1,875m, ahead of market expectations. The results reflected Feihe’s outperformance over peers and some restoration of product pricing even though the industry was under great pressure. While mgmt. expects sales should improve in 2H24, we expect Feihe would take more efforts to maintain its market share and penetrate into high-tier cities, which could limit its operating leverage. The market also reacted positively to Feihe’s commitment to higher dividends, but we believe such positivity could fade after ex- dividend and a potential escalating competition in 4Q24. Overall, we are still highly cautious on infant formula names as the industry faces structural challenges, and hence maintain SELL.
Key Factors for Rating
1H24 core operating profit ahead of expectations. Feihe’s 1H24 revenue was up 4% YoY to RMB10.0bn while NP surged 11% YoY to RMB1,875m, slightly ahead of expectations. Specifically, its OP grew 15% YoY to RMB3,220m as OPM expanded 3.1ppts YoY to 31.9%, a rather strong beat. This reflects: (1) Feihe’s strong growth of selective super-premium products such as Zhuorui; (2) some restoration of overall pricing, and (3) careful cost control of the company. However, NP was weighed by a RMB410m losses in fair value related to its cow herds, hence slower growth.
2H24 could be even better, but likely a temporary impact. Mgmt. of Feihe expected revenue growth to be even stronger in 2H24, as its pricing gradually recovers. While this could be the case, we believe a major contributor to stronger growth in 2H24 would be a low base in 2H23, as 2023 was affected by the inventory dumping of old GB standard products by small players. The overall infant formula market would remain highly competitive as the birth rate in China could continue to decline. We expect competition could potentially elevate in 4Q24 or during Double-11 as both major domestic brands and foreign brands could fight to grab market share. Particularly, Feihe recently ramped up its effort to penetrate into high tier cities. We believe this could pose pressure to its overall SG&A as it could be costly to run offline parental events.
Reiterate our view to SELL after ex-dividend. The market reacted positively after this set of 1H24 results and mgmt. reiterated the amount of dividend to be up 10% each year. We believe the yield, at 7.7% as of 29 August 2024 close, could be attractive to some investors. However, as we expect competition of the dairy market could remain keen in 2H24, we believe earnings visibility could reduce in 4Q24, which could weigh on its valuation. Hence, we expect share price weakness after ex-dividend, and we reiterate SELL as we expect more competitions in infant formula market could make specialised players more vulnerable to earnings deterioration.
Key Risks for Rating
Upside risks to our SELL rating include: better-than-expected birth rate in China, strong performance of Astrobaby and other super premium products and an effective control of SG&A leading to strong OPM expansion.
Valuation
We cut our EPS forecast for 2024 by 2% to reflect higher losses related to biological assets due to lower milk price but raise our EPS forecast for 2025-26 as the margins of Feihe were slightly above our expectations.
Our TP is lifted to HK$3.4, based on 6.5x 2025 P/E (previous: 6.5x 2024 P/E).