2Q17 results beat with strong sales growth; reiterating Buy
2Q17 sales/recurring earnings were 11%/14% higher than DB forecast
Yili reported strong 2Q17 results with 20% yoy sales growth and 30% yoyrecurring net profit growth. Net profit declined 1.6% yoy in 2Q17 due to lowergovernment grants. Recurring 2Q17 net profit was 14% higher than DB forecast ,mainly due to stronger than expected sales growth. On a semi annual basis, salesand recurring earnings grew 11% and 23% yoy respectively. By category, salesgrowth in 1H17 was driven by:
Liquid milk - grew by 13% yoy, mainly attributable to recoveringconsumption (industry retail sales up 7.3% yoy in 1H17) and Yili'sincreasing market share (UHT milk increased 300bps yoy to 33.4% in1H17).
Milk powder - grew by 20% yoy, helped by easing competition onimplementation of new regulations and lower channel stocking.
Ice cream - grew by 11% yoy, thanks to strong growth of high-endproducts and more favorable weather in 2Q17.
Particularly, sales growth was driven by high-end products (i.e UHTyoghurt, high-end yoghurt and high-end IMF), which grew by 31% yoy in1H17 and currently accounts for 40-50% of total sales.
OP margin expanded 120bps to 12.2% in 2Q17, helped by 245bps expansion inGP margin due to better product mix and stablizing raw material price, while partlyoffset by higher A&P expense ratio.
Three reasons for the strong sales recovery
Yili's recurring sales growth improved from 6% yoy in 1Q17 to 20% in 2Q17.We think this is mainly due to three reasons. Firstly, consumer staple sectorgenerally saw demand recovery from 2Q17, helped by recovering infrastructureand property investment from 2016 and a lower base; secondly, competition inliquid milk is easing, thanks to more balanced supply and demand; and thirdly,Yili's strong distribution network and branding in high-end products makes it wellpositioned in the recovery. We believe these reasons should continue to driveYili's sales in the near-term.
Reiterating Buy
We revise up our earnings forecast by 10-12% in 2017-19E, mainly to factor inhigher sales growth driven by industry recovery and Yili's product mix upgrade.
