Investment Summary

Mengniu`s interim revenue increased 17% y.o.y. to RMB34.474 billion. Gross profit margin(GPM) increased 3.6ppt y.o.y to 39.2%. Operating profit margin fell 0.5ppt y.o.y. to 5.6%, mainly due to the sponsorship of World Cup. Net profit increased 38.5% y.o.y. to RMB1.56 billion.

Facing the economic slowdown in China, the management team still raised its full-year growth target from the previous low double digit to the medium double digit and revealed that the business performance from July to August was in line with expectations. Facing the risk of competitors launching promotions or increasing discounts, it emphasizes that it will respond to price wars through increasing innovation capabilities and brand investment.

We believe that the dairy industry in China is with rigid demand and the impact from economic slowdown is limited. The double-digit growth target for the whole year is still able to meet. We believe that the recovery of raw milk prices in 2H will help its material associate China Modern Dairy (1117) to further reduce its loss. Sales and distribution expenses are expected to be lower than 1H. We maintain a forecast PE of 31 times and target price of HKD28.5. (current price as of 27th September, 2018)