China Feihe: Profit Warning for First-Half 2023 Amid Low Birth Rate; Lowering Valuation

Narrow-moat China Feihe 06186 issued a profit warning announcement for first-half 2023, with net profit expected to fall between 23.2% and 36.4% versus first-half 2022. We think subdued birthrate is the primary reason for the lackluster profit. The pandemic and soft economic outlook likely dragged birthrates in 2022 and through first-half 2023. We had expected new births to stay flattish this year, but actual numbers may finish lower than our estimates. We still project a rebound in birthrate next year as macro economy improves and potentially more favorable policies to encourage new births.

We reduced our full-year sales and net profit forecasts accordingly, which together with foreign exchange adjustments, drove our fair value estimate down to HKD 6.40 per share from HKD 7.10 per share. Our fair value estimate implies 12 times 2023 price/earnings, below its historical average since 2019 of 14 times. Negative sentiment is likely going to weigh on near-term share price. In our view, investors could remain cautious for earnings in the second half as birth numbers in 2023 would likely finish lower than last year. Management would have to lay out its strategies for turnaround in 2024 in order to reignite investors’ confidence on the company’s growth outlook.

China Feihe expects first-half 2023 revenue to land between CNY 9.58 billion and CNY 9.87 billion, roughly flattish versus same period last year. Management attributes the net profit decline to subdued birthrate, market competition, and net loss at subsidiary YuanShengTai. We think market competition is likely a result of a subdued birthrate and could be the main drag to profit. Clearance of inventories by market players ahead of implementation of a new national standard could be another factor for increased promotions in the industry. Feihe likely had to increase its sales and marketing spending to retain market share. Sluggish raw milk price should also drag profit of YuanShengTai in the first half.