Liquid Milk Sales Remain Robust; Mengniu Targets Double-Digit Sales Growth in 2022

Despite sluggish retail sales in China, liquid milk demand remains robust, with nationwide dairy food production volume rising 11.5% year over year in December, up from a 7.5% growth in November. We expect Mengniu and Yili to also report accelerating revenue growth in the fourth quarter. We think increasing health awareness and an earlier Lunar New Year should help to support milk sales. We lift both our full year 2021 revenue and net profit forecasts for no-moat Mengniu by 3%, to CNY 88.3 million and CNY 4.9 million, respectively, to reflect stronger sales growth, which represents 16.1% revenue growth and 42.2% net profit growth from a year ago. Management targets low-double-digit sales growth in 2022, and a 50 basis point margin expansion on product mix upgrade and improving operating efficiency. This is largely within expectations. We maintain our fair value estimate at HKD 36.00 per share, and we expect the company’s net profit to grow at a CAGR of 24% between 2020 and 2025.