Stable 1H Top-Line Growth for Mengniu, Momentum To Accelerate; Retain FVE at HKD 44

Narrow-moat Mengniu reported mixed first-half results as lockdowns caused muted top-line growth but margin levels fell only moderately year on year thanks to stable raw milk prices. We think Mengniu has appropriately identified top-line growth drivers amid the tough operating environment for liquid milk and milk powder in the first half, while effectively controlling costs to protect margins. We retain our fair value estimate of HKD 44 per share and think share price weakness in the past six months has priced in the unfavorable environment of the first half of 2022. Recovering sales and continued stability in the raw milk price should drive sequentially improving operating margins, serving as near-term catalysts. We still see further upside, and our fair value estimate imply 26 and 23 times 2022 and 2023 P/E. These multiples are slightly lower than our valuation of Yili given our more constructive view on the execution and growth outlook of the latter.