Resilient Q3 Trends for Mengniu, Near-Term Sentiment Could Be Positive; FVE Lowered to HKD 39

We revised our 2022 forecasts for narrow-moat Mengniu following our discussion with management and the third-quarter results of major competitors. We have lowered our second-half revenue projection for Mengniu mainly due to a slower-than-expected pace of recovery across liquid milk and milk powder segments. But we only reduced our operating profit estimates moderately and still forecast a mid- to high-single-digit increase in operating profit for the second half. We think Mengniu, just like its peers, will face pressure from slowing consumer demand for premium dairy, but its geographical sales distribution and smaller exposure to the UHT yogurt segment should drive near-term outperformance in the bottom line versus Yili. We have reduced our fair value estimate to HKD 39 per share (from HKD 44 per share), primarily due to the recent strength of the Hong Kong dollar against the Chinese yuan. Our fair value implies 22 times 2023 P/E, broadly consistent with the five-year historical average of 24 times.