Mengniu Earnings: Operational Efficiency Drove Margin Beat; Raising Fair Value Estimate by 7%

Narrow-moat China Mengniu’s 2024 net profit of CNY 105 million was in line with its profit warning. Revenue slightly missed our estimate, but gross margin exceeded expectations, thanks to an improved product mix and better efficiencies across the liquid milk and cheese segments. We think Mengniu would press ahead with cost savings and strive to improve the product mix in its nonliquid milk segments over the next five years. Hence, our 2025-28 operating margin forecasts increase by 1-1.9 percentage points, leading to 2%-13% higher net income projections over the same period. Consequently, we lift our fair value estimate by 7% to HKD 22.50 per share. This implies 17 times 2025 price/earnings and 10 times enterprise value/EBITDA. We see the shares as fairly valued.