Mengniu Dairy:Mengniu’s strong moats further confirmed by CRR study

CRR’s study of 660 Chinese households (in 49 cities) and 30 supermarket managers has confirmed sustained dairy consumption growth in China, continued sales growth across various categories as well as Mengniu’s strong brands and market leadership. Maintain BUY.

Sustained dairy consumption growth in China

Ninety percent of China consumers studied indicated to CRR that their spending on dairy products in 2015 YTD is no less than in 2014. Consumers expect dairy consumption growth to accelerate across all categories in 2016 vs 2015 (Fig 3). We expect dairy consumption to be more volume-driven than ASP-drink in 2015. UHT milk and chilled yogurt are the two categories enjoying stronger consumption growth in both high-tier and low-tier cities. Retailers in T1-2 markets responding to CRR’s study observed superior sales growth in the high-end segment while those in T3-5 markets saw higher sales growth in both mid-end and high-end segments (Fig 8-9). Only 3% of consumes in T1-2 cities (vs 1% in T3-5 cities) purchase dairy products online. The supermarket is still the dominant channel (about 90%) in dairy product distribution, according to CRR’s study (Fig 6).

Mengniu - The best-known dairy brand

According to CRR, Mengniu is the best recognised dairy brand in China, followed by Yili (Fig 10). Most Chinese consumers trust dairy products made in China. Mengniu’s products enjoy strong consumer recognition in categories of UHT milk (No.1), chilled yoghurt (No.1) and milk beverage (No.2). Compared to 2 years ago, Mengniu’s UHT milk has had better penetration in low-tier cities while its milk beverage has better accessed consumers in both T1-2 and T3-5 cities. In various categories, Mengniu’s brand strength is stronger in T3-5 than in T1-2 cities (Fig 15-22). Supermarket operators in T3-5 cities (studied by CRR) enjoy the highest margins in selling Mengniu products while those in T1-2 cities report the best margins in distributing both Mengniu and Yili products.

Innovation, category expansion and margin improvement

With eased raw-milk costs, continuous innovations in products/channels, strengthened branding and expansion into multiple categories, Mengniu’s strong earning growth appears sustainable in 15-17CL. We expect its sales of organic business to grow at 10% in 2015 (5% driven by volume and 5% driven by mix changes) and organic EBIT margin to expand 70bps YoY in 2015.