Mengniu Dairy First Take:FY2016core profit below GSe on higher admin expenses and lower GPM;2H16sales up 13%yoy

Mengniu reported FY2016 net loss of RMB751mn, vs. GSe’ RMB984mn loss.

Excluding the RMB2.25bn impairment, core net profit was RMB1.5bn, below GSeRMB2.06bn.

The miss is mainly coming from slightly lower than expected gross margin andRMB440mn yoy higher admin expenses.

FY2016 result highlights:Strong sales: FY2016 sales grew by 9.7% yoy. Mengniu recorded 2H16 salesgrowth of 13% yoy, including 16% growth for liquid milk and 27% growth for yogurtsegment.

Lower gross margin: 2H16 GPM was at 31.9%, lower than 1H16’s 33.7%,impacted by disposal losses of excessive milk powder inventory.

Selling and distribution: 2H16 A&P ratio was at 9.5%, higher than 2H15’s 7.7%;hence overall S&D expenses were up 29% yoy in 2H16.

Higher admin expenses: FY2016 was close to RMB600mn higher than 2015, as2H16 recorded RMB1.3bn expense. The company noted an increase in staff cost andcost due to underutilized production capacity.

Mengniu’s staff cost was up to RMB4.48bn in 2016, vs. RMB3.44bn in 2015, onthe back of 5% higher headcount.

Core OP margin was at 3.3% for FY2016, this compares to 5.2% in 2015.

Impairment: Mengniu recorded RMB2.25bn impairment associated with the Yashiliasset.

Yashili: net profit was RMB320mn loss for 2016, reversing the RMB118mn gain in2015.