伊利股份：Four measures to offset raw milk pressure

3Q20 NP +24% YoY to RMB2,289mn, 9% above consensus due toRMB94mn/82mn YoY increase of fair value gain/other income. The 10% shareprice drop last Friday was partly because share price already ran ahead of 3Q20results release. Share price jumped 9% from 23 to 29 Oct (vs MN’s 1% drop). Wethink Yili will implement four measures to offset raw milk pressure, and thereforewe kept FY21/22E NP estimates unchanged. We expect Yili would continue tobenefit from industry consolidation. Maintain Buy.

3Q20 NP beat but GPM missed. Revenue rose 11% YoY in 3Q20, which isin line with consensus and our expectation, led by 19%/10%/1% growth ofmilk powder/liquid milk/ice-cream segments. GPM fell 1.3ppt to 34.7%because of 6-7% raw milk price growth (RMB4.5kg in 3Q20 vs China ModernDairy’s ASP ~RMB4.2/kg) and dilution by Westland. That said, sellingexpenses ratio fell 1.4ppt to 20.5%, offsetting the impact of GPM decline.

Four measures to offset raw milk pressure. Management expects raw milkprice to grow by high single-digit in 2H20E and increase further in FY21E. (1)Reduce discount promotion: Our sources of channel check found retailprices of Satine rose to RMB65 in second half of Oct (highest level since Feb)and so did MN’s Milk Deluxe (Figure 4 & 5). Management expects the sectorwould be more disciplined in promotions. (2) Control raw milk source: Yilibecame the largest shareholder of Zhongdi (1492 HK) in Sep and its associatecompany, Youran, bought two farms from Fonterra China in Oct. (3) Productinnovation: For example, Ambrosial launched a high-end 5G protein in Augand Satine will launch a high-end 4.0g UHT milk in 1Q21. The retail price/gramof 5G protein is more than double of Ambrosial original favour (Figure 6 & 7). (4)Improve efficiency of selling expenses: Selling expenses ratio fell 0.9ppt to22.7% in 9M20 through more precise marketing such as online advertising. It’s12.3% A&P exp. ratio in FY19 was higher than many major consumer names(Figure 9). As dairy sector leader, we think Yili has room to improve efficiency.

Management expects slight drop of selling expenses ratio in FY21E.

To become global top three dairy company in 2025. The Company targetsto become global top 3 dairy players in 2025 and the largest player in 2030.

In the 14th five year period, Yili will strengthen its leadership and growth indairy sector, while sales contribution by non-dairy products and overseasmarket will not be significant. At a 10% sales CAGR in 2019-25, we believeYili could reach top 3 in 2025 (Figure 8).

Maintain Buy. We lifted FY20E NP by 4% to reflect strong 3Q20 results andmaintain our NP estimates in FY21/22E. Our TP is kept at RMB45.90, stillbased on 32x FY21E P/E. Catalysts: better-than-expecte