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China Mengniu Dairy: Multiple Earnings Growth Drivers For Market Leader In Under-Penetrated Market


  • China Mengniu Dairy is among the three largest dairy companies in an under-penetrated Chinese market.
  • Earnings growth drivers for Mengniu include corporate restructuring with associate company, international expansion leveraging on World Cup sponsorship, and launch of new premium products.
  • My target price implies a 28% upside for China Mengniu Dairy based on a 25 times forward P/E multiple applied to my FY2019 EPS estimate.

Elevator Pitch

China Mengniu Dairy Co., Ltd. (OTCPK:CIADF) (OTCPK:CIADY) [HKG:2319] is among China's top three dairy companies that is well-positioned to capitalize on a growing, under-penetrated, domestic dairy market. Future earnings growth drivers for Mengniu include the roll-out of new premium products, earnings upside from the restructuring, and streamlining of associate China Modern Dairy Holdings Ltd.'s (OTC:CMDKF) [HKG:1117] downstream operations and an acceleration of international expansion plans capitalizing on its World Cup sponsorship in June 2018. I arrive at a target price of HK$32.75 for China Mengniu Dairy by applying a 25 times forward P/E multiple to my FY2019 EPS estimate of RMB1.06 or HK$1.31, which implies a 28% upside from Mengniu's share price of HK$25.65 as of February 28, 2018.

Company Description

China Mengniu Dairy is a Hong Kong-listed Chinese dairy company that also trades on an OTC basis in the U.S. Mengniu is among the largest downstream dairy product manufacturer and distributor in China with an annual production capacity of in excess of 9 million tons in 2017. Mengniu generated 86.1%, 6.7%, 6.1% and 1.1% of its 1H2017 (YE Dec.) revenue from the Liquid Milk (comprises UHT milk, milk beverages, and chilled yogurt), Ice Cream, Milk Formula and Other Businesses (primarily cheese, plant-based nutritional food) segments respectively.

Mengniu also owns a 61.25% stake in Modern Dairy, China's largest upstream dairy farming company and producer of fresh raw milk with respect to herd size and quantity. Note that Modern Dairy is accounted for as an associate of Mengniu using the equity method, as Mengniu does not have more than 50% of the voting rights of Modern Dairy, taking into account zero coupon exchangeable bonds exchangeable into 689,438,782 shares of Modern Dairy representing approximately 11.24% of the company's issued share capital.

Market Leader In Under-Penetrated Chinese Dairy Market

China Mengniu

This article was written by

The Value Pendulum profile picture
Asia Value & Moat Stocks is a research service for value investors searching for attractive Asia-listed investment opportunities  with a huge gap between price and intrinsic value, leaning towards both deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like "Magic Formula" stocks, high quality businesses, hidden champions and wide moat compounders).

Those who believe that the pendulum will move in one direction forever or reside at an extreme forever eventually will lose huge sums. Those who understand the pendulum's behavior can benefit enormously. ~ Howard Marks

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Comments (3)

CMCI a lot better value more cash then market cap
Hi! Nice reading about your stockpicks! I have even very briefly mentioned this very company in my blog (in Swedish): http://bit.ly/2FcnzPs

For now I am owning Ultrajaya (Indonesian milk company) and A2 milk (New Zeeland). The latter is a really interesting way to play the China market for infant milk powder, although the stock may seem a bit pricy at the moment.

Other milk-related stocks that may be interesting is Tat Gida and Pinar Sut in Turkey. But Turkey may perhaps be too risky to invest in.

Best regards and keep up the good work! /Gustav
The Value Pendulum profile picture
Thanks for your kind words, Gustav. Glad you find my articles interesting.

Yes, I wrote about Ultrajaya earlier. I am familiar with A2 milk, but not the company itself. I just read write-up on your blog on the various milk companies that you linked to, using Google Translate. Thanks for the heads-up on the Turkish milk companies too.

I recommended Hong Kong-listed Vitasoy to my premium service subscribers in August 2015, and the stock price has since gone from HK$15 to over HK$20 representing a 16.7% annualized gain (including dividends) over the holding period. Vitasoy, a dominant soy milk company and brand in Hong Kong, has been growing very fast in China in recent years, with the market contributing 61.8% of sales in 1HFY2018 (YE March).

I look forward to reading your new blog articles as well! Thanks.

The Value Pendulum
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