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YuanShengTai Dairy (1431 HK) Summary

Core Content

YuanShengTai Dairy (YST) is a leading dairy-farming company in China, ranked as the fifth largest in terms of raw milk production volume. The company has established a strong presence in the market through its modernized dairy farms, particularly in the northeastern region of China. With a strategic focus on premium raw milk, YST is well-positioned to benefit from the ongoing industry consolidation and growing consumer demand for high-quality dairy products.

Main Points

Market Position

• YST is the fifth largest dairy-farm operator in China in terms of raw milk production volume.
• The company has established large modernized dairy farms in the Songnen Plain, which is known for its favorable conditions for dairy cows.
• It serves major dairy brands including Feihe, Mengniu (2319 HK), Yili (600887 CH), Bright Dairy (600597 CH), and Aibeite.

Industry Trends

• The Chinese dairy industry is highly fragmented, with most raw milk coming from small farms with fewer than 1,000 cows.
• The government requires dairy producers to trace raw milk back to the farm level or provide their own supply, which favors large-scale operators like YST.
• Frost & Sullivan forecasts a 21% CAGR for premium liquid milk sales from 2013 to 2018E, outpacing the overall market.

Pricing and Margins

• YST's raw milk selling prices and margins are above industry averages due to its focus on premium raw milk and high-quality production standards.
• The company's raw milk selling price has increased to Rmb5.2–5.5/kg in recent years, compared to Rmb4.8/kg in 2013.
• YST's milk yield per cow is significantly higher than the national average (9t vs. 5.5t).

Herd Expansion

• YST plans to construct five new farms on the Songnen Plain over the next three years.
• The expansion includes one for educational tours, one for reserve cows, and three for commercial production.
• The company aims to increase its herd to 100,000 dairy cows by 2017, representing a 25% CAGR.
• Total planned capex is Rmb2.3bn, which will be funded by Rmb2bn from the 2013 IPO without further fundraising.

Financial Performance

• YST's revenue is projected to grow at a 25% CAGR over FY14–16.
• Adjusted net profit is expected to increase significantly, from Rmb300.2m in 2013 to Rmb764.7m in 2016.
• Adjusted EPS is forecasted to grow from Rmb0.12 in 2013 to Rmb0.20 in 2016.
• The company's PEG is 0.28 for FY14–16, indicating strong growth potential.

Investment Outlook

• The company is initiated with a Buy rating and a target price of HK$1.70, based on 11x FY15E earnings.
• The target price implies a 0.35x FY15E PEG, which is attractive compared to its peers.
• Despite the recent decline in raw milk prices, the firm believes that prices will remain high due to tight supply and a long production cycle (24 months).

Key Information

• Share Price (as of 27 Jun 2014): HK$1.23
• Target Price: HK$1.70
• Upside: 38%
• 52-week range: HK$1.20–HK$2.71
• Dividend Yield: 0%
• Free Float: 27.57%
• Market Cap (HK$ m): 1,326
• 12M Daily Turnover (HK$ m): 33.19
• Major Shareholder: Zhao HongLiang & Zhao Hongyu (34.12%)

Risks

• Disease outbreaks and adverse weather could negatively impact milk yields and earnings.
• Food safety issues may affect consumer confidence, especially in the context of past scandals.
• Increased competition could lead to a surplus of premium raw milk, thereby affecting ASP.

Financial Highlights

FY-end Dec 31	2012	2013	2014E	2015E	2016E
Turnover (Rmb m)	689.1	880.8	1,182.4	1,511.1	1,856.6
Growth (%)	363.2	27.8	34.2	27.8	22.9
Adjusted Net Profit (Rmb m)	206.6	300.2	453.4	606.7	764.7
Growth (%)	1,230.0	45.3	51.0	33.8	26.0
Adjusted EPS (Rmb)	0.09	0.12	0.12	0.16	0.20
Growth (%)	N/A	36.1	(4.3)	33.8	26.0
PER (x)	11.1	8.1	8.5	6.3	5.0
OCF/Share (Rmb)	N/A	0.02	0.06	0.13	0.21
PBR (x)	N/A	1.0	0.9	0.8	0.7
EV/EBITDA (x)	16.5	12.4	8.4	6.3	5.1
DPS (Rmb)	N/A	0.00	0.00	0.00	0.00
Yield (%)	N/A	0.00	0.00	0.00	0.00

Peer Comparison

Name	Ticker	Last Price (LC)	Mkt Cap (US$m)	FY1 EPS growth (%)	FY2 EPS growth (%)	FY1 PER (X)	FY2 PER (X)	FY14-16 PEG (X)	FY1 EV/EBITDA (X)	FY2 EV/EBITDA (X)	Div Yield (%)
YST Dairy	1431 HK	1.23	625	(4.3)	33.8	8.5	6.3	0.28	8.4	6.3	0.0
Huishan Dairy	6863 HK	1.72	3,216	26.0	34.7	11.4	8.5	0.28	8.7	6.5	1.6
China Modern Dairy	1117 HK	3.11	1,943	47.3	30.3	13.5	10.4	0.27	11.7	9.5	0.0
Average (HK)	-	-	-	23.0	32.9	11.1	8.4	0.28	9.6	7.5	1.3

Conclusion

YST is a well-positioned player in the evolving Chinese dairy industry, benefiting from its focus on premium raw milk, efficient herd management, and strategic expansion plans. With a Buy rating and a target price of HK$1.70, the company is expected to deliver strong earnings growth over the next few years. However, it is important to monitor potential risks such as disease outbreaks, food safety issues, and increased competition.