China Modern Dairy (1117 HK) The milk as fresh as before？？ 31 Oct 2013

The milk as fresh as before BY oriental-patroN


We attended the teleconference call hosted by CMD of 1QFY14 business update,
here is our take:


Bullish 1QFY14 results bode well for further growth: what surprised us was
the milk yield has reached to 8.21t in seasonal low quarter (extremely high
temperature in July & early Aug lowed milk yield), and further climbed up to 8.78t
as of Oct, according to mgmt. Targeting to 8.5t and 9.0t in FY14 and FY15 seems
reachable for CMD, which is head of our estimation. Other 1QFY14 operation
performance still on the right track: i) ASP +18%yoy to RMB4.66/kg; ii) cash
EBITDA surged 129% to ~RMB210mn; iii) sales volume +30% to ~166kt. Core
NP almost tripled to RMB169mn alone with revenue 62%yoy growth in 1QFY14.
Regarding shares offering: Yinmu, Xinmu and Youmu conducted 5.2% shares
offering with 6% discount to previous closing price. The mgmt clarified that
investors who selldown were not involved in the operations, but mgmt who hold
Jinmu are not the participant of the shares offering. After twice shares offering
(Sep 25 and Oct 29), the combined holding by Jinmu, Yinmu, Xinmu and Youmu
has reduced to 31.6% from 38.5%, but still higher than Mengniu’s 29%. However,
we still caution to see further shares offering from legacy investors who have
around 8 years holding period with decent investment return.


We push up our target price to HK$5.00 as rollover impact and earning
upgrade: Inspiring 1QFY14 result encouraged our bullish forecast. We revised
up our earnings forecast by 2.5/17.2/10.3% for FY14/15/16E to mainly reflect the
better-than-expected milk yield and upgraded ASP. We roll over our forecast to
FY15 as base to get new target price of HK$5.00, implying 39% upside. Our new
target price implies 20/15.5X FY15/16 PER, with ~10%-20% discount to dairy
peers.