YILI INDUSTRIAL(600887)：PROMOTIONAL EXPENSE ON WINTER OLYMPICS COULD WEIGH ON 4Q RESULTS

We trim our 2021E net profits by 1.5% to RMB8,902mn subsequent to our incorporation of a 0.9pp higher opex ratio (of 28.7%) for 4Q21 due to any promotional expense for the Winter Olympics. In other words, we lowered our 4Q21E net profit estimate to RMB958mn which is now about 2% below consensus. Meanwhile, we leave our 2021E top line largely unchanged, as we expect 4Q shipment growth (+11.6% YoY) to sequentially improve from 8.6% in 3Q. We extrapolated our revised forecasts, and as such we cut ~4% of our 2022E net profits which explained our lowered TP of RMB46.5 (from RMB50.0)。 We are buy-rated, but we prefer CR Beer (291HK, Buy) and Mengniu (2319HK, Buy) within our China Consumer Staples coverage universe for a potentially lower earnings volatility into the result seasons.

    A steady 4Q top line. Sales in liquid milk improved vs 3Q21 when IMF continued to track strongly. Based on Nielsen data, Yili’s market share in IMF expanded 1.6ppt YoY to 7.1% in Nov 2021, despite regional outbreaks in the country during the quarter. Low temp milk recorded steady top line growth in the quarter but has not yet broken even, which is a common situation faced by the sector at the current stage, given still limited scale, high cold chain logistic cost, and the need of time to grow consumer habits.

    4Q21 margins still under presssure. 4Q21 margins went under relatively high pressure compared to 3Q21, due to a still-high raw milk price and a higher selling expense ratio, largely due to increased advertising campaigns including those for Winter Olympics. It is unlikely, in our view, to see significant reduction in selling expense ratio in the near term as the company plans to keep investing in emerging categories such as IMF, low temp milk, cheese. Management expected full-year NPM to improve by about 0.5ppt YoY.

    Valuation. Our TP is based on an updated 28.5x (from 29.0x) end-22E P/E which still represents +1sd above its 3-year average. In our view, our methodology reflects Yili’s solid growth roadmap which likely manifests into a guided approximately 0.5ppt margins expansion per annum.