Biostime (1112 HK) Negatives Priced In With

Company Update, 14 January 2015
Biostime (1112 HK)
Neutral (Maintained)
Consumer Non-cyclical - Food & Beverage Products
Market Cap: USD1,255m
Target Price:
Price:
HKD15.97
HKD16.04
Macro
Risks
Negatives Priced In With Limited Upside
Growth
Value
Biostime (1112 HK)
Relative to Hang Seng Index (RHS)
79.2
108
69.2
94
59.2
80
49.2
66
39.2
51
29.2
37
19.2
23
9.2
18
16
14
12
10
8
6
4
2
0
0
.
2
0
0
Management guides for flat FY14 sales (from +6% YoY previously) .
0
- which implies negative growth for 2H14 - and 2H14 NP margin to be 0
similar to 1H14’s of 14.3%. Maintain NEUTRAL with a lower HKD15.97 0
TP (0.4% downside). Given challenges ahead including fierce
competition, an industry slowdown and Biostime’s sales team
restructuring, we see limited catalysts to support a share price
rebound. This marks the transfer of coverage to Robin Yuen.

8
Nov-14
Sep-14
Jul-14
May-14
Mar-14

Jan-14
Vol m
Price Close

Source: Bloomberg
Avg Turnover (HKD/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (HKD)
Free float (%)
Share outstanding (m)
Shareholders (%)
43.7m/5.67m
37.5
-0.4
15.0 - 72.4
26
607
Directors
Artisan Partners
Janus Capital Management
74.2
0.9
0.8
Share Performance (%)

Difficult industry conditions. We recently spoke with management for
an update. Management stated there is a fierce competition in the infant
milk formula (IMF) market, with an explosion of IMF brands and rapid
expansion of retail stores. IMF sales volume has stagnated, with sales
value going up primarily due to consumers upgrading to supreme-tier
products.
Weak 3Q14 guidance. Management sees ASPs to decline going
forward as Biostime grabs share in mid-end market via cheaper
selections within its secondary brand Adimil on e-commerce platforms,
and via a locally-produced IMF product for penetration into tier-4 and
tier-5 cities. Thus, management further revised down its guidance for
FY14 sales growth and net profit (NP) margins to be flat.
Cut numbers to reflect the new environment. We reduce our numbers
to incorporate management’s guidance and also comments from
Biostime’s industry peers. For FY14-16F, we: i) cut sales by
6%/10%/12%, ii) lower gross profit (GP) margins by 2ppts/4ppts/4ppts to
61%/60%/59% to reflect product mix dilution and increased promotions,
and iii) revise selling, general and administrative (SG&A) expenses up
1.5ppts/2.0ppts/2.5ppts to reflect increased headcount on specialised
sales team and continued investment in the e-commerce business,
leading to a NP reduction of 22%/33%/40% for FY14-16F respectively.
Reduce TP, maintain NEUTRAL. Our new TP of HKD15.97 (from
HKD34.10) is based on a reduced FY15 P/E of 12x (from 17x P/E),
which is about -1SD of its 3-year historical forward P/E. We consider a
reduced multiple is justified as Biostime faces margin compression and
curtailed revenue growth in the forecasted years. With limited catalysts in
sight, we find a re-rating is unlikely in the near future.
YTD
1m
3m
6m
12m
Absolute
0.6
4.2
(34.0)
(60.0)
(77.6)
Forecasts and Valuations
Relative
(0.7)
1.3
(37.4)
(63.0)
(82.1)
Total turnover (CNYm)
Shariah compliant
Robin Yuen, CFA +852 2103 9202
[email protected]
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
3,382
4,561
4,557
4,775
5,179
Reported net profit (CNYm)
743
821
653
647
661
Recurring net profit (CNYm)
698
917
645
639
653
Recurring net profit growth (%)
51.9
31.4
(29.7)
(1.0)
2.2
Recurring EPS (CNY)
1.17
1.53
1.08
1.06
1.09
DPS (CNY)
0.88
1.06
0.44
0.43
0.44
Recurring P/E (x)
11.0
8.4
11.9
12.1
11.8
P/B (x)
3.31
3.06
2.83
2.45
2.12
P/CF (x)
8.1
11.7
8.5
10.9
10.4
Dividend Yield (%)
6.8
8.2
3.4
3.4
3.4
3.11
3.26
6.64
6.13
5.47
EV/EBITDA (x)
Return on average equity (%)
Net debt to equity (%)
Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report


2

.
2
0
.
1




Source: Company data, RHB
34.6
net cash
33.9
24.9
net cash
22.1
19.5
net cash
net cash
net cash
(1.4)
(7.3)
(14.1)
Powered by EFATM Platform
1
Biostime (1112 HK)
14 January 2015
Update On Infant Formula Milk Industry
 3Q14 conference call
Stiffer competition sets in. Ever since the 2008 melamine crisis shook consumer
confidence in the domestic IMF market, Chinese parents have been purchasing as
many foreign IMF products as they could afford. This flight to quality has created
huge demand and subsequently rich profit margins for foreign IMF producers and
distributors over the last five years.
“China remains a very, very attractive category… it certainly is growing [but] not
growing at the rate that it was perhaps two or three years ago,” said Mead Johnson’s
(MJN US, NR) CEO Jakobsen in the company’s 3Q14 conference call. Biostime CEO
Luo Fei remarked that “some foreign companies might be overly optimistic about the
China’s IMF market… and [even] sports and real estate sector [companies] have
entered this market.”
This “gold rush” in China’s IMF market has given rise to an influx of both domestic
and foreign players overcrowding the market. Intensifying market competition has led
to aggressive promotional sales of inventory, especially in the supreme-tier segment.
 Volume is stagnant and price hikes are
unlikely as the only driver is the consumption
mix upgrade
Industry slowing down. The National Development and Reform Commission’s
(NDRC) clampdown on price fixing in 2013 has affected ASP hikes for IMF products.
Industry sales value grew only by 10% YoY for trailing 12 months ending Sep 2014,
in contrast to a 5-year CAGR of 20% for 2008-2013, according to Nielson data.
3Q14 industry sales volume growth was “insignificant”, while sales value growth was
driven primarily by ASP increases via consumers upgrading to supreme-tier products,
said Luo Fei. Despite the trend in product mix upgrade, he observes that “price
competition has intensified” among supreme-tier products such that the effective
retail price is trending down.
However, most IMF brands are hesitant to increase prices since they become
politically sensitive after the NDRC’s clampdown on price fixing in 2013. Mead
Johnson’s Jacobsen commented that “industry growth will be “mid-single digit volume
growth amplified by some growth in pricing” and that moderate price hikes would
return in the future.
 What about the relaxation of One-Child
Policy? Immaterial, my dear Watson
Looking at China demographics, birth rates historically trended at 12 births per 1,000
persons per year, or 1.2% of total population that equals to 16.4m new births in 2013.
Economists predict an estimate of +8% increase in new births from 2013’s relaxation
of One-Child Policy, so even if we assume an immediate effect in 2014, ceteris
paribus, annual birthrate would increase to 1.3%. While the policy is beneficial to IMF
consumption demand and positive to market sentiment, the magnitude of the benefit
is rather immaterial, in our view.
Figure 1: China Demographics
Figure 2: Breastfeeding rate, age 0-6 mos
1,380
12.50
1,360
12.40
12.30
1,340
12.20
1,320
12.10
1,300
12.00
35%
Title:
Source:
30%
30%
Please fill in the values above to have them entered in your rep
25%
20%
11.90
1,280
11.80
1,260
11.70
1,240
11.60
16%
15%
10%
5%
Total Population (m)
0%
Crude Birth Rate (Annual Births per 1000 persons )
Source: National Bureau of Statistics
 Competitive edge sustainable?
See important disclosures at the end of this report
Rural China
Urban China
Source: National Health and Family Planning Commission
Competitive edge sustainable? Biostime prides itself on its well-established
distribution channel and meticulous education in its channel partners via regular visits
and seasonal seminars on the company’s new products. We believe, however, that
its willingness to offer greater wholesale discounts vs multinational corporations
(MNC) brands has played an equally important role in boosting its sales historically –
2
Biostime (1112 HK)
14 January 2015
as salespersons are more incentivised to push Biostime products for more
profits/commissions, especially in the baby store and pharmacy setting.
However, in a pseudo price war scenario, MNC brands could sacrifice their wholesale
margins for market share, thus eroding Biostime’s primary source of competitive
advantage. It is worth noting that MNC products usually have a strong brand image
and some independent baby stores would stock those brands despite their margins
being 50% less than that of domestic brands, just to win store traffic.
We also point out that Biostime’s Mama100 active members numbers went down for
the first time in 3Q14, with CEO Luo Fei citing competition as the reason. A lack of
growth in the number of active members is one of the reasons management guided
for flat sales growth for FY14.
Figure 3: Distribution channel mix
Distribution Channel
FY11
FY12
FY13
1Q14
2Q14
3Q14
VIP baby specialty stores
6,727
10,404
13,952
15,173
16,941
19,916
Supermarkets
2,968
4,174
5,235
5,462
5,659
6,104
545
1,028
1,522
1,679
1,900
2,397
10,240
15,606
20,709
22,314
24,500
28,417
VIP Pharmacies
Total POS
Mama100 active members
825,230
1,400,781 1,811,492 1,898,839 1,995,233 1,985,539
Source: Company Data, RHB
Figure 4: 1H14 sales by product
Figure 5: 1H14 sales contribution by channel
3% 3%
Title:
Source:7.2%
9%
Please fill in the values above to have them entered in your r
27.2%
65.6%
85%
Probiotic supplements
Infant formulas
Dried baby food
Baby care products
Source: RHB
 Online platform is set to be the next growth
frontier
 Data on e-commerce growth may not
represent true end-user demand
VIP Baby Specialty Stores
Supermarkets
VIP Pharmacies
Source: RHB
Shifting to online e-commerce. Biostime is building in a stronger presence in the
online channel to capture this growth opportunity. In addition to its existing online-tooffline (O2O) programme that started in 2013, in Aug 2014, it started business-toconsumer (B2C) and consumer-to-consumer (C2C) business by partnering with
JD.com, YiHaoDian and Suning.com to distribute mid- to low-end IMF products (ie
products priced below CNY200) on their online store fronts. Management guides
sales growth contribution to be minimal in 2H14, but there will be an increase in
selling expense due to new hires of 30+ people in the new B2C team.
The IMF e-commerce market is growing 25% YoY while the brick and mortar IMF
market is declining 10% YoY, according to Nielson industry data. While we may infer
from this set of data that consumers are price conscious and are going online to hunt
for bargains, raising the issue of sales cannibalisation in the brick and mortar stores,
we note that e-commerce data may overstate the actual consumption of IMF due to
double counting. This is due to the overlap of distribution channels in China, whereby
brick and mortar shops eg independently-run baby stops and pharmacies buy
cheaper products online and sell them at higher prices in their stores. Thus, ecommerce market represents the sum of both middlemen’s and end-users’
purchases.
Biostime’s management further elaborated on industry trends. Baby specialty stores,
which contributed 70% of 3Q14 sales, reported zero volume growth but “single-digit
value growth”. Modern channel (eg supermarkets), which contributed 21% of sales,
See important disclosures at the end of this report
3
Biostime (1112 HK)
14 January 2015
declined in terms of both volume and value for an undisclosed magnitude. Finally,
pharmacies contributed 8% of sales, but growth details were not provided.
 Product mix dilution
Seeking growth in mid-end market. Anticipating future growth in mid-end market,
Biostime created a new line of product “Adimil” with a price range of CNY160-350.
This price point is designed to cater for the e-commerce market where the price point
of CNY200 per unit is common and allows it to take part in online promotion
campaigns at a 20% discount. As such, a separate mid-end name could help prevent
reputation damage to Biostime’s core brands due to price promotions.
 Heyday of hyper-growth is over…
Outlook. We see limited catalysts in the near future. The company faces secular
headwinds from stiff competition among brands. Management has serially toned
down its guidance over the last nine months – it recently guided for flat sales growth
for FY14, implying a negative growth rate for 2H14. NP margin is guided to be the
same as 1H14 levels at 14.3%. We now see Biostime as more of a fairly-valued stock
compared to an EPS growth story previously.
Figure 6: Change in our estimates
(CNY m)
New estimates
2014F
2015F
2016F
Old estimates
2014F
Difference
2015F
2016F
Revenue
4,557
4,775
5,179
4,871
5,328
5,902
COGS
(1,793)
(1,926)
(2,138)
(1,826)
(1,962)
(2,177)
Gross profit
Selling and distribution costs
Administrative expenses
Op Expense
Other income and gains
Other expenses
NDRC fine
EBIT
EBITDA
Finance costs
PBT
Income tax expense
2,764
2,849
3,042
3,045
3,365
3,725
(1,686)
(1,767)
(1,916)
(1,728)
(1,866)
(2,034)
(182)
(191)
(207)
(185)
(193)
(211)
(1,868)
(1,958)
(2,124)
(1,913)
(2,060)
(2,245)
93
93
93
93
93
93
(82)
(86)
(93)
(59)
(59)
(65)
-
-
-
-
-
1
906
898
918
1,165
1,340
1,509
954
961
996
1,212
1,402
1,587
-
-
-
-
-
1
906
898
918
1,165
1,340
1,510
-6.4%
-10.4%
-12.2%
-9.2%
-15.3%
-18.3%
-2.3%
-4.9%
-5.4%
-22.2%
-33.0%
-39.2%
(254)
(251)
(257)
(326)
(375)
(423)
28.0%
28.0%
28.0%
28.0%
28.0%
28.0%
Net Profit (Reported)
653
647
661
839
965
1,087
-22.2%
-33.0%
-39.2%
Recurring net profit
645
639
653
831
957
1,079
-22.4%
-33.3%
-39.5%
-22.2%
-33.0%
-39.2%
-22.4%
-33.3%
-39.5%
Effective tax
Basic EPS (RMB)
Diluted EPS (RMB)
Core EPS (RMB)
1.088
1.078
1.102
1.399
1.609
1.813
1.064
1.054
1.078
1.368
1.573
1.774
1.075
1.065
1.089
1.385
1.596
1.799
y/y change
Revenue
-0.1%
4.8%
8.5%
7%
9%
11%
Gross Profit
-7.1%
3.1%
6.8%
2%
11%
11%
S&D expense
11.4%
4.8%
8.5%
14.2%
8.0%
9.0%
Admin expense
2.8%
4.8%
8.5%
4.5%
4.4%
9.0%
SGA Expense
10.5%
4.8%
8.5%
13%
8%
9%
EBIT
-22.7%
-0.9%
2.2%
-1%
15%
13%
PBT
-22.0%
-0.9%
2.2%
0%
15%
13%
NP (Reported)
-20.5%
-0.9%
2.2%
2%
15%
13%
GP margin
60.7%
59.7%
58.7%
62.5%
63.2%
63.1%
-1.8%
-3.5%
-4.4%
S&D expense
37.0%
37.0%
37.0%
35.5%
35.0%
34.5%
1.5%
2.0%
2.5%
Admin expense
4.0%
4.0%
4.0%
3.8%
3.6%
3.6%
0.2%
0.4%
0.4%
SGA Expense
41.0%
41.0%
41.0%
39.3%
38.7%
38.0%
1.7%
2.3%
3.0%
EBIT margin
19.9%
18.8%
17.7%
23.9%
25.1%
25.6%
-4.0%
-6.3%
-7.9%
PBT margin
19.9%
18.8%
17.7%
23.9%
25.1%
25.6%
-4.0%
-6.3%
-7.9%
NP (reported) margin
14.3%
13.5%
12.8%
17.2%
18.1%
18.4%
-2.9%
-4.6%
-5.7%
NP (recurring) margin
14.1%
13.4%
12.6%
17.1%
18.0%
18.3%
-2.9%
-4.6%
-5.7%
As % of Sales
Source: RHB
See important disclosures at the end of this report
4
Biostime (1112 HK)
14 January 2015
Revenue. We cut FY14-16F sales estimates by 6%/10%/12% respectively, primarily
to account for intense competition in the IMF industry, as Biostime’s IMF business
makes up c.85% of group revenue.
Figure 7: Operating Segment Assumptions
New
2014F 2015F 2016F
(CNY m)
Sales Revenue by
Product supplements
Probiotic
376
338
- 18%
- 10%
Infant formulas
3,827
YoY changes
2%
YoY changes
5%
4,057
4,422
4,090
4,499
5,007
6%
9%
9%
10%
11%
179
188
0%
5%
201
232
134
- 10%
175
15%
15%
15%
15%
Total Revenue
4,557
4,775
5 , 17 9
y-o-y changes
- 0.1%
4.8%
8.5%
YoY changes
461
3%
175
Baby care products
439
- 7%
- 10%
YoY changes
426
0%
179
Dried baby food
338
Old
Difference
2014F 2015F 2016F
139
4%
203
146
- 12%
- 23%
- 27%
- 6%
- 10%
- 12%
34%
28%
28%
0%
- 1%
- 2%
5%
237
16%
17%
4,871
5,328
5,902
- 6%
- 10%
- 12%
GP margin by Product
Probiotic supplements
71.0%
71.0%
71.0%
73.0%
73.5%
73.5%
- 2.0%
- 2.5%
- 2.5%
Infant formulas
61.0%
60.0%
59.0%
62.5%
63.3%
63.3%
- 1.5%
- 3.3%
- 4.3%
Dried baby food
46.0%
46.0%
46.0%
50.0%
50.0%
50.0%
- 4.0%
- 4.0%
- 4.0%
Baby care products
46.0%
46.0%
46.0%
50.0%
50.0%
50.0%
- 4.0%
- 4.0%
- 4.0%
Overall GP m argin
60.7%
59.7%
58.7%
62.5%
63.2%
6 3 . 1%
- 1. 8 %
- 3.5%
- 4.4%
Source: RHB
GP margins. We reduce our FY14-16 GP margins forecasts to 61%/60%/59% from
63%/63%/63% to reflect a combination of: i) product mix dilution as Biostime seeks
new growth areas from cheaper-priced online sales and cheaper-priced domesticallyproduced products under the Adimil brand, ii) contribution to GP margin from cheaper
milk powder input cost, and iii) continued product promotion costs, which are mostly
borne by Biostime, as management insists that distributors and end-retailer receive
steady margins of 10% and 16% respectively.
Figure 9: Value-chain analysis – Gross profit distribution
Figure 8: 1H14 GP margins by product
80.0%
71.6%
Percentage (%)
70.0%
Value Captured (CNY)
61.7%
Raw
Brand Owner Distributor Retailer Full Retail
Title:
Materials
(i.e. Biostine)
Price
Source:
30
44
10
16
100
¥81
¥119
¥27
¥43
¥270
Please fill in the values above to have them entered in your r
60.0%
50.0%
46.0%
46.0%
Dried baby food
Baby care
products
40.0%
30.0%
20.0%
10.0%
0.0%
Probiotic
supplements
Infant formulas
Source: RHB
Source: RHB
Exposure to milk powder. Around 25% of cost of goods sold (COGS) from
Biostime’s IMF business comes from milk powder, and the IMF segment comprises
85% of group sales. As Biostime procures finished IMF products from Montaigu,
Isigny Sainte Mère (“ISM”), and Arla Foods in France – essentially their original
equipment manufacturer (OEM) partners – whether cost savings may be passed to
Biostime mainly depends on price negotiations.
See important disclosures at the end of this report
5
Biostime (1112 HK)
14 January 2015
We note that global milk powder prices have retreated c.50% between 2H13 and
1Q15. Using New Zealand Whole Milk Powder as a proxy to Biostime’s cost of milk
powder from France, and given a lag time of 7-8 months from Biostime’s time of
purchase from OEMs to delivery to regional distributors (inventory days were 223 in
1H14), we expect the impact of COGS savings to be felt in 1H15, and more impact in
2H15 as the low average cost of milk powder flows through.
Sensitivity analysis. Based on our calculations, every 10% reduction in milk powder
price leads to a 1ppt increase in GP margin. This translates into a c.4% increase in
net profit, taking into consideration that the IMF business makes up only 85% of
group sales.
We believe there should be no effect on GP margins in 2H14 from lower cost of milk
powder as powder prices stayed flat on average. However, for 1H15, there could be
an effective 25% half-on-half discount, implying that 1H15 GP margin could improve
by 2.5ppts from 2H14 levels, if we assume cost savings are full passed through from
OEM to Biostime.
From our conversations with industry experts, we believe that milk powder price
is close to bottoming out as the cost-income model for small farmers is no longer
profitable at current price levels. In addition, some farmers are reported to have
started slaughtering their herd to exit the business, which may cause the supply of
milk powder to moderate.
Figure 10: NZ whole milk powder price (USD per tonne)
7000
6000
5000
4000
3000
2000
1000
0
Source: Bloomberg
Selling and distribution (S&D) expenses. We raise FY14-16 SG&A expenses by
1.5ppts/2.0ppts/2.5ppts to reflect Biostime’s new restructuring of its sales team by
brand and the addition of the e-commerce team. Within S&D, we expect advertising
and promotion (A&P) expense to rise (currently c.4% of sales) as Biostime has
shifted to build its brand name rather than continuing using a promotion-driven
strategy. Thus, we forecast FY14-16 EBIT margins to contract by 3ppts/5ppts/7ppts
to 21%/20%/19%. As a result, our new net profit forecasts are reduced by
18%/16%/11% respectively.
Valuation and risks. Our new TP of HKD15.97 (from HKD34.10) is based on a
reduced FY15 P/E of 12x (from 17x P/E), which is about -1SD of its 3-year historical
forward P/E. We believe the IMF industry sees limited topline pricing power due to
regulatory concerns, while fierce competition could erode Biostime’s GP margins.
However, we believe most of the negatives have been priced in as we see a steady
industry growth rate of in the high single digits, supported by fundamental growth
drivers (eg urbanization, population growth, consumer demand for quality). We also
note that Biostime trades at 11x FY15 P/E, a major discount vs its peers Yashili’s
(1215 HK, NR) 19x and A-share listed Beingmate’s (002570 CH, NR) 38x. Thus, we
rate Biostime as NEUTRAL.
Key upside risks include an accelerated pace in industry consolidation, a continued
fall in milk powder prices, and favourable government policies to support domestic
IMF players. Key downside risks include a prolonged price war, Biostime’s inability to
penetrate e-commerce markets, as well as milk product safety issues.
See important disclosures at the end of this report
6
Biostime (1112 HK)
14 January 2015
Figure 11: 3-year forward P/E band
100.00
Share Price (HKD)
80.00
+2SD @51.5x
60.00
+1SD @38.0x
40.00
Mean @24.6x
20.00
-1SD @11.1x
0.00
Jan-12
May-12 Sep-12
Jan-13
May-13 Sep-13
Jan-14
May-14 Sep-14
-2SD @-2.4x
-20.00
Source: Bloomberg, RHB
See important disclosures at the end of this report
7
Biostime (1112 HK)
14 January 2015
Figure 12: Peer Valuation I
Company
Ticker
Biostime Interna
1112 HK
Price
Mkt
3-mth
cap avg t/o
(USDm) (USDm)
16.04
HSI
24,216
HSCEI
12,063
CSI300
3,514
1,255
6.0
P/E
Hist
(x)
P/E
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr PEG (x) Div yld Div yld P/BV P/BV
EPS
Hist
FY1 Hist FY1
Cagr
(%)
(%)
(x)
(x)
(%)
(10.7)
N/A
6.4
3.4
3.1
2.8
9.4 11.9
12.1
(21.3)
(1.7)
10.2 10.9
9.9
(6.4)
10.3
5.4
2.0
3.7
3.7
1.4
1.3
7.9
7.2
6.7
10.2
7.7
1.0
3.6
4.0
1.3
1.1
15.6 12.8
11.2
21.6
14.5
N/A
1.6
2.3
2.3
1.9
24.1 24.5
21.3
10.6
19.0
11.2
1.9
1.8
1.9
3.8
3.4
8.4
Adjusted sector avg*
P/E
FY1
(x)
N/A
Domestic Dairy
China Mengniu Da
2319 HK
34.00
8,588
20.5
30.1 25.3
20.9
18.9
21.1
19.7
1.3
0.7
0.9
2.6
2.5
Yashili Internat
1230 HK
2.28
1,047
1.9
14.8 18.2
16.6
(18.7)
10.0
3.2
5.8
2.0
2.4
2.0
2.0
Huishan Dairy
6863 HK
1.38
2,557
5.2
11.0 11.1
9.4
(1.0)
19.2
15.7
0.7
2.0
2.0
1.2
1.1
Beingmate Baby-A
002570 CH
16.20
2,672
39.5
22.9 36.9
26.0
(37.8)
41.7
2.0
18.2
2.5
1.7
4.2
3.6
Inner Mong Yil-A
600887 CH
28.36 14,018
327.9
25.8 19.5
16.0
32.2
21.9
23.8
0.8
1.9
2.2
4.8
4.2
Bright Dairy-A
600597 CH
18.63
3,698
65.3
56.5 38.3
26.7
47.6
43.5
39.9
1.0
1.1
1.4
5.2
4.9
International Dairy
Mead Johnson
MJN US
100.09 20,221
132.0
31.3 26.9
24.2
16.1
11.3
12.7
2.1
1.5
1.5
39.7
31.7
Danone
BN FP
54.12 41,129
83.5
22.4 20.6
18.7
8.7
10.3
10.1
2.0
2.7
2.7
2.9
2.8
Abbott Labs
ABT US
45.58 68,634
218.7
27.8 20.2
20.2
37.9
(0.4)
15.7
1.3
2.0
1.9
3.0
2.9
Want Want China
151 HK
9.99 17,002
2.6
2.7
2.6
9.0
7.6
Uni-President
220 HK
6.94
0.9
0.5
2.2
2.2
Tingyi
322 HK
1.6
1.8
4.2
4.0
Domestic F&B
17.4
24.8 24.8
21.1
0.0
17.3
9.4
3,866
3.1
22.8 42.4
31.5
(46.2)
34.4
(4.9)
17.52 12,662
19.9
31.0 27.6
22.6
12.3
22.0
15.7
N/A
1.8
Source: Bloomberg, RHB
Figure 13: Peer Valuation II
Company
Biostime Interna
Rev Hist NP Hist
(USDm) (USDm)
736
132
EV/
Ebitda
Hist
7.2
EV/
Net
Net
Ebitda gearing gearing
Cur Yr Hist (%) FY1 (%)
8.0
0.0
0.0
Unlev
beta
0.26
Gross
Net
margin margin
Hist (%) Hist (%)
65.2
18.0
ROIC ROE Hist ROE FY1
Sh px
Sh px
Hist (%)
(%)
(%) 1-mth % 3-mth %
35.2
24.9
4.2
HSI
16.8
13.3
11.4
4.2
4.6
HSCEI
15.1
14.1
7.4
17.3
CSI300
Adjusted sector avg*
17.4
14.3
15.3
13.3
0.57
41.3
(34.0)
14.5
14.8
10.0
43.1
8.7
8.1
15.6
14.4
2.0
2.0
Domestic Dairy
China Mengniu Da
6,994
263
18.5
13.9
16.6
2.3
0.59
27.0
3.8
7.1
11.4
11.5
12.4
2.7
Yashili Internat
627
71
12.1
11.0
0.0
0.0
0.68
53.5
11.2
3.2
11.4
11.0
(2.1)
(21.6)
Huishan Dairy
569
202
52.6
9.8
8.7
29.6
N.A
20.1
35.4
1.4
13.1
10.8
(2.1)
(18.3)
Beingmate Baby-A
975
116
16.3
30.6
0.0
0.0
0.99
61.0
11.9
17.8
19.7
9.7
(6.5)
(3.2)
Inner Mong Yil-A
7,669
514
22.1
13.9
0.0
0.0
N.A
28.3
6.7
N/A
25.4
23.0
3.1
16.6
Bright Dairy-A
2,614
65
24.0
20.6
0.0
N/A
0.63
34.4
2.5
N/A
11.8
12.4
9.5
11.9
8.3
International Dairy
Mead Johnson
4,201
650
20.4
18.0
133.0
28.2
0.37
63.5
15.5
40.3
198.6
190.6
2.3
Danone
18,051
1,205
12.4
12.9
75.8
60.6
0.30
48.5
6.7
7.8
9.5
13.7
0.6
6.8
Abbott Labs
21,848
2,576
16.6
14.5
0.0
17.0
1.17
54.0
11.8
5.8
8.4
13.2
4.3
11.4
Want Want China
3,818
687
18.4
17.0
0.0
0.0
0.72
41.5
18.0
19.4
39.0
33.7
(0.3)
1.6
Uni-President
3,763
148
17.4
14.3
56.4
39.6
0.14
33.3
3.9
2.1
7.3
5.7
1.8
(3.9)
10,941
409
13.0
11.2
11.1
16.1
0.68
30.3
3.7
7.9
14.3
14.4
2.7
(12.0)
Domestic F&B
Tingyi
Source: Bloomberg, RHB
See important disclosures at the end of this report
8
Biostime (1112 HK)
14 January 2015
Financial Exhibits
Profit & Loss (CNYm)
Dec-12
Dec-13
Dec-14F
Dec-15F
Total turnover
3,382
4,561
4,557
4,775
5,179
Cost of sales
(1,153)
(1,586)
(1,793)
(1,926)
(2,138)
Gross profit
2,229
2,975
2,764
2,849
3,042
Gen & admin expenses
Selling expenses
Dec-16F
(117)
(177)
(182)
(191)
(207)
(1,078)
(1,513)
(1,686)
(1,767)
(1,916)
Other operating costs
(39)
(82)
(86)
(93)
Operating profit
996
1,229
814
805
825
1,018
1,256
Operating EBITDA
Depreciation of fixed assets
864
876
909
(22)
(26)
(54)
(76)
(90)
(1)
(1)
3
5
7
814
805
825
-
-
-
Amortisation of intangible assets
Operating EBIT
(56)
996
1,229
Other recurring income
12
-
Interest income
44
88
Interest expense
(2)
(11)
-
14
-
1
(158)
Exchange gains
Exceptional income - net
Pre-tax profit
Taxation
1,051
1,162
85
85
-
85
-
-
-
8
8
8
906
898
918
(307)
(341)
(254)
(251)
(257)
Profit after tax & minorities
743
821
653
647
661
Reported net profit
743
821
653
647
661
Recurring net profit
698
917
645
639
653
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
996
1,229
814
805
825
23
27
50
71
84
115
(167)
235
17
29
59
(81)
67
67
67
1,166
960
1,005
Source: Company data, RHB
Cash flow (CNYm)
Operating profit
Depreciation & amortisation
Change in working capital
Other operating cash flow
Operating cash flow
Tax paid
1,192
1,008
(245)
(347)
(258)
(256)
Cash flow from operations
947
660
908
704
743
Capex
(39)
(136)
(300)
(150)
(150)
Other new investments
(0)
Other investing cash flow
(1,811)
Cash flow from investing activities
(1,850)
(2)
(262)
(5)
(5)
(5)
428
80
80
80
290
(225)
(75)
(75)
(404)
(622)
(454)
(264)
(266)
Increase in debt
271
480
-
-
Other financing cash flow
(58)
(73)
-
-
(192)
(215)
Dividends paid
Cash flow from financing activities
Cash at beginning of period
Total cash generated
Forex effects
Implied cash at end of period
1,814
(1,095)
5
724
(454)
(264)
(266)
1,669
1,663
1,891
2,255
736
228
364
402
-
-
1,891
2,255
(1)
2,405
1
2,658
Source: Company data, RHB
See important disclosures at the end of this report
9
Biostime (1112 HK)
14 January 2015
Financial Exhibits
Balance Sheet (CNYm)
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
1,669
1,733
1,961
2,325
2,728
523
972
775
812
880
Accounts receivable
0
15
15
16
17
Other current assets
98
146
140
146
156
2,291
2,866
2,891
3,299
3,782
942
855
-
-
77
322
568
643
702
163
Total cash and equivalents
Inventories
Total current assets
Total investments
Tangible fixed assets
Intangible assets
1
1
149
154
158
222
428
440
438
482
Total non-current assets
1,242
1,754
1,161
1,239
1,349
Total assets
5,131
Total other assets
3,533
4,620
4,053
4,538
Short-term debt
271
751
-
-
-
Accounts payable
263
362
400
426
471
Other current liabilities
600
933
876
909
977
1,133
2,045
1,276
1,335
1,448
Other liabilities
77
60
60
60
60
Total non-current liabilities
77
60
60
60
60
1,211
2,104
1,336
1,395
1,507
Total current liabilities
Total liabilities
Share capital
5
5
5
5
5
Other reserves
2,317
2,510
2,711
3,138
3,617
Shareholders' equity
2,323
2,516
2,716
3,143
3,622
-
-
-
-
Total equity
2,323
2,516
2,716
3,143
3,623
Total liabilities & equity
3,533
4,620
4,053
4,538
5,131
Minority interests
1
Source: Company data, RHB
Key Ratios (CNY)
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
Revenue growth (%)
54.5
34.9
(0.1)
4.8
8.5
Operating profit growth (%)
55.1
23.4
(33.8)
(1.0)
2.5
Net profit growth (%)
40.9
10.4
(20.5)
(0.9)
2.2
EPS growth (%)
41.7
10.3
(20.5)
(0.9)
2.2
Bv per share growth (%)
18.1
8.1
8.0
15.7
15.3
Operating margin (%)
29.4
26.9
17.9
16.9
15.9
Net profit margin (%)
22.0
18.0
14.3
13.5
12.8
Return on average assets (%)
24.9
20.1
15.1
15.1
13.7
Return on average equity (%)
34.6
33.9
24.9
22.1
19.5
(60.2)
(39.0)
(72.2)
(74.0)
(75.3)
DPS
0.88
1.06
0.44
0.43
0.44
Recurrent cash flow per share
1.58
1.10
1.51
1.17
1.24
Net debt to equity (%)
Source: Company data, RHB
See important disclosures at the end of this report
10
Biostime (1112 HK)
14 January 2015
SWOT Analysis
 Premium market position due to superior product
quality
 Fierce
competition in
supreme-tier
infant formula
market
 Strong distribution channels with strict channel control
 Sophisticated customer service platform
 NDRC’s
clampdown on
excessive
pricing
 Upbeat outlook
on China’s
infant formula
market
 Potential
relaxation of
China’s one
child policy
 New business
segment into
parental
education and
kids learning
 Low market share in dried baby food and baby care
product segments
P/E (x) vs EPS growth
P/BV (x) vs ROAE
16
60%
4.5
40%
14
49%
4.0
36%
12
38%
3.5
31%
3.0
27%
2.5
22%
2.0
18%
1.5
13%
10
26%
8
15%
4%
0
-30%
0.0
0%
EPS growth (rhs)
Source: Company data, RHB
Jan-13
Jan-13
P/E (x) (lhs)
P/B (x) (lhs)
Jan-16
0.5
Jan-15
-19%
Jan-14
9%
2
Jan-12
1.0
Jan-16
-8%
Jan-15
4
Jan-14
4%
Jan-12
6
Return on average equity (rhs)
Source: Company data, RHB
Company Profile
Listed in Dec 2010, Biostime is a premium baby and children nutrition and baby care products provider in China. Its five main products
are probiotic supplements, infant formulas, dried baby food, baby care products, and nutrition supplements. It is the dominant brand in
the children’s probiotic supplements and the supreme-tier infant formula markets in China, with shares of 85% and 34% respectively.
See important disclosures at the end of this report
11
Biostime (1112 HK)
14 January 2015
Recommendation Chart
Price Close
64.1
34.1
54.5
55.9
51.5
63.9
66.6
44.1
29.6
29.6
44.1
23.2
23.3
74.1
24.8
Recommendations & Target Price
na
84.1
54.1
44.1
34.1
24.1
14.1
Buy
4.1
Dec-10
Neutral
Sell
Dec-11
Trading Buy
Jan-13
Take Prof it
Not Rated
Jan-14
Source: RHB, Bloomberg
Date
Recommendation
Target Price
Price
2015-01-12
Neutral
16.0
16.3
2014-08-21
Neutral
34.1
30.3
2014-06-27
Buy
54.5
44.3
2014-03-27
Neutral
55.9
52.6
2013-11-18
Neutral
66.6
68.4
2013-10-18
Neutral
66.6
64.3
2013-09-19
Buy
63.9
54.7
2013-08-22
Buy
51.5
44.9
2013-05-20
Buy
44.1
44.8
2013-04-03
Buy
44.1
40.6
Source : RHB, Bloomberg
See important disclosures at the end of this report
12
RHB Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
Disclosure & Disclaimer
All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or
warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer
to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for
information purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report does
not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the
information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or
financial advice to independently evaluate the particular investments and strategies.
This report may further consist of, whether in whole or in part, summaries, research, compilations, extracts or analysis that has been prepared by RHB’s
strategic, joint venture and/or business partners. No representation or warranty (express or implied) is given as to the accuracy or completeness of such
information and accordingly investors should make their own informed decisions before relying on the same.
RHB, its affiliates and related companies, their respective directors, associates, connected parties and/or employees may own or have positions in
securities of the company(ies) covered in this research report or any securities related thereto, and may from time to time add to, or dispose off, or may be
materially interested in any such securities. Further, RHB, its affiliates and related companies do and seek to do business with the company(ies) covered
in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies),
may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or
underwriting services for or relating to such company(ies), as well as solicit such investment, advisory or other services from any entity mentioned in this
research report.
RHB and its employees and/or agents do not accept any liability, be it directly, indirectly or consequential losses, loss of profits or damages that may arise
from any reliance based on this report or further communication given in relation to this report, including where such losses, loss of profits or damages are
alleged to have arisen due to the contents of such report or communication being perceived as defamatory in nature.
The term “RHB” shall denote where applicable, the relevant entity distributing the report in the particular jurisdiction mentioned specifically herein below
and shall refer to RHB Research Institute Sdn Bhd, its holding company, affiliates, subsidiaries and related companies.
All Rights Reserved. This report is for the use of intended recipients only and may not be reproduced, distributed or published for any purpose without prior
consent of RHB and RHB accepts no liability whatsoever for the actions of third parties in this respect.
Malaysia
This report is published and distributed in Malaysia by RHB Research Institute Sdn Bhd (233327-M), Level 11, Tower One, RHB Centre, Jalan Tun Razak,
50400 Kuala Lumpur, a wholly-owned subsidiary of RHB Investment Bank Berhad (RHBIB), which in turn is a wholly-owned subsidiary of RHB Capital
Berhad.
Singapore
This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No. 200808705N), a wholly-owned subsidiary of DMG &
Partners Securities Pte Ltd, a joint venture between Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group) and OSK Investment
Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB”, which in turn is a whollyowned subsidiary of RHB Capital Berhad). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG &
Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this
report is therefore classified as a non-independent report.
As of 12 January 2015, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not have proprietary
positions in the securities covered in this report, except for:
a)
As of 12 January 2015, none of the analysts who covered the securities in this report has an interest in such securities, except for:
a)
Special Distribution by RHB
Where the research report is produced by an RHB entity (excluding DMG & Partners Research Pte Ltd) and distributed in Singapore, it is only distributed
to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not
an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research
report in its entirety. In respect of any matters arising from, or in connection with this research report, you are to contact our Singapore Office, DMG &
Partners Securities Pte Ltd
Hong Kong
This report is published and distributed in Hong Kong by RHB OSK Securities Hong Kong Limited (“RHBSHK”) (formerly known as OSK Securities Hong
Kong Limited), a subsidiary of OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is
referred to as “RHBIB”), which in turn is a wholly-owned subsidiary of RHB Capital Berhad.
13
RHBSHK, RHBIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company.
RHBSHK, RHBIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain
compensation for investment banking services from the subject company.
Risk Disclosure Statements
The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that
losses will be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. RHBSHK
does not maintain a predetermined schedule for publication of research and will not necessarily update this report
Indonesia
This report is published and distributed in Indonesia by PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia), a
subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned
subsidiary of RHB Capital Berhad.
Thailand
This report is published and distributed in Thailand by RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL), a
subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned
subsidiary of RHB Capital Berhad.
Other Jurisdictions
In any other jurisdictions, this report is intended to be distributed to qualified, accredited and professional investors, in compliance with the law and
regulations of the jurisdictions.
DMG & Partners Research Guide to Investment Ratings
Kuala Lumpur
Hong Kong
Singapore
Malaysia
Tel : +(60) 3 9280 2185
Fax : +(60) 3 9284 8693
19 Des Voeux Road
Central, Hong Kong
Tel : +(852) 2525 1118
Fax : +(852) 2810 0908
Tel : +(65) 6533 1818
Fax : +(65) 6532 6211
Buy: Share price may exceed 10% over the next 12 months
Trading Buy:Malaysia
Share price
may exceed 15% over theRHB
nextOSK
3 months,
however longer-term outlook remains uncertain
Research Office
Securities Hong Kong Ltd. (formerly known
DMG & Partners
Neutral: Share
mayInstitute
fall within
months
as 12
OSK
Securities
Securities Pte. Ltd.
RHB price
Research
Sdn the
Bhdrange of +/- 10% over the next
Take Profit:
Target
price One,
has RHB
beenCentre
attained. Look to accumulate at lower
Honglevels
Kong Ltd.)
Level
11, Tower
10 Collyer Quay
Sell: Share price may
more than 10% over the next 12 months
Jalanfall
TunbyRazak
12th Floor
#09-08 Ocean Financial Centre
Lumpur
World-Wide House
Singapore 049315
Not Rated: Stock isKuala
not within
regular research coverage
DISCLAIMERS
Phnom
Penh
This research is issuedJakarta
by DMG & Partners Research Pte Ltd and it is forShanghai
general distribution only. It does not have any regard
to the
specific investment
objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular
PT RHB OSK and
Securities
Indonesia
(formerlyfinancial
known asadviser
RHB
OSK (China)
Advisory
Ltd. into any
RHBtransaction
OSK Indochina
Securities
Limited
(formerly
investments
consult
an independent
before
makingInvestment
any investments
or Co.
entering
in relation
to any
securities
or
PT OSKmentioned
Nusadana in this report.
(formerly known as OSK (China) Investment
known as OSK Indochina Securities Limited)
investment instruments
Securities Indonesia)
Plaza CIMB Niaga
Advisory Co. Ltd.)
Suite 4005, CITIC Square
No. 1-3, Street 271
Sangkat Toeuk Thla, Khan Sen Sok
Tel : +(6221) 2598 6888
Tel : +(8621) 6288 9611
Fax: +(855) 23 969 171
The information contained
herein has been obtained from sources 1168
we believed
to be reliable but we do not make any representation
or warranty nor
14th Floor
Nanjing West Road
Phnom Penh
accept any responsibility
or liability
as to its accuracy, completeness orShanghai
correctness.
are subject to change
Jl. Jend. Sudirman
Kav.25
20041Opinions and views expressed in this report
Cambodia
without notice.
Jakarta Selatan 12920, Indonesia
China
Tel: +(855) 23 969 161
Fax
: +(6221)
2598or6777
Faxof: +(8621)
6288
9633or sell any securities.
This report does
not
constitute
form part of any offer or solicitation
any offer
to buy
Bangkok
DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank
Berhad, Malaysia which have since merged into RHBRHB
Investment
Bank Berhad (the merged entity is referred to as “RHBIB” which in turn is a whollyOSK Securities (Thailand) PCL (formerly known
owned subsidiary of RHB Capital Berhad) and Deutsche Asiaas
Pacific
Holdings Pte
Ltd (a PCL)
subsidiary of Deutsche Bank Group). DMG & Partners Securities
OSK Securities
(Thailand)
Pte Ltd is a Member of the Singapore Exchange Securities Trading
Limited.
10th Floor,
Sathorn Square Office Tower
98, North Sathorn Road,Silom
Bangkok 10500
DMG & Partners Securities Pte Ltd and their associates, directors,Bangrak,
and/or employees
may have positions in, and may effect transactions in the securities
Thailand
covered in the report, and may also perform or seek to perform broking and
other corporate finance related services for the corporations whose securities
Tel: +(66) 2 862report.
9999
are covered in the report. This report is therefore classified as a non-independent
Fax : +(66) 2 108 0999
As of 12 January 2015, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary
positions in the subject companies, except for:
a)
As of 12 January 2015, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except
for:
a)
DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N)
14