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2016 年 8 月 13 日

中国：日常消费品证券研究报告

乳业进入“新常态”；执行能力将推动表现分化；首次覆盖：伊利评为买入 (摘要)中国乳制品行业进入“新常态”，奶价依然低迷我们认为，一度快速增长的中国乳制品行业进入了增速处于低个位数的“新常

态”。该市场中的高收入消费者已经达到饱和点，目前一二线城市的消费量已经

与日本和韩国相当。同时，由于经济增长放缓、乳制品对于低收入人群而言并非

一项日常消费品，我们预计低端消费者需求将处于低位。

我们预计到 2020 年乳制品销量年均复合增速将仅为 3%，并基于此预计中国原奶

价格将保持在人民币 3.4 元/公斤的低位。虽然我们预计全球供应过剩状况将在未

来 18 个月恢复平衡、但是因为中国奶价较国际价格高 30%，所以我们认为进口

也将对抑制国内价格产生一定影响。

高附加值产品将推动增长；酸奶将蓬勃发展在当前的低增速阶段，我们预计企业盈利增长将来自于：(1) 一二线城市消费者偏

好转向功能性、高蛋白质产品；(2) 二三线城市乳制品消费量逐步增长。我们预

计，被越来越多消费者认为营养丰富且有助消化的酸奶将有优于所有其它品类的

表现，年均复合增速将达到两位数，市场规模将增长至当前的近两倍，达到 220亿美元。总体而言，我们预计到 2020 年中国乳制品行业利润池将增长至当前的

1.6 倍，达到 58 亿美元。

当前执行是关键；首次覆盖乳业，买入伊利，卖出中国旺旺在竞争加剧、增速放缓的环境下，执行能力将是能否赢得市场份额的关键所在。

在这方面伊利股份（买入）表现优异：公司凭借扁平化的单层经销网络可更好地

感应消费者需求变化；公司拥有领先的产品线、有效的品牌运营和经验丰富的管

理团队，我们预计这些优势将带来行业领先的较高回报，2015-18 年预期每股盈

利年均复合增速为 13%。我们预计公司将凭借高端产品赢得市场份额，并认为股

价尚未反映利润率大幅改善的潜力（2018 年预期营业利润率上升 170 个基点）。

我们认为中国旺旺（卖出）在这些行业趋势当中市场地位较薄弱，其产品结构向

较不健康的乳饮料倾斜、保守的营销和经销模式导致市场份额流失和盈利下降。

我们还首次覆盖蒙牛乳业、光明乳业、合生元和现代牧业，评级均为中性。

* 全文翻译随后提供

我们的观点与市场观点的不同之处

1：我们预计中国乳制品行业将在更长时间内呈增长放

缓态势：渗透率并不像看上去那样低，乳制品仍然并非

生活必需品

2：功能性高蛋白质产品将引领增长——酸奶将是未来

五年的亮点所在

3：伊利的利润率扩张被低估——强大的品牌和分销实

力推动产品结构改善

到 2020 年酸奶市场规模预计将增长至当前的两倍，达到

220 亿美元

资料来源：Euromonitor、高盛全球投资研究

研究范围概览 – 首次覆盖

资料来源：彭博、高盛全球投资研究

未来可关注事件

2016 年二季度/中期业绩：8 月中至 8 月底

廖绪发, CFA 执业证书编号: S1420510120006 +86(21)2401-8902 [email protected] 北京高华证券有限责任公司

北京高华证券有限责任公司及其关联机构与其研究报告所分析的企业存在业务关系，并且继续寻求发展这些关系。因此，投资者应当考虑到本公司可能存在可能影响本报告客观性的利益冲突，不应视本报告为作出投资决策的唯一因素。有关分析师的申明和其他重要信息，见信息披露附录，或请与您的投资代表联系。

北京高华证券有限责任公司投资研究

Pasteurized

UHT milk

13bn->17bnFlavored Milk

13bn->12bn

Yogurt,

12bn ->22bn

IMF

17bn-18bn

Ice Cream

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-5.0% -3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0%

Dairy Market Size 2015-2020E (US$)

2015 2020E

Volume CAGR

ASP CAGR

TickerCompany name

Market Cap (USD mn)

Target Price Rating

Upside / Downside

2017E P/E

600887.SS Yili 17,387 Rmb 21.5 Buy 18% 18.2

1112.HK Biostime 1,644 HK$ 26.9 Neutral 14% 15.0

2319.HK Mengniu 5,770 HK$ 12.9 Neutral -3% 19.4

1117.HK CMD 620 HK$ 1.05 Neutral -5% 10.7

600597.SS Bright Dairy 2,856 Rmb 13.2 Neutral -11% 36.8

0151.HK Want Want 8,455 HK$ 4.2 Sell -15% 17.5

2016 年 8 月 13 日中国：日常消费品

全球投资研究 2

Contents

Our thesis in 6 charts 4

China dairy enters a ‘new normal’ stage; milk price to remain weak 5

Slower growth for longer 5

Global milk price recovering in 2017, but China raw milk price to remain weak 7

Next growth driver: high protein, functional; Yogurt the bright spot 11

China profit pool to increase 1.6X by 2020 to Rmb5.8bn 11

Yogurt will be the bright spot 13

Execution is now the key: Yili stands out on distribution, branding 16

Products, branding, distribution, mgmt. comparison 16

Dairy 2020: Yili to gain market share in key product categories 24

Valuation: Yili our top pick, Want Want overvalued 29

Yili (Buy): A long-term stand-out leader; fastest sales/EPS growth 33

Want Want (Sell): Weaker brand could lead to further sales drop 40

Mengniu (Neutral): Sales recovering, but margin drags earnings 46

Biostime (Neutral): Swisse offset by weak IMF; Policy the key focus 51

Bright Dairy (Neutral): Stalled sales, GPM expansion offset by ANP 57

CMD (Neutral): Weak upstream to persist, brand expansion slower 62

Appendix: China dairy overview 68

Disclosure Appendix 74

Prices as of August 9, 2016 close, unless otherwise stated.

Gao Hua Securities acknowledges the role of Lincoln Kong, CFA, Joshua Lu and Kevin Li of Goldman Sachs in the

preparation of this product.

Comp Sheet (China and Global dairy)

*Conviction list, NC: Not Covered, NR: Not Rated.

Source: Bloomberg, Goldman Sachs Global Investment Research

BBG Ticker Name Mkt Cap Last GS Target List Report EPS 15-17 PE PE PEG EV/EBITDA EV/EBITDA P/B P/B Div Yield Div Yield ROE ROE

Close Rating Price Crncy Crncy 6M Chg CAGR CY16 CY17 2Yr CY16 CY17 CY15 CY16E CY16E CY17E CY16E CY17

US$m Price L.C. L.C. L.C. % % (X) (X) CAGR (X) (X) (X) (X) % % % %

China Dairy

600887 CH Yili 16,700 18.3 Buy 21.5 CNY CNY 37.0 13.5 20.5 18.1 1.5 13.4 11.6 5.6 5.0 2.9 3.3 25.5 25.9

2319 HK Mengniu 6,894 13.6 Neutral 12.9 HKD CNY 19.2 2.6 20.4 19.4 7.7 12.3 11.8 2.0 1.9 1.0 1.0 8.3 8.1

600597 CH Bright Dairy 2,770 15.0 Neutral 13.2 CNY CNY 40.1 7.8 38.8 36.3 5.0 13.3 13.0 4.1 3.8 1.2 1.3 8.7 8.7

151 HK Want Want China 8,345 5.1 Sell 4.2 HKD USD (5.2) (5.8) 16.7 17.9 (2.9) 9.7 10.2 4.5 4.1 0.4 0.4 26.0 22.2

1117 HK Modern Dairy^ 759 1.1 Neutral 1.05 HKD CNY (20.7) (14.4) 16.2 8.7 (1.1) 26.5 15.8 0.6 0.7 - - (7.1) (0.2)

Average 35,468 20.9 19.5 1.9 12.6 11.5 4.4 4.0 1.7 1.9 20.3 19.7

China IMF

1112 HK Biostime 1,918 23.6 Neutral 26.9 HKD CNY 9.0 89.5 16.7 15.4 0.2 9.4 8.8 3.4 2.8 1.3 1.4 19.2 17.4

1230 HK Yashili 1,046 1.7 NC N/A HKD CNY (4.5) 54.4 40.7 23.6 0.7 17.3 9.8 NA 1.1 1.0 0.8 3.0 4.6

002570 CH Beingmate 1,909 12.4 NC N/A CNY CNY 13.9 31.5 100.9 71.7 3.2 32.8 27.8 NA 3.4 0.2 0.1 1.5 4.5

Average 59,110 54.8 39.2 1.5 20.3 16.5 3.4 2.7 0.8 0.8 8.8 9.6

Global leaders

BN FP Danone 50,334 68.8 NR N/A EUR EUR 16.0 4.1 22.7 21.5 5.5 12.5 12.1 3.5 3.5 2.4 2.5 14.5 14.9

NESN VX Nestle 247,695 78.0 Sell 65.0 CHF CHF 7.0 4.4 23.1 21.6 5.2 15.0 14.1 NA 3.6 3.0 2.8 16.2 16.7

FSF NZ Fonterra 6,673 5.8 NC N/A NZD NZD (0.2) 15.5 10.9 10.7 0.7 7.9 7.6 NA 1.3 6.9 7.2 12.5 12.5

ALMARAI AB Almarai 11,733 55.0 Buy 72.0 SAR SAR 6.9 10.7 21.5 17.6 2.0 15.9 13.8 4.2 3.8 2.1 2.1 17.8 19.5

CHR DC CHR Hansen 8,455 427.8 Neutral 452.0 DKK EUR 8.9 13.2 37.6 34.1 2.8 25.0 21.6 33.2 25.2 0.2 0.2 78.8 57.7

MJN US Mead Johnson 16,363 88.6 Neutral 96.0 USD USD 25.3 6.0 25.2 23.0 4.2 16.8 15.6 NA NA 2.1 2.4 (114.5) (101.9)

2269 JP Meiji 14,849 9,850.0 Neutral 12,000.0 JPY JPY 6.7 6.8 20.3 20.3 3.0 11.7 10.9 3.8 3.3 1.0 1.4 15.7 14.6

Average 341,253 22.2 20.7 4.7 14.1 13.2 21.9 3.8 2.6 2.6 11.0 11.4

China F&B/FMCG

322 HK Tingyi 5,382 7.5 Neutral 6.4 HKD USD (12.5) (4.2) 24.3 18.8 (5.8) 7.8 6.8 1.8 1.8 0.2 0.3 5.6 6.9

220 HK UPC 3,470 6.2 Neutral 6.5 HKD CNY 24.6 17.5 23.7 20.3 1.4 9.1 8.0 1.9 1.9 0.7 0.9 8.2 8.9

168 HK Tsingtao 5,522 28.6 Sell 24.3 HKD CNY (0.3) (1.2) 26.0 24.9 (22.6) 12.3 11.8 2.0 1.9 1.0 1.1 7.8 7.7

600519 CH Kweichow Moutai 59,606 315.4 Buy 332.3 CNY CNY 54.7 16.1 22.2 19.0 1.4 13.2 11.1 6.2 5.4 2.3 2.6 25.1 25.4

1044 HK Hengan 10,455 66.9 NC N/A HKD HKD (0.4) 6.1 18.6 17.9 3.1 11.6 11.1 NA 4.3 3.3 2.8 23.8 22.8

288 HK WH Group 11,332 6.0 Buy* 7.4 HKD USD 39.5 9.2 12.2 10.8 1.3 6.3 5.7 2.1 1.9 0.3 0.5 14.2 14.2

Average 8,851 21.0 18.3 (0.2) 11.7 10.2 4.9 4.3 1.9 2.1 21.0 21.2

^ Excl. biological FV chg gain / (loss)

Price



PM Summary

Slower growth for longer China’s dairy industry was worth US$64bn in 2015, up from US$42bn in 2011. Although total per capita consumption is still low vs. DM countries (20kg vs. 200kg in the US), we think the market has entered a slower growth stage — and we estimate only 3% volume CAGR over 2015-

2020.

The slower growth is due to: 1) tier 1 and 2 cities already have similar penetration rates as Japan/Korea and 2) economic slowdown is impacting low-end consumer demand (dairy is not a staple for most low-end consumers).

Our GS proprietary global dairy Supply and Demand model (including all major milk production

and consumption countries globally) indicates a gradual recovery in the milk price in 2017. (GSe:

New Zealand Whole Milk Power price to reach US$2,700/ton by end 2017, 30% increase from now) as milk output has started to slow in both NZ and the EU.

In China, however, with the slower demand growth, our milk supply-demand model suggests the supply gap will be filled by higher imports (given a still large price gap), and therefore we see China raw milk prices remaining flat out to 2020 (GSe: around Rmb3.40/kg).

Growth to come from value-added products, Yogurt to outperform With slower volume growth, we see growth coming from the shift in consumer preferences away from sweeter products like flavored milk towards functional, high protein products – like probiotic yogurt.

Within all dairy subcategories, we expect yogurt will outperform the rest and almost double in

size by 2020. With further distribution expansion, we see low temp yogurt continuing to deliver mid-teen growth whereas we expect UHT yogurt to be more of a short-term product before gradually tapering off as distribution infrastructure improves and consumers shift to fresher, healthier products. In all, we expect the China dairy profit pool to grow 1.6X by 2020 to

US$5.8bn over 2015, driven by growth in value-added products and margin improvement at dairy

companies (due to the change in product mix).

To capture the step change in the growth profile of the industry, we derive our 12-month target prices from our returns-based Director’s Cut methodology (2017E EV/GCI vs. CROCI/WACC).

Buy Yili on better execution; Sell Want Want We think a successful downstream expansion strategy is the key for dairy players to win market share. In this regard, Yili stands out. It has led on this front for the last three years, and we

expect it to extend this leadership out to 2020. Yilli is best positioned in the higher growth categories and offers more targeted marketing to cater to young consumers. It also has a more comprehensive distribution network and a prudent, proven management team.

We initiate with Buy and 12-month Rmb21.5. We expect it to deliver fastest 14% EPS CAGR and highest cash return of 27% over 2015-17E vs. peers in an 8-15% range.

In contrast, we think Want Want stands to lose market share and register negative growth as

its product offerings of flavored milk and rice crackers are less innovative and positioned in declining categories. We expect -4% EPS (Rmb terms) CAGR over 2015-18E.



Our thesis in 6 charts

Exhibit 3: We see yogurt registering the highest growth of all categories Forecasted dairy growth by category

Exhibit 4: We expect Yili to gain further market share in the yogurt category Yogurt market share (%)

Source: Euromonitor, Goldman Sachs Global Investment Research


Exhibit 5: Yili has been improving its product mix, bringing 330bps higher gross margin by 2018E Yili product mix and GPM

Exhibit 6: We expect Yili to show the highest EPS growth Company EPS 2015-2020 CAGR

Source: Goldman Sachs Global Investment Research.

Source: Company data, Goldman Sachs Global Investment Research.

19.3

26.9

28.7 28.0

14.2

10.8

0

5

10

15

20

25

30

35

2012 2013 2014 2015 2016E 2017E 2018E

Yili Mengniu Bright Dairy

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016E 2017E 2018E

Mid to low end products % sales

High end products % sales

GPM

Yili, 13% CAGR

Bright, 7%

Mengniu, 6%

Want Want, -4%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2014 2015 2016E 2017E 2018E 2019E 2020E

Company EPS growth YoY

Exhibit 1: China dairy market enter a new normal (slow low single digit growth)

Exhibit 2: We expect China’s raw milk price to stay low for the next three years China Raw milk supply excess/(shortage)

*LME: liquid milk equivalent

Source: USDA, dairy Association, Goldman Sachs Global Investment Research.

Source: DCANZ, Wind, Goldman Sachs Global Investment Research

22%

-8%

6%

2%3%

-10%

-5%

0%

5%

10%

15%

20%

25%

2000-07 2008-09 2010-13 2014-16E 2016E-20E

Dairy consumption growth CAGR (LME)

2.79

2.45

2.89

3.20

3.24

3.53

4.03

3.43

3.40

3.37

3.36

3.45

3.48

2.00

2.50

3.00

3.50

4.00

4.50

-4,000

-2,000

0

2,000

4,000

6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E2019E2020E

Total Supply Excess/(Shortage) Domestic Raw Milk Price (RMB/kg, RHS)

Melamine

China raw milk excess/ (shortage) incl. imports, K tons

China domestic raw milk price , RMB/kgr

Global Supply Shocks

Global Over‐supply

Global production cuts on lower prices



China dairy enters a ‘new normal’ stage; milk price to remain weak

We see China dairy industry growth having entered a ‘new normal’ stage and expect low single digit volume growth over the next 3-4 years. Per capita diary penetration for high tier cities is already comparable with levels in Japan and Korea level and in our view therefore has reached equilibrium. On the other hand, demand in lower tier cities are more a function of economic growth as dairy is not yet a staple among lower-income Chinese.

With the slower demand, we see the China raw milk price remaining weak even though we expect the global S/D backdrop to gradually recover. In light of this, we are cautious on upstream dairy farming companies.

As the industry shift from high growth to low growth, we see the earning growth driver for dairy companies also changing. It is more difficult for companies to grow if they simply expand their distribution network or push new products into existing channels. Going forward we think execution will be the key to winning market share, Yili stands out with strong results in the past years.

Slower growth for longer China dairy: double digit volume growth before 2014, but subdued in past 2 years

The China dairy market has grown nine-fold in the past 15 years with a total addressable market of US$64bn currently. Before 2014, dairy demand growth average 12% for more than 10 years, with Yili and Mengniu growing their sales six-fold.

Per capita comparison not always correct, high tier city consumption already on par with overseas peers

Compared with US/EU, China’s per capita consumption is low (roughly 20kg per person vs. 200kg in the US). Among staples categories, dairy is also one of the least penetrated at only avg. 22% of US/EU level. However, in light of their different dietary habits, we think US/EU’s dairy consumption is not a good comparable for China and think Japan/Korea are better benchmarks.

Exhibit 10 shows that for liquid milk (fresh + UHT milk), China per capita is about 46% of the Japan/Korea avg. and if we include the flavored milk, then China is already 76%. This is higher

than the relative penetration for RTD tea or instant noodles.

Exhibit 7: China dairy market enter a slow growth stage

Exhibit 8: China dairy market volume comparable with US/W. Europe

Source: Euromonitor

Source: Euromonitor

22%

-8%

6%

2%3%

-10%

-5%

0%

5%

10%

15%

20%

25%

2000-07 2008-09 2010-13 2014-16E 2016E-20E

Dairy consumption growth CAGR (LME)

34,205

19,347

27,386

3,9641,419

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

WesternEurope

USA China Japan S. Korea

Total Dairy Market Volume ('000 Tonnes)



Looking at per capita by different tier cities, more developed regions and tier 1 cities are closer to Japan/Korea already. This suggests that high tier city consumers have developed the milk drinking appetite and future volume growth may be more muted. (Exhibit 11)

Exhibit 9: China per capita consumption of dairy still has large gap vs US/EU level China per Capita consumption vs US/West Europe

Exhibit 10: …but smaller vs Japan/Korea China per Capita consumption vs Japan/Korea



Exhibit 11: Urban China’s liquid LME consumption is closer to Japan than to Rural China Liquid milk per capita, Urban and Rural

Exhibit 12: East/South China (wealthier regions) have similar dairy consumption vs Japan/Korea Per capita by region

Source: Goldman Sachs Global Investment Research

Source: Euromonitor

We expect weak volume demand: Economy and high ASP impact low-end demand

We see the main reasons that demand has been weak for past 2 years are:

1) Dairy not yet a staple for lower-end consumers: Chinese consumers’ tastes have

diverged as income growth has diverged. While for higher income consumer we may see continued trade-up, lower income consumers are more deeply affected by the overall slowdown in income growth. Dairy is still not a staple product for many Chinese families, and so if the economy slows, many may switch to inexpensive alternatives (eg: soy milk etc.)

92%

234%

45%

32%

18%

0% 50% 100% 150% 200% 250%

0

1

2

3

4

5

Volume per capita as % of US/W.Europe volume per capita

Milk Formula

FlavouredMilk

Yoghurt

Liquid + Flavoured Milk

Liquid Milk (Fresh+UHT)

240%

276%

51%

76%

46%

0% 50% 100% 150% 200% 250% 300%

0

1

2

3

4

5

Volume per capita as % of Japan/Korea volume per capita

Milk Formula

FlavouredMilk

Yoghurt

Liquid + Flavoured Milk

Liquid Milk (Fresh+UHT)

23

7

38

0

5

10

15

20

25

30

35

40

Urban China Rural China Japan

Liquid Milk Equivalent per capita (kg)

0

5

10

15

20

25

30

35

40

45

Northwest Southwest Mid China North and

N/E

East China South China Japan Korea

Kg/C

apit

a

Dairy per capita consumption by region

Yoghurt/Sour Milk Milk Flavored Milk

26kg

31kg

39kg

34kg

12kg



We run an affordability analysis on major milk products (Exhibit 14). This indicates that compared to US, liquid milk/yogurt is still a relatively expensive products for Chinese’s hourly earnings, especially for the urban mass (annual income of US$2,500-4,000.)

Additionally, spending on food is already over indexed in China vs. other developed countries, and so as income grow, the incremental money spent on food will be proportionally less than overall income growth.

2) High-tier city close to saturation: Although overall per capita consumption still has

growth potential, urban consumption, especially in tier 1 cities has already reached a similar level as in Japan, and so we think the incremental volume growth there will be

more subdued.

In conclusion, we see China dairy demand growth to be slower for longer at about 3.5% volume CAGR over 2015-2020E.

Exhibit 13: Tier 2 and below cities have seen higher growth in disposable income and have greater spending power Per capita income by tier city

Source: Wind

Exhibit 14: For China Urban Mass, many yogurts remain expensive Affordability analysis


Global milk price recovering in 2017, but China raw milk price to remain weak The global milk price (often referred to the New Zealand Whole Milk Powder [WMP] auction price) has corrected since peaking in mid-2013 and has remained at the weak US$2,000/ton level in past year. The down cycle is being driven by weaker-than-expected China demand over 2014-15 and accelerating production in the EU as the milk quota was lifted. The current milk price of US$2,100/ton is already below NZ farmers’ all-in cash cost of US$2,700/ton as well as Europe’s milk cost.

Our GS proprietary supply-demand model (includes the detail production, consumption forecast for the major exporting/importing countries, NZ, EU, US, China, Brazil, etc.) suggests that:

The EU will see 3% production growth in 2016, as since the milk quota was lifted in Apr 2015, many farmers reared new heifers, and these have only become milkable in the past 6 months. With the still lackluster EU domestic consumption, this will lead to higher

Urban Tier 1 Tier 2 Tier 3 and Below RuralPopulation (mn) 767.5 70.2 234.2 463.1 606.02015 Urban avg. disp. Income/cap (RMB) 31,194.8 48,352.2 36,031.6 27,046.4 11,812.3

2013-15 2yr CAGR 8.8% 9.7% 7.7% 10.7%Spending Power (RMB bn) 3,395.7 8,437.6 12,525.2 7,158.1



export volume for EU in 2016. From 2017 we estimate EU farmers will slow their pace production with flat growth, given the milk price is not high enough to cover their production costs.

NZ has set a target to reduce milk production by 3-4% in 2016/17 season, on top of the 2% decline last season. The US is also reducing export volume as domestic demand is stronger than expected.

Net net, for 2016 we expect the exports from these three major markets combined will still grow at just over 4% in 2016 but then gradually taper off in 2017-18. (Exhibit 16).

For 2016-2020, we think the oversupply issue will gradually balance out starting in 2017, driving

2015-2020 consumption and production from major countries at a similar 1.2% CAGR.

Exhibit 15: We forecast that milk powder prices will reach US$2,700 by 2017E, driven by gradual S/D balancing Milk powder price and Global Production/Consumption forecast

Source: USDA, DCANZ, Goldman Sachs Global Investment Research

2016E: 2,300

2017E: US$2,700

2018E :US$3,000

-

1,000

2,000

3,000

4,000

5,000

6,000

Au

g-0

8

No

v-0

8

Feb

-09

Ma

y-0

9

Au

g-0

9

No

v-0

9

Feb

-10

Ma

y-1

0

Au

g-1

0

No

v-1

0

Feb

-11

Ma

y-1

1

Au

g-1

1

No

v-1

1

Feb

-12

Ma

y-1

2

Au

g-1

2

No

v-1

2

Feb

-13

Ma

y-1

3

Au

g-1

3

No

v-1

3

Feb

-14

Ma

y-1

4

Au

g-1

4

No

v-1

4

Feb

-15

Ma

y-1

5

Au

g-1

5

No

v-1

5

Feb

-16

Ma

y-1

6

Au

g-1

6

No

v-1

6

Feb

-17

Ma

y-1

7

Au

g-1

7

No

v-1

7

Feb

-18

Ma

y-1

8

Au

g-1

8

No

v-1

8

NZ Global Dairy Trade Wholemilk Powder Auction Price (US$/ton)

Supply shortage:

- NZ Drought

- Europe Quota

- China cow disease and

culling on high crop cost

Robst Demand:- Robust China demand,

stock-piling

- Russia 2nd largest

importer in cheese globally

Over Supply:

- NZ returns to good weather

- Europe quota lifted April 15

- Reaction to high prices

Demand shocks:- China austerity measure,

economy slows, de-stocking

- Russia shut imports from

August 2014

Moderate reduction in supply:

- NZ cutting supply on lower prices

- Europe still seeing supply growth

- China modern farms slow supply

- Lower oil, corn costs

Still weak demand:- China demand remains slow but

de-stocking largely finished

US$/ton

8.2 7.4

-1.4

3.6

4.9

0.5

-0.4

22.7

1.0%

1.5%

-1.0%

2.0%

2.8%

0.4%

-1.1%

1.2%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

-5.0

-

5.0

10.0

15.0

20.0

25.0

EU US Russia Brazil China NZ Japan Top 7

2015-20 Global Milk Production

2015-20 Production (mn tons) 2015-20 5-yr Production CAGR

mn tons 5-Yr CAGR

3.3

4.9

0.5

2.7

6.8

0.2

18.4

0.5%

1.4%

0.3%

1.5%

3.4%

0.4%

1.1%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

EU US Russia Brazil China Japan Top 6

2015-20 Global Milk Consumption

2015-20 Incremental Consumption (mn tons, LHS)

2015-20 5-yr Consumption CAGR (RHS)

mn tons 5-yr

CAGR



Global milk price to recover: Although China demand has not yet picked up, with the more

radical supply side reduction, we estimate NZ WMP price will slowly recover starting 2H16 and reach US$2,700/ton by the end of 2017 (NZ farmer’s breakeven point).

Exhibit 16: We expect exports from EU/US/NZ to grow at 4% for 2016E then taper off to 0.9% in 2018E Export growth by EU/US/NZ

Exhibit 17: China’s raw milk continues to trade at a premium against Global milk prices China raw milk price vs. Global

Source: Goldman Sachs Global Investment Research, DCANZ

Source: Bloomberg

China milk prices to flat line

For China, given demand has been weaker than expected in the past 2 years, milk oversupply

has driven excess inventory and a lower milk price (down 20% from peaks). Our China supply-demand model estimates currently there’s about 3.3mn tons of liquid milk equivalent inventory in the market, vs. China’s annual demand of 37-38mn ton. The excessive inventory is mostly poured into milk powder format so it can be stored for more than 18 months.

Milk price has also been in a down cycle since 1H14 due to the industry oversupply. Following the smaller farmers exiting market last year, in 2016 we have started to see large scale farmers also

sharply slowing down the dairy farm expansion and are having trouble selling raw milk. (China Modern dairy poured about 11% of its milk production into milk powder in 1H16). Therefore, we estimate in 2016 domestic supply will be reduced by 1.3%.

However, due to higher feed cost and land prices, China raw milk price has consistently been much higher than global prices. Currently it’s still running at 55% premium to global prices (Exhibit 17, including all transport, tariff expenses), thus we see the imports will continue to be strong and sufficient to fill the China supply gap. (Exhibit 18) This will drive China raw milk price to be lower for longer at around Rmb3.35-3.45/kg level, in our view.

We are cautious about upstream dairy companies, as they will continue to have very tight cash margin and will need to more aggressively expand into the branded milk market to earn cash flow.

45.5 45.5

52.6

57.060.0 61.3

68.670.9

73.775.5 76.2

-0.1%

15.7%

8.3%

5.4%

2.1%

12.0%

3.3%4.0%

2.4%

0.9%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Mn Tonnes

Dairy Export Market (3 major exporters) EU US NZ yoy growth

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

China raw milk price (Rmb/Kg)

NZ WMP equivalent price (auction only)

NZ WMP equivalent price (auction plus transport, VAT)



Exhibit 18: We still see a glut of supply in China’s milk market in 2016E China S/D (including imports)

Exhibit 19: We expect China’s inventory surplus to persist China raw milk price and Inventory surplus

Source: China dairy Association, Goldman Sachs Global Investment Research

Source: China dairy Association, Goldman Sachs Global Investment Research

Exhibit 20: We expect a milk supply excess up until 2020E, but only less than half of the current surplus China supply-demand model

*Inventory: 2yr cumulative basis, due to majority of inventory are in milk powder format and can last for 18 months.

Source: China Dairy Association, Goldman Sachs Global Investment Research.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

China domestic production Imported Milk (Liquid+Milk Powder) China total demand

Raw Milk Equivalent

consumption (K tons)

Melamine

2015 total supply 39mn ton: 33.8mn domestic production + 5.2mn ton Imports

2015 total demand: 37mn tons RME

2.79

2.45

2.89

3.20

3.24

3.53

4.03

3.43

3.40

3.37

3.36

3.45

3.48

2.00

2.50

3.00

3.50

4.00

4.50

-4,000

-2,000

0

2,000

4,000

6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E2019E2020E

Total Supply Excess/(Shortage) Domestic Raw Milk Price (RMB/kg, RHS)

Melamine

China raw milk excess/ (shortage) incl. imports, K tons

China domestic raw milk price , RMB/kgr

Global Supply Shocks

Global Over‐supply

Global production cuts on lower prices

China S/D model 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2015-20 CAGRTotal supply (K ton) 35,821 34,333 33,380 34,995 37,768 35,916 39,844 39,000 39,428 40,626 41,872 43,700 45,151 yoy growth 1.2% -4.2% -2.8% 4.8% 7.9% -4.9% 10.9% -2.1% 1.1% 3.0% 3.1% 4.4% 3.3% 3.0%Total demand (K ton) 34,563 30,263 32,466 34,112 36,256 37,560 36,441 37,196 38,280 39,582 41,022 42,445 43,989 yoy growth -2.3% -12.4% 7.3% 5.1% 6.3% 3.6% -3.0% 2.1% 2.9% 3.4% 3.6% 3.5% 3.6% 3.4%Supply Excess/(Shortage) 1,258 4,070 913 883 1,512 (1,645) 3,403 1,804 1,147 1,044 849 1,256 1,162 Estimated Inventory 1,256 5,328 4,983 1,796 2,395 (132) 1,758 5,207 2,951 2,191 1,893 2,105 2,417



Next growth driver: high protein, functional; Yogurt the bright spot

China profit pool to increase 1.6X by 2020 to Rmb5.8bn If we look at the liquid milk equivalent (LME) — i.e. transfer each dairy product to LME based on its contents — then we see penetration in China is actually still low at 16kg per person per year vs. Japan 38kg (excluding cheese). This is because of the much higher portion of flavored milk

consumption in China vs. other countries.

Therefore, we see future growth potential may not come from the dairy volume growth, but from consumers’ shifting between dairy categories — chiefly from demand for higher protein, functional products.

Going forward, we see demand drivers varying between different tiered cities.

Tier 1 and 2: per capita demand near saturation, growth will mainly come from product

premiumization and consumers shifting to more value-added products (Yogurt etc.)

Tier 3-4: per capita demand still has room to grow, future growth will depend on increased frequency in milk drinking and awareness of healthier products (shift from flavored milk to UHT milk and yogurt)

County and Rural areas: very limited per capita dairy demand currently, future growth depend on development of milk drinking habits and income growth (beneficial products

could still be basic UHT milk and UHT yogurt)

Exhibit 21: 20% of China’s dairy consumption is flavored milk China dairy Per cap Consumption (LME)

Exhibit 22: In contrast Japan consumes a lot less flavored milk Japan dairy Per cap Consumption (LME)

Source: Euromonitor

Source: Euromonitor

Profit pool to increase on product mix; high protein products drive increase

We estimate China’s dairy total profit pool is about US$3.6bn in 2015, implying c.6% industry avg. margin. For 2015-2020, we see the total industry size growing at 6.6% CAGR to US$82bn, driven by 3% volume CAGR and 2% ASP growth. With consumers’ preference for value added products, we see company margins also increasing from mid-single digit to high single digit, driving the overall profit pool to increase 1.6X to US$5.8bn in 2020.

As we mentioned earlier, we see consumers, especially the high tier city consumers, will prefer

more functional and high protein content products. In the past 2 years, yogurt has been the fastest growth category, and we see this trend continuing.

Flavoured

Milk , 21.4%,

4kg/cap

Milk, 48.9%,

8kg/cap

Yoghurt and

Sour Milk ,

29.7%,

5kg/cap

China per capita consumption breakdown

Total LMEper Cap:16

Flavoured

Milk , 1.4%,

1kg/cap

Milk, 65.3%,

25kg/cap

Yoghurt and

Sour Milk ,

33.2%,

13kg/cap

Japan per capita consumption breakdown

Total LME per cap: 38



Exhibit 23: We forecast Yogurt to be the fastest growing category with double digit volume growth, driving the China profit pool to increase by 1.6X by 2020 Market size, volume, profit pool forecast by category

Source: Euromonitor, Goldman Sachs Global Investment Research.



By subcategory, we see the yogurt segment nearly doubling its market size to US$22bn in 2020, driven by strong volume growth. UHT milk will continue to be the dominant liquid milk product given its convenience and consumers’ established drinking habits; hence we see the similar

volume growth as the industry average and expect roughly US$17bn in annual sales by 2020.

On the other hand, we see flavored milk and IMF as the two categories that will shrink over next few years. China’s flavored milk penetration is already one of highest in the world, and with the increasing awareness of healthy and less sweet preference, we expect the size of flavored milk to shrink by 1.3%.

For IMF, China is among the world’s largest market with annual sales of US$16bn in 2015. This is

due to per baby penetration is on par with world average and average IMF product ASP is 50% above the EU/NZ level. For the next 5 years, we see IMF pricing remaining under pressure with the proliferation of online and cross border channels. Absolute ASP for IMF products, especially premium products will decline yoy, in our view; however this will be partially offset by the product mix upgrade, driving about 1% ASP fall yoy to 2020. The impact from the removal of the ‘one child’ policy”, initiated in 2016 will start to kick in from the end of year, however given the trend of

number of new births and increasing promotion of breast feeding, we expect IMF volume growth to be more muted in the next 5 years at low single digits.

Yogurt will be the bright spot In beverages, we have seen a clear trend of consumers moving to healthier, less-sweet and functional products. In the past two years, Sports drink and Water recorded mid-to-high single digit growth vs. Carbonates and RTD tea posting negative growth.

We expect a similar trend in dairy products. Specifically, yogurt in China is usually considered a healthier product, and beneficial to health. In China, the perception of yogurt is different from Western style or Greek yogurt. In China, low temp yogurt (Exhibit 24, fourth column) is what

consumers typically perceive as real ‘Yogurt’, which is usually the drinkable yogurt. It generally has higher sugar content than Greek yogurt.

In the past few years, hot categories have been 1) Drinking yogurt and 2) UHT yogurt. The former has been led by Japanese brand Yakult and promoted as ‘good for digestion’, while the latter became very popular only from 2014, led by Bright Dairy, Yili and Mengniu products, advertised as high nutrition and easy to carry yogurt. As it is stored and consumed at room temperature,

UHT yogurt can be rapidly and easily distributed into lower tier cities and has gained popularity as the big dairy companies aggressively promote them.

Similar to beverages, we expect consumers to gradually turn to less-sweet and more functional products, i.e. move towards the low temp yogurt or the Western style yogurt (eg: Bright Dairy introduced a plain yogurt last year called ‘Rushi’) Thus, we expect low temp yogurt to record rapid 13% sales CAGR for 2016-2020E, but for yogurt drinks to show limited growth as consumers

switch.



Exhibit 24: Consumer taste shifts towards less sweet, functional products – we see similar trends for Beverage and Milk Beverage and dairy products Comparison


UHT yogurt grew from a niche product in 2012 to an Rmb20bn market in 2015, due to the products being easy to carry and perceived as healthy (although there’s no ‘active’ Lactobacillus in UHT yogurt). The product caters to new demand in locations that lack sophisticated cold chain logistics and replaces some of the flavored milk and yogurt drink demand, in our view. Bright

Dairy is the leader of this category with star products Momchilian, followed by Yili and Mengniu.

UHT yogurt is a new product category and many people are worried about the lifecycle of the product. However, we note consumer purchase frequency of this product has only reached 50% of that for Want Want’s “Hot kid milk”, which at its peak in 2013 was the best-selling single SKU dairy product in China. Therefore we think UHT yogurt growth has another 1-2 years of rapid growth ahead. That said as consumers start to realize the difference between UHT and low temp

yogurt, as well as with development of logistics in low tier cities, we expect UHT yogurt growth to taper off and be outpaced by low temp yogurt.



Exhibit 25: UHT yogurt not yet near the purchase frequency of Hot Kid Milk during its peak in 2013 Purchase frequency

Exhibit 26: Liquid milk has seen higher growth in lower tier cities Liquid milk growth by category

Source: Euromonitor, Company data.

Source: Nielsen.

Exhibit 27: We forecast low temp yogurt to take share from UHT yogurt and yogurt drink shares post 2016 Yogurt market breakdown by type

Exhibit 28: We expect low temp/UHT yogurt to grow 13%/8% four-year CAGR, respectively 4 year CAGR by Category

Source: Company data, Goldman Sachs Global Investment Research


Products Hot Kid Milk UHT Yoghurt UHT YoghurtYear 2013 2015 2018E

Sales Value (Rmb bn) 18.7 19.7 35.6

ASP (RMB/L) 17.3 22.0 22.0

Sales Packs (bn) 4.3 4.5 8.1

Typical consumers 5-15 yrs 15-35yrs 15-35yrs

Frequency (Pack/person/yr) 29.2 10.9 19.7 4.5%

7.5%

4.3%

6.3%

4.1%

6.1%

2.8%

6.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Tier 1 Tier 2 Tier 3 Tier 4 and below

Liquid milk growth yoy by tier

2014

2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Low temp Yogurt Yogurt Drinks UHT yogurt

86%

8%

23%

2%10%

13%

3%

-1%

7% 6%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012-2016E 2016E-2020E

UHT yogurt Yogurt drink Low temp yogurt

Flavor milk UHT milk



Execution is now the key: Yili stands out on distribution, branding

Since the 2008-2009 melamine incident, China consumers’ demand for quality milk has increased substantially. Yili and Mengniu’s premium UHT milk products all gained market share with strong growth after that event.

However, in past two years, China dairy demand has been weaker than expected and posted subdued volume growth. But upstream dairy supply is still growing rapidly, leading to high milk

inventory in the market and increasing competition. Mengniu saw greater challenge to its growth and its stock price corrected as much as 50% during 2014-15.

As the China dairy market has now entered a slower growth stage, individual companies’ performances have diverged more and more. The future growth and market share dynamics depend on each company’s specific strategy on product offering, marketing and branding and their effective execution.

We compare in detail the 4 downstream branded dairy companies and conclude that Yili as industry leader is set to extend its leading position and gain further market share in most categories.

Products, branding, distribution, mgmt. comparison

#1: Products: Yili and Mengniu better exposed to high-growth categories

Yili and Mengniu, as leading national players, have key products in most categories. They both

have more than 50% of their sales in the higher growth UHT milk and yogurt, with the rest in milk beverage and milk powder. Both companies have been gaining market share in the yogurt category.

In comparison, Want Want’s sales are more skewed to flavored milk sales, accounting for 50% with the rest rick crackers or snacks. Therefore Want Want’s dairy sales are under significant pressure as the flavored milk market continues to shrink and the company faces more

competition from Yili/Mengniu’s children’s milk products.

Bright Dairy is a more of a regional player focusing on East China and pasteurized milk. In the past 3 years it has successfully launched and led the UHT yogurt market with its star product Momchilovtsi. However, as competition intensifies in the UHT yogurt market, we see Bright’s growth coming under pressure from its dependence on a single SKU product. (We estimate in 2016 Yili’s UHT yogurt Ambrosial will surpass the scale of Bright Dairy’s UHT yogurt sales).



Exhibit 29: Yili has outperformed Mengniu in the past two year slow growth period Yili and Mengniu 2004-2016

Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.

8,735

60,360

7,214

0

10,000

20,000

30,000

40,000

50,000

60,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Rmb mn

Sales Yili Mengniu

49,027

4.4%

7.9%

6.0%

5.2%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

OPMYili OPM Mengniu OPM

0

200

400

600

800

1000

1200

1400

1600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Stock Performance

Mengniu, 6X

Yili, 12X

mid 2008:

Melamine

2009 July:

COFCO invested

in Mengniu

2012 Apr: Mengniu

changed CEO to

Ms. Sun

2008: Mr. Pan

elected Yili

Chairman/CEO

Index to 100 as

of July 2004

2004-07: ExpansionMengniu: expanded liquid milk / yogurt

facilities aggressively and increased

promotion (sponsor 'Super Girl'),

surpassed Yili in size in 2007

Yili: Chairman Pan stepped in and

gradually built each region's network-

flat distribution and high control on retail

end (ZhiWang plan in 2006)

2008-09: MelamineMengniu, Yili both hit

but recovered quickly

in 2009

Mengniu: COFCO

invested, Founder

mgmt team gradually

left the company

2010-13: Demand for qualityPremium milk stands out as consumers

demand safety and quality

Yili: outperform on sales/margin due to

strong premium products, higher brand

investment

Mengniu: focus on growing size after

COFCO and new mgmt came in;

Acquired IMF, invest in upstream

farming and JV with Danone

2014-15: Divergent consumer, Slower growthYili: cater well to the changing

consumers demand; invest in the

brand

Mengniu: hit by high inventory

and slowing demand, started to

increase direct control of the

distribution network



Exhibit 30: Yili and Mengniu has biggest exposure to Yogurt Sales by product type (2015)

Source: Company data.

#2: Branding: more effective and targeted branding crucial for young consumers

For dairy products, typical consumers are children/ students for flavored milk and teenagers or

millennials for yogurt etc. Hence we think marketing and branding aimed at younger consumers will become more important for dairy companies. From 2013, we have seen increasing number of dairy companies investing in the popular TV or entertainment programs.

Yili, starting from 2014, has greatly increased its A&P expenses as they promote their star products. Its A&P ratio reached 12% in 2015 and we expect it to continue to rise over 2016-18E vs. Mengniu’s 8-9% and Want Want and Bright at less than 4%. Yili has invested in television

programs with higher viewership (avg. 3.0 rating vs. Mengniu’s 1.5) and has greater presence on social media (sponsoring online video program and engaging in WeChat events).

Also Yili spends about 60% more on advertising and roughly Rmb1bn on TV sponsorship each year. This has translated into higher sales growth for the last two years (Exhibit 34).

Want Want on the other hand, spent less than 4% of sales on A&P, as it relies rely more on distributors’ effort to push products. In our opinion this puts them at a disadvantage to win market

share.

36%42%

28% 20%

49%

18%27%

37%

9%

8%10%

4%

51%

26%

37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yili Mengniu Want Want Bright

Sales Exposure by Category

UHT Milk Milk Beverage Yogurt IMF Others Past. Milk



Exhibit 31: Yili’s higher spending on A&P has led to higher incremental sales growth A&P comparison

Exhibit 32: Most of Yili’s selling expenses are advertising 2015 Yili vs Mengniu Selling Expenses Breakdown


Source: Company data

Exhibit 33: Yili sponsored TV programs have had higher ratings than Mengniu’s TV program sponsorship

Exhibit 34: Yili’s higher ANP spending has led to higher sales growth vs Mengniu Yili/Mengniu A&P ratio vs Abs. sales increase

Source: tvtv.hk


Yili, 13.6%

Bright, 3.6%

Mengniu, 8.9%

Want Want, 3.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

A&P as % of Sales

2,183

7,276

3,139

233 427806

4,085

2,310

789

2,994

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Salary Advertising Transportation Rental Others

Rmb mn

Yili Selling Expenses Breakdown

Yili Mengniu

150

610

430390

976

1275

1.6

1.3

3.53.3

2.0

0

0.5

1

1.5

2

2.5

3

3.5

4

0

200

400

600

800

1,000

1,200

1,400

2014 2015 2016

Rating pts.Rmb mnA&P expenses on TV program sponsorship

Mengniu Yili Mengniu ratings (RHS) Yili ratings (RHS)

Yili, 13.7%

Mengniu, 8.9%

-2,000

0

2,000

4,000

6,000

8,000

10,000

2%

4%

6%

8%

10%

12%

14%

16%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Rmb mnA&P as % of Sales vs Abs. Sales increase

Yili Abs Sales Increase Mengniu Abs. Sales Increase Yili Mengniu



Exhibit 35: Yili sponsored TV shows are some of the most popular ones in China Yili, Mengniu and Bright Dairy sponsor list

Source: tvtv.hk

#3: Distribution: Yili has flat distribution network and better control of the retail end

Both Yili and Mengniu have national production facilities and distribution networks, so they can

roll out the new products more quickly than the regional players.

By comparison, Yili employs a lot more sales people than Mengniu (Exhibit 36, 30% more) as it has a flat one-tier distribution network. Its sales person contacts their tier 1 distributor and then the distributor directly reaches out to the retail end. They have 8K plus distributors, whereas Mengniu and other peers have less than 5K. Under this network, Yili will be able to more efficiently adapt to the changes at the retail end and get up-to-date information from consumers.

Company 2015 TV Shows Dates on Air Brand Expense (rmb mn) Avg. RatingsMengniu 花儿与少年（Flower and Teenager) April - July 2015 ZhenGuoLi 60 1.25

蒙面歌王 (Hidden Singer) July - Sep 2015 Just Yogurt N/A 1.10偶像来了（Here Comes Idol) Aug- Oct 2015 Just Yogurt 400 1.81十二道鋒味 (Nicolas Tse Show) Aug- Oct 2015 Mengniu N/A 1.00全员加速中（Full Speed) Nov 2015 - Present Just Yogurt 150 1.13

Mengniu Total 610 1.26Yili 最强大脑2 (Largest Brain 2) Jan - March 2015 Satine 250 4.17

奔跑吧兄弟 2 (Running Man 2) April - July 2015 Ambrosial 216 4.76爸爸去那兒 3 (Dad, where to? 3) July - Oct 2015 QQ Star 500 2.30奇葩说 2 (QiPa Shuo 2) June - Present GuLiDuo 10 2.1

Yili Total 976 3.33

Company 2016 TV Shows Dates on Air Brand Expense (rmb mn) Avg. RatingsMengniu 2016超级女声 (Super Voice) March - Present SuanSuanRu 150 N/A

全员加速中2（Full Speed 2) April - Present Just Yogurt 200 1.16我是模王 (I am MoWang) Apr-16 Yoyi C 80 N/A迪士尼神奇之旅 (Disney Land) May-16 Future Star

Mengniu Total 430 1.16Yili 我是歌手4 (I am Singer 4) Jan - April 2016 Satine 600 1.96

奔跑吧兄弟 4 (Running Man 4) April - July 2016 Yili 500 2.20挑战者联盟２ (Challenger's Leauge 2) Summer 2016 ChangYi里约奥运会《中国骄傲》 (Rio Olympics)Summer 2016 Yili 175 N/A

Yili Total 1,275 2.08Bright Dairy 极限挑战 2 (Extreme Challenge) April-June 2016 Momchilovtsi N/A N/A

2015 TV Sponsorship

2016 TV Sponsorship



Exhibit 36: Yili is more directly involved in each POS, vs Mengniu’s distributor driven model Yili vs Mengniu sales employees (2015)

Exhibit 37: Want Want still has limited exposure in modern trade channel vs. other large staples companiesSales by channels (2015)



With its wider distribution system, Yili has greater presence in lower tier cities and traditional channels than Mengniu.

Mengniu, due to its relatively higher exposure in tier 1 and 2 cities, will face more intense competition vs. upstream dairy players or import player on the premium UHT milk side. This is because smaller, newer players usually have fewer resources to distribute products into low tier city and therefore focus on premium end products. In past 12 months, Mengniu has also started to reform its distribution network by increasing the portion of direct selling and simplifying its layers of distributors. We think this will take time to have a material impact on the company.

Want Want has been in China since the early 1990s and hence is well penetrated into traditional channels. However, it is having difficulty penetrating into new channels such as supermarkets or convenience stores in the past decade. More than 90% of its sales still come through traditional channels as they want to protect their distributor margin. However this makes Want Want less effective in launching new products or catering to young consumers, in our view.

Exhibit 38: Yili has greater premium milk market share in tier 3 and below cities Market share in different tier cities

Exhibit 39: Mengniu has a greater share in offline channels than Yili Market share by channels

Source: Modern Dairy.

Source: Modern Dairy.

57,971

39,683

5,372

15,60411,905

1,834

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


# of Employees Total employees Sales employees

95%

45% 50% 55%45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

WW Mengniu Yili Tingyi UPC

Traditional channel Modern trade Online and others

28.8 31.7 36.2 38.2

37.4

50.147.8 47.9

0

10

20

30

40

50

60

70

80

90

100

Tier 1 Tier 2 Tier 3 Tier 4 and below

(%) Yili Mengniu

32.7 35.2 33.2 29.939.7

39.942.3

54.8 57.950.6

0

10

20

30

40

50

60

70

80

90

100

Hypermarket Supermarket Small

supermarket

Convenience

store

Brick and

Mortar

(%) Yili Mengniu



Exhibit 40: Greater competition in the premium UHT market – Yili and upstream players are catching up Premium UHT milk sales (ex-factory level)


#4: Management team: Yili more prudent and incentivized management. team

Both Yili and Mengniu have explicit mgmt. incentive scheme through either share awards or share options. For Yili, as much as 30% of annual incremental earnings growth can be allocated to the mgmt. team. This compares to Want Want and Bright which have share incentive plan in place but none has been awarded since it began.

Yili mgmt. has been with the company for more than 10 years and has deep experience in the industry. The team has focused on both growth and returns, and subsequently in our view Yili has proven prudent in its capex expansion. It has also focused more on organic expansion rather than M&A, which could potentially dilute company value.

Exhibit 41: Yili provides a comprehensive performance linked incentive scheme Incentive schemes and remuneration comparison


3,048

4,8775,706

6,550

7,533

8,136321

832

1,502

303

739

1,656

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2013 2014 2015

Rmb mn Yili JinDian Mengniu Milk Deluxe Modern Dairy Shengmu

Shengmu:134%

cagr

Modern

Dairy:116% cagr

Mengniu: 11%

cagr

Yili: 37% cagr

Company Yili Mengniu Want Want Bright

Share Award Scheme

- 30% of incremental

increase in net income

Share Award Scheme

Adopted in 2013Discretionary Bonus Share Award Scheme

Share Option Scheme

ended in 2013Share Option Scheme

Share Option Scheme -

no options have been

granted since adoption

Total Remuneration (2015) 5,148 3,439 3,828 1,325

Sales (2015) RMB mn 59,863 49,027 23,407 20,385

Remuneration as % of Sales (2015) 8.6% 7.0% 16.4% 6.5%

2015 Average Employees 59,178 38,100 52,000 4,459

Average Monthly Remuneration RMB'000 6.5 7.2 5.4 22.9

Type of Incentives



Exhibit 42: Yili has one of the highest free floats of all China dairy companies, while mgmt. still holds nearly 8% Share ownership of each company

Source: Bloomberg

Compared with China and Global dairy companies, Yili has the highest CROCI (26%) due to its high asset turnover. It deploys a light asset model due to years of prudence on capex and working capital. Over 2011-2015, Yili’s CROCI grew from 15% to 26% on the back of 70% increase in Gross Cash Invested (GCI). Most of the incremental capital growth has come from

PPE investment or organic capacity expansion. We expect Yili to retain its high CROCI of c.27% over 2016-18E.

This compares to Mengniu’s 3X higher GCI, which mainly come from higher intangibles and working capital, as the company made a series of acquisitions in last 3 years and also saw inventory levels go up due to milk oversupply.

Exhibit 43: Yili has highest CROCI among of peers, mainly driven by higher asset turnover 2015 CROCI breakdown comparison


Dairy Companies Ownership Structure

Hohhot

Investment,

7.5%

China Security

Fund, 3.0%

China Securities

Finance, 4.3%

Gang Pan, 3.9%

Other

Executives,

4.1%

Public Investors,

77.2%

Yili

Founder

Bright Food

Group, 54.4%

Public

Investors,

43.6%

Bright Dairy

Sun Yi

Ping*(CEO),

0.4%

Public

Investors,

68.1%

COFCO Dairy

Invst. (JV of

COFCO, Arla,

Danone), 31.5%

Mengniu

Tsai Eng Meng

(Chairman),

49.8%

IWATSUKA

CONFECTIONE

RY , 5.0%JPMORGAN ,

5.0%

Public

Investors, 40.2%

Want Want

6%

8%

26%

8%

22%

15%

0.6x

1.0x

2.3x

1.2x1.1x

2.0x

17.2%

9.8%

11.2%

8.3%

28.7%

7.4%

0.6x

0.8x

0.9x

0.8x

0.7x

1.0x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

0%

5%

10%

15%

20%

25%

30%

Danone Meiji Yili Mengniu

2015 CROCI Breakdown ComparisonCROCI Asset Turnover EBITDA Margin Cash Conversion

Want Want Bright



Exhibit 44: Yili’s increase in GCI driven by Fixed Asset investments, leading to higher CROCI Yili CROCI/GCI breakdown

Exhibit 45: Mengniu’s acquisition in last few years increased its intangibles, but brought down its CROCI Mengniu CROCI/GCI breakdown



Dairy 2020: Yili to gain market share in key product categories For next 3 years, as the dairy market enters slow growth stage, we expect Yili will continue to

gain market share on the back of its better execution.

We expect Yili to maintain its dominant market share in UHT milk and flavored milk, and shrink the gap vs. Mengniu in the yogurt segment. We think Yili’s UHT yogurt will take No.1 position in the market due to its wide-spread branding and strong distribution, and that Yili’s low temp yogurt products can catch up with Mengniu from better logistics and further penetration. In the IMF segment, with the further influx of overseas IMF, we expect foreign brands to continue taking

share from domestic brands.

We expect Mengniu to face intense competition in the UHT milk segment; especially the premium UHT as more upstream and import companies compete with them in the tier 1 and 2 cities.

Exhibit 46: We expect Yili to maintain market share and Mengniu to further lose in UHT milk market Market share – UHT milk

Exhibit 47: We expect Yili to gain market share Market share – Yogurt



25,805

14,168

10,740

372 0 526

CROCI, 14.9%

CROCI, 26.2%

0%

5%

10%

15%

20%

25%

30%

0

5,000

10,000

15,000

20,000

25,000

30,000

2011 Fixed Assets GrossIntangibles

NetOperating WC

Others 2015 GCI

Rm

b m

n

Yili (Historical) Gross Cash Invested & Cash Return on Cash Invested Growth

* Due to

negative Net

Operating WC

41,342

13,548

10,595

6,975

4,209

6,015 CROCI, 20.7%

CROCI, 8.0%

0%

5%

10%

15%

20%

25%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2011 GCI FixedAssets

GrossIntangibles

NetOperating

WC

Others 2015 GCI

Rm

b m

n

Mengniu (Historical) Gross Cash Invested & Cash Return on Cash Invested Growth

33.634.6 34.9

36.6 36.4 36.2 36.6

33.934.5 34.3

31.2 30.3

29.3 29.0

25.0

27.0

29.0

31.0

33.0

35.0

37.0

39.0

2012 2013 2014 2015 2016E 2017E 2018E

Yili UHT Mengniu UHT

11.3 11.413.0

19.3 24.2 26.0

26.9 21.2 21.923.4

28.7 28.4 28.3 28.0

13.7

15.917.9

14.2 12.6 11.5 10.8

0

5

10

15

20

25

30

35

2012 2013 2014 2015 2016E 2017E 2018E




Exhibit 48: We expect Yili and Mengniu to gain market share, but Yili to gain more Market share – Flavored milk

Exhibit 49: We expect Yili to maintain its leading domestic position Infant Milk Formula market Market share – IMF



Earnings forecasts: Yili to deliver 13% EPS 3-year CAGR while Want Want will be in negative territory

We expect Yili to deliver the fastest 7% sales 3yr CAGR 2015-2018E, driven by stronger Yogurt and UHT premium product growth. We expect Yili to take over Bright Dairy to have the No.1 UHT

yogurt position in 2016 and narrow the gap between Mengniu for premium UHT and yogurt products.

Margin wise, with the lower upstream raw milk price, we expect most downstream companies to have lower raw milk procurement cost vs. 2015 (Exhibit 52). Mengniu will benefit less vs. Yili and Bright due to its tighter connections with upstream companies (China Modern Dairy etc.) so they need to protect their raw milk suppliers’ interest to some extent. We expect Yili to deliver a strong

330bps GPM improvement from a better product mix and further benefit from lower raw milk prices.

With more promotions being rolled out, there was high competitive intensity starting from 2H15 as companies aimed to clear up their excessive inventory. YTD, however, our channel checks show that for UHT milk, especially premium milk, the discount has been reduced (about 5% now vs. 20% in 3Q15). This suggests market inventory levels are not getting worse in 2016. For UHT

yogurt categories, there have been significant discounts, of up to 35% this year to its original price.

Net net, we expect Yili to deliver the strongest 12% CAGR 2015-2020E, vs. Mengniu’s 6% and Want Want’s 4% decline.

25.4 26.128.1

31.6 32.3 34.0

36.1

20.321.2

22.5

20.0 20.4 20.8 21.3

10

15

20

25

30

35

40

2012 2013 2014 2015 2016E 2017E 2018E

Yili Mengniu Want Want

6.06.3

6.0 6.0

5.3 5.3 5.3

0.4

5.65.4

4.1 4.5

4.7 4.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2012 2013 2014 2015 2016E 2017E 2018E

Yili Mengniu



Exhibit 50: UHT milk discounts have gradually reduced from 3Q15 to Aug 2016 Premium UHT milk discount to standard price

Exhibit 51: UHT yogurt saw more discounts from 3Q15 to Aug 2016 UHT yogurt discount



Exhibit 52: We expect downstream companies to benefit from lower raw milk cost for 2016E vs 2015 Raw milk procurement cost (RMB/kg)

Exhibit 53: We forecast Yili’s margins to further benefit from better product mix and low raw milk prices Company OPM



-24%

-12%

-15%

-6%

0% 0%

-22%

-16%

-9%

-2%

-7%

-2%

-30%

-25%

-20%

-15%

-10%

-5%

0%

3Q15 4Q15 May-16 Jun-16 Jul-16 Aug-16

Dis

cou

nt

fro

m o

rig

inal

pri

ce

UHT Milk Discount from Original price

Yili Satine Mengniu Milk Deluxe

Yili: Buy 1 get 2nd box half price

Mengniu: Buy up to Rmb66, get Rmb15 off

-9%

-9%

-33%

-31%

-29%

-19%

-13%

-8%

-19%-20%

-20%

-15%

-36%-35%

-34%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

3Q15 4Q15 May-16 Jun-16 Jul-16 Aug-16

Dis

cou

nt

fro

m o

rigin

al

pri

ce

UHT Yoghurt Discount from Original price

Yili, Ambrosial Bright, Momchilovtsi Mengniu, Just Milk

3.5

3.7

3.9

4.1

4.3

4.5

4.7

4.9

2014 1H15 2H15 1H16 2H16E

Yili

Mengniu

Bright DairyYili, 10.7%

Bright, 4.3%

Mengniu , 5.1%

Want Want, 17.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Company OPM



Exhibit 54: We expect Yili to almost triple its sales by 2018E from 2010, but Mengniu only to double Dairy 2010-18E Financial Comps


Exhibit 55: We forecast Yili to have highest EPS growth till 2020E Company EPS 2014-20E CAGR (RMB term)

Exhibit 56: We forecast Yili to have highest EPS growth out to 2020E Company CROCI



GS vs. Consensus: Yili above on margin, Want Want below on lower topline

For Yili, we are about 2-3% above Bloomberg consensus due to our higher margin assumptions.

Given the slower industry growth outlook, we see Yili delivering 7% sales CAGR for next 3 years,

or 2% slower than consensus. However, we see the strong product mix increase and continued weak raw milk cost will drive Yili’s GPM and OPM 330bps and 170bps higher over 2015-2018E. Net net we look for 13% EPS 3-year CAGR.

Company 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 15-18E CAGR Yili 29,665 37,451 41,991 47,779 54,436 60,360 63,492 68,117 72,933 6.5%

Mengniu 30,265 37,388 36,079 43,357 50,049 49,027 51,586 54,589 57,582 5.5%

Bright 9,572 11,789 13,775 16,291 20,385 19,373 19,885 20,606 21,464 3.5%

WW 15,187 19,042 21,190 23,470 23,260 21,538 20,859 20,640 20,279 -2.0%

Yili 22.0% 26.2% 12.1% 13.8% 13.9% 10.9% 5.2% 7.3% 7.1%

Mengniu 17.7% 23.5% -3.5% 20.2% 15.4% -2.0% 5.2% 5.8% 5.5%

Bright 20.5% 23.2% 16.8% 18.3% 25.1% -5.0% 2.6% 3.6% 4.2%

WW 29.9% 25.4% 11.3% 10.8% -0.9% -7.4% -3.2% -1.0% -1.7%

Yili 30.0% 28.7% 29.1% 28.2% 32.8% 36.0% 38.2% 38.9% 39.3%

Mengniu 25.7% 25.7% 25.0% 27.0% 30.8% 31.4% 32.0% 31.8% 31.8%

Bright 34.0% 32.9% 34.6% 34.2% 34.2% 35.6% 36.8% 36.9% 37.0%

WW 37.6% 34.8% 39.5% 41.5% 40.2% 43.9% 45.7% 44.5% 43.7%

Yili 1.9% 3.9% 3.9% 5.3% 8.7% 8.5% 9.2% 9.8% 10.3%

Mengniu 5.3% 5.1% 4.6% 4.9% 6.2% 5.2% 5.5% 5.2% 5.1%

Bright 2.6% 2.4% 3.7% 4.2% 4.5% 4.3% 4.2% 4.3% 4.3%

WW 17.7% 15.6% 19.8% 21.1% 18.6% 18.8% 19.5% 18.1% 17.5%

Yili 20% 133% -5% 86% 30% 12% 16% 14% 12% 13.8%

Mengniu 14% 13% -19% 19% 31% 4% 1% 5% 7% 4.4%

Bright 43% 32% 32% 12% 59% -34% 9% 7% 7% 7.4%

WW 14% 12% 29% 21% -9% -11% -3% -6% -3% -4.0%

Yili 14.8% 19.1% 17.0% 22.8% 26.4% 26.2% 27.1% 27.3% 27.5%

Mengniu 23.4% 20.7% 15.2% 12.6% 10.9% 8.0% 9.1% 8.6% 8.2%

Bright 12.1% 11.9% 11.5% 12.4% 13.5% 15.2% 12.0% 11.4% 10.6%

WW 29.9% 29.9% 30.2% 29.7% 22.8% 22.1% 19.6% 16.7% 14.6%

Sales (Rmb mn)

Sales yoy growth

GPM

OPM

Earnings Growth

CROCI

Yili, 13% CAGR

Bright, 7%

Mengniu, 6%

Want Want, -4%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2014 2015 2016E 2017E 2018E 2019E 2020E

Company EPS growth YoY

Yili, 27.5%

Bright, 10.6%

Mengniu,

8.2%

Want Want,

14.6%

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014 2015 2016E 2017E 2018E

CROCI



For Want Want we are 8-12% below consensus on 2017-18E sales assumptions. This is driven

by our more cautious view on Want Want’s dairy segment growth. With slower growth and negative operating leverage, we expect Want Want to post 4% EPS decline CAGR over 3years,

or about 10-25% below 2016-18E consensus.

Exhibit 57: We expect Yili to post 6%/13% yoy growth for Sales/NPAT for 2Q16 Interim forecasts


Exhibit 58: We are 2-3% above consensus on Yili due to higher margin assumptions GSe vs. Consensus

Source: Bloomberg, Goldman Sachs Global Investment Research.

Quarterly Results

Ticker Company name 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E

Sales 14,992.2 15,158.9 15,728.4 14,480.4 15,326.1 16,092.4 yoy 14% 6% 8% 17% 2% 6%

NPAT 1,303 1,359 975 994 1,554 1,536 yoy 20% 12% -23% 70% 19% 13%

Sales 5,075.0 5,152.2 4,892.1 4,253.9 4,994.2 5,255.3 yoy 10% -2% -10% -16% -2% 2%

NPAT 98 103 45 172 118 105 yoy 39% -26% -77% 6% 21% 2%

Ticker Company name 1H14 2H14 1H15 2H15 1H16E

Sales 25,836 24,213 25,564 23,462 26,533 yoy 25% 7% -1% -3% 4%

NPAT 961 1,211 1,310 946 1,301 yoy 24% 37% 36% -22% -1%

Sales 1,853 1,923 1,817 1,610 1,644 yoy 6% -7% -2% -16% -10%

NPAT 318 302 286 257 263 yoy 4% -20% -10% -15% -8%

Sales 2,189.0 2,542.6 1,962.9 2,855.7 3,120.9 yoy 6% 2% -10% 12% 59%

NPAT 316.1 507.2 205.0 25.9 400.2 yoy -35% -8% -35% -95% 95%

Sales 2,584.5 2,442.2 2,437.3 2,389.0 2,203.1 yoy 86% 28% -6% -2% -10%

NPAT 604.7 447.8 663.2 102.0 -5.0 yoy 179% 31% 10% -77% nmf

Mengniu (Rmb mn)2319.HK

600887.SS Yili (Rmb mn)

Semi- Annual Results

1112.HK Biostime (Rmb mn)

600597.SS Bright Dairy (Rmb mn)

0151.HK Want Want (USD mn)

1117.HK Modern Dairy (Rmb mn)

Sales EPS

GS vs. Bloomberg cons GS vs. Bloomberg cons

Company name FY1 FY1 FY2 FY3 FY1 FY2 FY3

600887.SS Yili Industrial (1%) (3%) (6%) 3% 2% 0%

1112.HK Biostime International Holdings 1% 5% 4% 3% 5% 6%

600597.SS Bright Dairy (5%) (7%) (5%) (5%) (13%) (14%)

2319.HK Mengniu Dairy 1% (0%) (2%) (7%) (13%) (15%)

0151.HK Want Want China Holdings (4%) (8%) (12%) (10%) (20%) (25%)

1117.HK China Modern Dairy Holdings (11%) (8%) (2%) nmf (4%) 1%



Valuation: Yili our top pick, Want Want overvalued

We use an EV/GCI vs. CROCI/WACC (Director’s Cut) framework to value the China dairy sector names. In our view, this methodology is appropriate because:

Investors tend to compare the dairy stocks against each other.

As the dairy industry growth slows, relative returns have grown in importance;

Dairy stocks historically tend to have high correlation under our framework (R squared of

0.9).

We compare the five downstream companies (Yili, Mengniu, Bright Dairy, Want Want and Biostime) under the framework, and value Modern dairy using DCF as it is an upstream business and more capital intensive.

We make these key assumptions:

1) WACC: 9%/9.5% cost of equity for A/H share (per GS strategy team), 3.5%-7.5% cost of

debt according to each company’s different profile and recent debt issuance. Based on this, our WACC ranges from 7%-8.5% for the six companies.

2) Premium on consistently 1st quartile CROCI company: we assign 10% premium to Yili.

Historically Yili has traded at a discount to industry peers, but in the past four years the discount has shrunk to about 5% as of 2016 from about 50% in 2013 (each year shrinking by an avg. 15%). Given Yili has consistently recorded 1st quartile and growing CROCI in the

past and we expect it relative valuation to improve out to 2018, we see by 2017 the company should trade at 10% premium to peers (improve another 15% from 2016’s 5% discount).

Under our 2017 Director’s Cut, Yili looks undervalued whereas Want Want is trading above the industry line (overvalued). On our estimates, Yili should see its CROCI increase over 2015-18 but Want Want’s will decline sharply.

Exhibit 59: We forecast Yili to continue posting top quartile CROCI performance vs our coverage CROCI quartiling


Ticker Company nameCROCI 2013

CROCI 2014

CROCI 2015

CROCI 2016E

CROCI 2017E

CROCI 2018E

Avg 2016E-2018E

600887.SS Inner Mongolia Yili 22.8% 26.4% 26.2% 27.1% 27.3% 27.5% 27.3%

0151.HK Want Want China Holdings 29.7% 22.8% 22.1% 19.6% 16.7% 14.6% 17.0%

1112.HK Biostime International Holdings Limited 28.1% 26.0% 9.0% 14.5% 14.5% 14.8% 14.6%

0288.HK WH Group Ltd. 12.4% 14.6% 13.9% 14.1% 14.3% 14.1% 14.2%

600597.SS Bright Dairy 12.4% 13.5% 15.2% 12.0% 11.4% 10.6% 11.3%

0220.HK Uni-President China Holdings Ltd. 8.1% 7.9% 9.2% 10.9% 11.2% 11.4% 11.1%

0322.HK Tingyi (Cayman Islands) Holdings 12.9% 9.9% 8.2% 8.0% 9.3% 9.6% 9.0%

2319.HK Mengniu Dairy 12.6% 10.9% 8.0% 9.1% 8.6% 8.2% 8.6%

1117.HK China Modern Dairy Holdings 9.0% 17.1% 12.0% 8.7% 8.1% 7.4% 8.1%

0168.HK Tsingtao Brewery (H) 9.4% 9.9% 7.0% 8.1% 7.9% 8.0% 8.0%



Exhibit 60: Yili looks undervalued on our 2017E Director’s Cut plot 2017E Director’s Cut valuation

Exhibit 61: Want Want’s declining CROCI and high EV/GCI suggest it is overvalued 2015-17E Director’s Cut valuation



We derive our 12-month target prices using 2017E EV/GCI vs CROCI/WACC. Yili offers the highest upside and Want Want’s TP implies downside to the current stock price.

Our target prices imply roughly 21X 2017E PE for Yili and 15X PE for Want Want.

Exhibit 62: Our 2017E EV/GCI vs CROCI/WACC valuation yields Yili as our top Buy pick and Want Want as our Sell 2017E EV/GCI vs CROCI/WACC

Source: Datastream, Goldman Sachs Global Investment Research

y = 0.90x

R² = 0.90

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

EV

/GC

I

CROCI/WACC

Director's Cut 2017

2017 Linear (2017)

Yili

Want Want

Mengniu

Bright

Biostime

Yili, 17

WW, 17

Mengniu, 17

Bright, 17

Biostime, 17

y = 0.90x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

EV

/GC

I

CROCI/WACC

Director's Cut 2017 vs 2015

2017 2015 Linear (2017)

Yili, 15

WW, 15

Mengniu, 15

Bright, 15

Company Name Yili Mengniu Bright Want Want BiostimeTicker 600887.SS 2319.HK 600597.SS 0151.HK 1112.HKPricing/Reporting Currency Rmb/Rmb HKD/RMB Rmb/Rmb HKD/USD HKD/RMBCROCI (2017E) 27.1% 8.6% 11.4% 16.7% 14.5%WACC 7% 7% 7% 8% 7%CROCI/WACC (X) 3.7x 1.2x 1.6x 2.0x 2.0xSector Val-ratio 0.9x 0.9x 0.9x 0.9x 0.9xValuation premium/discount 10% 0% 0% 0% 0%Adjusted Val-ratio (Y) 1.0x 0.9x 0.9x 0.9x 0.9xTarget EV/GCI (=X*Y) 3.7x 1.1x 1.5x 1.8x 1.8xGCI (pricing currency mn, 2017E) 32,902 53,887 11,887 28,121 12,416 Target EV (pricing currency mn, 2017E) 122,044 57,290 17,419 49,985 22,061 Less: Net debt (pricing currency mn) 8,328 (1,042) (267) 3,461 (5,430) Less: MI (pricing curr mn 2017E) (218) (5,506) (911) (52) (687) Implied equity value (Pricing Currency) 130,155 50,742 16,241 53,394 15,944Number of shares (mn) 6,065 3,921 1,231 12,654 614Director's cut TP (Pricing Currency) 21.5 12.9 13.2 4.2 SOTPCurrent price 18.1 13.0 14.7 4.8 24.2Potential upside / (downside) 19% -1% -10% -13%Rating Buy Neutral Neutral Sell NeutralTP implied 2017E P/E 21.4 18.1 32.1 14.7 17.3 Current 2017E P/E 18.0 18.3 35.6 16.9 15.5



Crosscheck with PE framework suggests similar result

We also crosscheck the dairy companies using our PE framework. We benchmark our PE multiple against global staples companies. Under this method, we look at the average P/E

multiple during normalized EPS growth and cash return periods in DM countries and position the China companies according to a similar growth and return profile.

We look at the global top 50 staples companies in size and their median avg. EPS growth, CROCI and PE multiple over 2010-2015. Given the China staples sector growth has also slowed to avg. single digit levels and companies have now become more prudent in expansion, we think it is appropriate to compare China with DM countries. We divide the global peers into nine

different sets based on EPS growth (2%, 10% thresholds) and CROCI (10%, 15% thresholds), we then apply the avg. PE for each set as the benchmark for China staples companies.

Yili also has 1st quartile EPS growth among the China staples companies while Want Want is at bottom due to its EPS decline (4% CAGR in Rmb terms).

Under this PE framework, with 13% EPS CAGR and 27% CROCI, we apply a 22X 2017E PE to Yili, which gives a valuation (Rmb22.2) similar to our 12-month Director’s Cut-based target price

of Rmb21.5. For Want Want we apply a PE of 16X, which also gives a result similar to Director’s Cut.

The main outlier on PE is Bright Dairy, which is currently trading at 33X 2017E PE, or about a 60% premium to Yili. We believe this because it is more a small to mid-cap A share company, which consistently trade at 40% premium vs. A-share large cap companies and H-share consumer companies. Also Bright Dairy has high financing expenses due to its upstream

exposure and hence a lower net margin. We think a returns based valuation is therefore more appropriate for Bright, especially relative to its downstream milk-staples peers.

Exhibit 63: Yili is in the 1st quartile of EPS growth within our coverage EPS growth quartiling

Exhibit 64: P/E implied valuation yields similar results to Director’s Cut PE framework based on PE and CROCI

*Want Want EPS is RMB basis.



Ticker Company name2015-18E EPS CAGR

0220.HK Uni-President China Holdings Ltd. 16%600887.SS Inner Mongolia Yili 13%0288.HK WH Group Ltd. 10%1112.HK Biostime 7%600597.SS Bright Dairy 7%2319.HK Mengniu Dairy 4%0168.HK Tsingtao Brewery (H) 2%1117.HK China Modern Dairy Holdings 0%0322.HK Tingyi (Cayman Islands) Holdings -1%0151.HK Want Want China Holdings -4%

1st quartile2nd quartile3rd quartile4th quartile

UPC, 21X Yili, 22X

Mengniu 18XBiostime, 20XBright Dairy

Tsingtao, 15XWant Want, Tingyi, 16X

5% 10% 15%

CROCI (2018E)

EPS (2016E-18E cagr)

-10%

2%

10%

20%

20+%

2017E PE



Exhibit 65: Yili, Mengniu and WW have valuations under PE framework in line with our Director’s Cut derived target prices PE implied value per share


A and H share premium is not significant for staples sector

For the China staples sector, there’s is no significant difference in trading multiple between A and

H share listed companies. H shares have since 2007 traded at an average of 23X fwd PE (the data set includes large cap staples companies under our coverage), and A share large cap staples at 23.5X. Therefore, we see there is no need to assign different premium/discount for A and H share companies, and value them under the same DC framework.

Exhibit 66: H shares staples median PE is trading near 20X H share staples median PE

Exhibit 67: A shares large cap staples trade near 24X forward PE, while small to mid-caps are near 31X A share staples median PE

Source: Bloomberg

Source: Wind

Industry risks Industry supply-demand: we expect the global S/D gradually balancing over 2017E. However,

a faster/slower rebalancing in the industry and will drive higher/lower milk prices globally.

Competition: we have seen new players (importers and upstream companies etc.) entering the

market over the past year. Higher than expected competition would likely drive greater promotion activities in the market and impose pressure on company margins.

Company Crosscheck methology CurrencyTarget

2017 PE2017 EPS

Implied Valuation per share

Yili Target PE (global peers) RMB 22 1.01 22.2

Mengniu Target PE (global peers) RMB 18 0.61 12.6

Want Want Target PE (global peers) USD 16 0.037 4.6

Bright Dairy Target PE (global peers) RMB 20 0.41 8.2

39.9

13.9

20.2

5

10

15

20

25

30

35

40

Ju

l-07

No

v-0

7

Mar-

08

Ju

l-08

No

v-0

8

Mar-

09

Ju

l-09

No

v-0

9

Mar-

10

Ju

l-10

No

v-1

0

Mar-

11

Ju

l-11

No

v-1

1

Mar-

12

Ju

l-12

No

v-1

2

Mar-

13

Ju

l-13

No

v-1

3

Mar-

14

Ju

l-14

No

v-1

4

Mar-

15

Ju

l-15

No

v-1

5

Mar-

16

Ju

l-16

Staples sector average P/E -1STDEV Historical Avg. +1STDEV

Historical avg. 23.1X

28.9

45.8

28.626.0

23.5 22.9

17.716.2

13.816.8

18.7

30.9

40.2

33.4

41.9

33.031.0

25.5

21.3

24.6

31.333.2

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

A- Shares Staples Median PELarge cap median PE Small to Mid cap median PE

Large cap avg. PE: 23.5X

Small to mid cap avg PE: 31X



Yili (Buy): A long-term stand-out leader; fastest sales/EPS growth

Source of opportunity We believe Yili offers the most attractive risk-reward among China dairy sector stocks. We expect the company will extend its market leadership with strong new product offerings, effective branding and better control of retail stores. With the dairy industry entering a slower growth stage, we expect Yili will continue to gain market share across key product categories and deliver

7% sales 3yr CAGR. Also, with the continued premiumization and Yili’s star products to account for a higher portion of sales, we expect a higher-than-peer 13% EPS 2015-18E CAGR, and expect it to improve its CROCI by another 50bps to 27.5% by 2018. Our 12m target price is Rmb21.5, implying 18% upside. We initiate coverage with a Buy rating.

Catalyst The stock has rallied c.15% in the past 3 months, in our view on expectation

of strong margin improvement and broader A-share staples multiple expansions. We see further upside from here on:

1. Yili’s strong margin expansion is underappreciated by the market:we expect Yili to see 120bps OPM expansion in 2015-17E due to continued product mix improvement. We see Yili’s high-end products accounting for 57% of total sales by 2018 vs. 47% in 2015, mostly driven by high growth in

the premium UHT milk and Yogurt segments. Additionally, the company’s flexible raw milk procurement policy makes it a great beneficiary in the upstream down cycle.

2. Strong 2Q16 result: we expect Yili to deliver 13% 2Q16 or 16% 1H16

EPS growth, due to further GPM expansion from lower raw milk price (down by high single digit yoy) and better product mix. We think its UHT yogurt

product is set to deliver strong sales and surpass Bright Dairy to be the best-selling brand in 2Q16.

Valuation Our target price is based on 2017E EV/GCI vs. CROCI/WACC. We assign a 10% premium to the sector cash return ratio of 0.9x to Yili on the basis of its sustainable first quartile CROCI (in line with the average premium that top-performing CROCI companies have enjoyed). Our target price implies 21X

2017E PE.

Key risks Slower than expected liquid milk sales, weaker margin from higher marketing expenses.

INVESTMENT LIST MEMBERSHIP

Asia Pacific Buy list

Coverage View: Neutral

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Yili Industrial (600887.SS)

Asia Pacific Consumer Peer Group Average

Key data Current

Price (Rmb) 18.16

12 month price target (Rmb) 21.50

Market cap (Rmb mn / US$ mn) 110,136.8 / 16,579.6

Foreign ownership (%) --

12/15 12/16E 12/17E 12/18E

EPS (Rmb) 0.78 0.89 1.01 1.13

EPS growth (%) 11.4 13.9 13.2 12.0

EPS (diluted) (Rmb) 0.78 0.89 1.01 1.13

EPS (basic pre-ex) (Rmb) 0.76 0.89 1.01 1.13

P/E (X) 21.0 20.3 18.0 16.0

P/B (X) 5.0 5.0 4.5 4.0

EV/EBITDA (X) 13.7 13.3 11.5 10.0

Dividend yield (%) 2.7 2.9 3.3 3.7

ROE (%) 24.6 25.7 26.1 26.3

CROCI (%) 26.2 27.1 27.3 27.5

2,800

3,000

3,200

3,400

3,600

3,800

4,000

4,200

12

13

14

15

16

17

18

19

Aug-15 Nov-15 Feb-16 May-16

Price performance chart

Yili Industrial (L) Shanghai - Shenzhen 300 (R)

Share price performance (%) 3 month 6 month 12 month

Absolute 17.7 35.9 1.4

Rel. to Shanghai - Shenzhen 300 12.2 24.6 27.5

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/11/2016 close.



Premium products growth drive strong margin increase

We expect Yili to deliver a strong 170bps OPM increase over 2015-18E due to continued product mix improvement. We see Yogurt products outperforming in the liquid milk segment with double

digit growth over next 3 years. This will be driven by rapid growth in UHT yogurt in 2016-17 and sustained high growth of low temp yogurt. We now expect Yili to surpass Bright Dairy to be No.1 UHT yogurt player in 2016 and extend its market share to 36%.

With the rapid growth of star products, we expect Yili’s high-end products will account for 57% of total sales vs. 47% in 2015.

Exhibit 68: We expect Yili’s yogurt sales to grow at high double digits till 2018E Yili liquid milk sales growth by type

Exhibit 69: Yili has been improving its product mix to higher end ones, driving higher margins Yili Product Mix



Exhibit 70: We expect Yili to surpass Bright Dairy to be the No.1 UHT yogurt player in 2016 UHT yogurt market share

Exhibit 71: Yili’s advertisement caters to a younger demographic Yili’s ads on UHT yogurt



75%

49%

22%

15%

-10%

10%

30%

50%

70%

90%

2015 2016E 2017E 2018E

Yili Liquid Milk sales growth yoy

UHT milk

Milk beverage

Yogurt

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016E 2017E 2018E

Mid to low end products % sales

High end products % sales

GPM

77%

44%32% 28% 26%

9%

26%

36%38% 38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016E 2017E 2018E

Others

Chunzhen

Ambrosial

Momchilovtsi



Exhibit 72: Yili has production bases across China Yili production bases distribution

*Each color represents different sales region.


Exhibit 73: Yili mgmt team have been with the company for ~10 years Yili Management Bio


Dairy Products Production/Sales

Chilled Drinks Production/Sales

Milk Powder

Yili - Bases across

China

Yili Management/Board BioName Position Bio

Pan Gang Chairman & CEO

Joined Yili in July 1992

1999 appointed as assistant to CEO

2002 asssumes role as Liquid Milk segment

General Manager

June 2005 assumes role as Board member and

CEO/Chairman of Group at the age of 35

Originates from Inner Mongolia

Other roles: All China Federation of Industry and

Commerce Vice President and Party Member

Chun-hai Liu Vice President

Previous roles include Liquid Milk segment

Deputy General Secretary

June 2005 assumes current role as Vice President

of Group

Experienced in agricultral/food/beverage industry

within Inner Mongolian region

Cheng-xia Zhao Vice President & CFO

Previous roles in Yili include GM of Financial dept

March 2007 assumes role as Vice President &

CFO

Experienced in agricultral/food/beverage industry

within Inner Mongolian region

Li-Ping Hu Vice President & Board Secretary

Accreditation: Senior Accountant

March 2005 assumes current role as General

Secretary



Financials: 14% EPS 2yr CAGR from further market share gain and GPM expansion

Income Statement Sales: We expect Yili to deliver 7% sales CAGR over 2015-18E, driven by continued market

share gain in the liquid milk segment. For 2016, we expect 5.4% sales or 8% organic growth (Yili disposed of the Youran Farming in 1Q16).

Liquid milk: expect 9% sales three-year CAGR driven by the rapid yogurt growth and

recovery of UHT milk.

For yogurt, we see company’s UHT yogurt will surpass Bright Dairy to become No.1 selling brand in 2016 and reach close to RMB8bn scale by 2017. Over the longer term, we see low temp yogurt will be the bright spot with above 20% CAGR as consumers shift to functional products.

For UHT milk, we see Satine to continue the strong low teen growth and close its gap with Mengniu’s Milk Deluxe over next 3yrs. With the smaller discount in 2016-17, we expect also sales recovery for other UHT products.

Milk powder: we expect sales to drop by 9% in 2016 due to higher competition and

consumer’s shift to online channels.

Margin: we expect Yili’s GPM to further increase by 220bps/70bps in 2016/17E, driven by lower

raw milk price and product mix improvement. We see a 4% drop in raw milk price in 2016. Therefore, despite the increase in SG&A expenses (mainly higher A&P spend), we see company will still have 120bps OPM increase over 2015-17E.

Net net, we look for 14%/13%/12% recurring EPS growth for 2016-18E, and 2-3% above consensus for 2016-17E.

Cash Flow Statement Capex: expect stable capex trend over 2016-17E with Rmb3.5-3.6bn/year, as the company does

not have an aggressive plant expansion plan in near term.

FCF: with improved profit margin, we see Yili will deliver stronger free cash flow each year, from

Rmb3.2bn in 2016 to Rmb6.4bn in 2018.

Balance Sheet Net cash: Yili has strong cash position and current net cash is close to Rmb7bn in 2015. We see

further net cash increase given no massive capex plan. Potential M&A may also be an option for the company.

ROE and CROCI: expect company’s return to slightly increase over next 3yrs, driven by

improved margin and slower capital base increase.



Expect 14% EPS growth in 2016, 13% in 2Q16, still attractive valuation We expect Yili to deliver 13% EPS yoy growth in 2Q16, driven by continued GPM expansion. Yili is now trading at 20X fwd PE, lower than historical avg. level despite the recent rally. Expect the

14% EPS two-year CAGR and higher return to drive re-rating.

Exhibit 74: We expect 13% yoy EPS growth in 2Q16 Yili quarterly earnings

Exhibit 75: Yili is currently trading at 20X fwd 12m P/E, vs avg of 23X Yili 12m fwd P/E



Key risks

Weaker than expected sales growth: more intense competition and slower industry growth will

hamper Yili’s ability to grow topline. Milk powder will also be a drag for company

Higher selling expenses: Yili raised its A&P ratio rapidly over past 2yrs and we have already

built in another 160bps increase over 2015-17E. However higher than expected selling expenses will have negative impact on operating profit if it fails to translate into topline.

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

NPAT (RMB mn) YoY growth (RHS)

Hi t

+ 1

STDV

- 1

STDV- 2

STDV

43.5

13.9

19.7

-150%

-100%

-50%

0%

50%

100%

150%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0Fwd 12m P/E EPS Growth

Historical

avg: 23.4X

+1SD

-1SD

+2SD

-2SD



Exhibit 76: We expect a 9% 15-17E 2yr sales CAGR for Yili’s liquid milk segment, more than enough to offset a weaker IMF segment


Yili Industrial Group (600887.SS)Rmb millionsDivisional P/L FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E

15-'17E 2yr CAGR

15-'20E 5yr CAGR

1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E

Revenues (external only)

Liquid milk (inc. Yogurt) 37,116 42,406 47,151 51,606 56,053 60,551 65,016 69,831 9.0% 8.2% 17,963 19,153 20,709 21,698 22,423 24,728 24,217 27,389

Frozen dairy 4,243 4,284 4,098 4,180 4,263 4,349 4,436 4,569 2.0% 2.2% 2,811 1,432 3,040 1,243 2,990 1,108 2,990 1,190

Milk powder and products 5,512 6,013 6,447 5,892 5,952 6,106 6,330 6,620 -3.9% 0.5% 2,788 2,724 3,041 2,972 3,336 3,111 2,902 2,990

Mixed feed 583 783 1,058 212 212 212 212 212 -55.3% -27.5% 298 285 305 478 524 534 157 54

Others 325 950 1,605 1,723 1,799 1,904 2,066 2,217 5.9% 6.7% 162 163 375 575 879 727 1,153 570

47,779 54,436 60,360 63,612 68,279 73,121 78,059 83,448 6.4% 6.7% 24,021 23,758 27,471 26,966 30,151 30,209 31,419 32,193

Gross Profit

Liquid milk 9,684 13,071 16,069 19,046 21,290 23,372 25,598 27,784 5,124 4,560 6,429 6,643 7,324 8,746 9,154 9,892

Forzen dairy 1,391 1,501 1,489 1,527 1,557 1,588 1,620 1,669 937 454 1,123 378 1,137 351 1,136 391

Milk powder and products 2,414 2,743 3,609 3,180 3,153 3,173 3,226 3,308 1,234 1,180 1,395 1,348 1,736 1,872 1,451 1,729

Mixed feed 66 122 212 42 42 42 42 42 36 30 38 84 139 73 31 11

Others 141 599 606 774 803 858 968 1,064 83 58 237 361 342 264 376 398

13,696 18,036 21,984 24,569 26,845 29,034 31,454 33,867 11.8% 9.0% 7,413 6,283 9,223 8,814 10,678 11,306 12,148 12,421

YoY Growth (%) FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E


Liquid milk 15% 14% 11% 9% 9% 8% 7% 7% 18% 12% 15% 13% 8% 14% 8% 11%

Frozen dairy -1% 1% -4% 2% 2% 2% 2% 3% -3% 3% 8% -13% -2% -11% 0% 7%

Milk powder and products 23% 9% 7% -9% 1% 3% 4% 5% 6% 46% 9% 9% 10% 5% -13% -4%

Mixed feed -15% 34% 35% -80% 0% 0% 0% 0% -6% -23% 2% 68% 72% 12% -70% -90%

Others 28% 192% 69% 7% 4% 6% 8% 7% 67% 4% 132% 252% 134% 26% 31% -22%

14% 14% 11% 5.4% 7.3% 7.1% 6.8% 6.9% 13% 14% 14% 14% 10% 12% 4% 7%

Gross Profit

Liquid milk 7% 35% 23% 19% 12% 10% 10% 9% 25% -9% 25% 46% 14% 32% 25% 13%

Forzen dairy 0% 8% -1% 3% 2% 2% 2% 3% -7% 19% 20% -17% 1% -7% 0% 11%

Milk powder and products 36% 14% 32% -12% -1% 1% 2% 3% 7% 92% 13% 14% 24% 39% -16% -8%

Mixed feed -40% 85% 74% -80% 0% 0% 0% 0% -14% -56% 7% 176% 263% -12% -77% -85%

Others 3% 324% 1% 28% 4% 7% 13% 10% 31% -21% 187% 518% 44% -27% 10% 51%

10% 32% 22% 12% 9% 8% 8% 8% 17% 3% 24% 40% 16% 28% 14% 10%

Margins FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E ppt ppt 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E

Gross Profit

Liquid milk 26.1% 30.8% 34.1% 36.9% 38.0% 38.6% 39.4% 39.8% 3.9% 5.7% 28.5% 23.8% 31.0% 30.6% 32.7% 35.4% 37.8% 36.1%

Forzen dairy 32.8% 35.0% 36.3% 36.5% 36.5% 36.5% 36.5% 36.5% 0.2% 0.2% 33.3% 31.7% 36.9% 30.4% 38.0% 31.7% 38.0% 32.8%

Milk powder and products 43.8% 45.6% 56.0% 54.0% 53.0% 52.0% 51.0% 50.0% -3.0% -6.0% 44.2% 43.3% 45.9% 45.4% 52.0% 60.2% 50.0% 57.8%

Mixed feed 11.3% 15.6% 20.1% 20.1% 20.1% 20.1% 20.1% 20.1% 0.0% 0.0% 12.0% 10.6% 12.5% 17.5% 26.5% 13.7% 20.0% 20.2%

Others 43.4% 63.0% 37.7% 44.9% 44.6% 45.1% 46.8% 48.0% 6.9% 10.3% 51.2% 35.8% 63.3% 62.9% 38.9% 36.3% 32.6% 69.9%

28.7% 33.1% 36.4% 38.6% 39.3% 39.7% 40.3% 40.6% 2.9% 4.2% 30.9% 26.4% 33.6% 32.7% 35.4% 37.4% 38.7% 38.6%

Consolidated P/L (Rmb mn) FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E15-'17E 2yr

CAGR15-'20E 5yr

CAGR1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E

Revenue 47,779 54,436 60,360 63,612 68,279 73,121 78,059 83,448 6.4% 6.7% 24,021 23,758 27,471 26,966 30,151 30,209 31,419 32,193

COGS -34,083 -36,400 -38,376 -39,043 -41,434 -44,087 -46,604 -49,581 -16,608 -17,475 -18,248 -18,152 -19,473 -18,902 -19,149 -19,893

GP 13,696 18,036 21,984 24,569 26,845 29,034 31,454 33,867 10.5% 9.0% 7,413 6,283 9,223 8,814 10,678 11,306 12,269 12,300

SG&A (excl. other rev/exp) (10,938) (13,094) (16,581) (18,465) (19,877) (21,205) (22,740) (24,320) -5,955 -4,983 -6,706 -6,388 -7,364 -9,218 -8,819 -9,647

Selling Exp. (8,546) (10,075) (13,258) (14,963) (16,118) (17,253) (18,521) (19,893) -4,806 -3,741 -5,222 -4,853 -6,015 -7,243 -7,370 -7,593

Admin Exp. (2,392) (3,020) (3,323) (3,502) (3,759) (3,953) (4,220) (4,427) -1,149 -1,242 -1,484 -1,535 -1,349 -1,974 -1,448 -2,054

OP 2,758 4,942 5,403 6,104 6,967 7,829 8,714 9,547 13.6% 12.1% 1,459 1,300 2,516 2,426 3,314 2,088 3,451 2,653

Other income/expenses (264) (505) (398) (368) (398) (426) (450) (477) -163 -101 -141 -221 -155 (242.97) -150 -218

EBIT (reported) 2,495 4,437 5,005 5,736 6,569 7,403 8,265 9,070 14.6% 12.6% 1,296 1,199 2,375 2,205 3,160 1,845 3,301 2,436

D&A (1,143) (1,479) (1,781) (1,998) (2,281) (2,538) (2,786) (3,050) -544 -599 -1,100 300 -924 -857 - -1,998

EBITDA 3,637 5,916 6,786 7,735 8,850 9,941 11,051 12,119 14.2% 12.3% 1,840 1,798 3,475 1,905 4,084 2,702 3,301 4,434

Net Finance Exp. 33 -155 -297 -118 -86 -81 -67 -38 7 26 52 -207 -214 (83.48) -47 -71

Other Non-Op Income 533 504 816 758 764 792 821 853 192 340 258 103 242 573 400 358

Profit Before Tax 3,060 4,786 5,524 6,376 7,247 8,114 9,019 9,885 14.5% 12.3% 1,495 1,565 2,684 2,101 3,188 2,335 3,654 2,722

Tax 141 -619 -869 -955 -1086 -1216 -1352 -1482 251 -110 -378 -241 -514 -355 -551 -405

Minority Interest -14 -22 -23 -26 -30 -34 -37 -41 -8 -6 -13 -9 -12 -11 -13 -13

NPAT Attributable to S/holders 3,187 4,144 4,632 5,394 6,131 6,864 7,629 8,362 15.0% 12.5% 1,738 1,449 2,293 1,851 2,662 1,970 3,090 2,304

One-off's after tax -552 171 125 23 - - - - - - 34 -69 -94 -16 -11 34

Recurring NPAT 2,635 4,315 4,756 5,416 6,131 6,864 7,629 8,362 13.5% 11.9% 1,738 1,449 2,259 1,920 2,756 2,000 3,101 2,315

WA Shares - Basic 3,642 6,129 6,065 6,065 6,065 6,065 6,065 6,065 3,642 6,129 6,129 6,129 6,065 6,129 6,065 6,065

WA Shares - Diluted 3,642 6,129 6,065 6,065 6,065 6,065 6,065 6,065 3,642 6,129 6,129 6,129 6,129 6,129 6,065 6,065

EPS - Basic (Rmb/Sh) 0.88 0.68 0.76 0.89 1.01 1.13 1.26 1.38 0.48 0.24 0.37 0.30 0.44 0.32 0.51 0.38

EPS - Diluted (Rmb/Sh) 0.88 0.68 0.76 0.89 1.01 1.13 1.26 1.38 15.1% 12.5% 0.48 0.24 0.37 0.30 0.43 0.33 0.51 0.38

Growth

Sales 14% 14% 11% 5% 7.3% 7.1% 6.8% 6.9% 13% 14% 14% 14% 10% 12% 4% 7%

GP 10% 32% 22% 12% 9% 8% 8% 8% 17% 3% 24% 40% 16% 28% 15% 9%

SG&A 3% 20% 27% 11% 8% 7% 7% 7% 8% -2% 13% 28% 10% 44% 20% 5%

Operating profit (GP less SG&A) 45% 79% 9% 13% 14% 12% 11% 10% 73% 23% 73% 87% 32% -14% 4% 27%

EBIT 52% 78% 13% 15% 15% 13% 12% 10% 89% 26% 83% 84% 33% -16% 4% 32%

Recurring NPAT 54% 64% 10% 14% 13% 12% 11% 10% 128% 52% 30% 33% 22% 4% 13% 16%

Margins

GP margin 28.7% 33.1% 36.4% 38.6% 39.3% 39.7% 40.3% 40.6% 2.9% 4.2% 30.9% 26.4% 33.6% 32.7% 35.4% 37.4% 39.1% 38.2%

Operating profit (GP less SG&A) 5.8% 9.1% 9.0% 9.6% 10.2% 10.7% 11.2% 11.4% 1.3% 2.5% 6.1% 5.5% 9.2% 9.0% 11.0% 6.9% 11.0% 8.2%

EBIT margin 5.2% 8.2% 8.3% 9.0% 9.6% 10.1% 10.6% 10.9% 1.3% 2.6% 5.4% 5.0% 8.6% 8.2% 10.5% 6.1% 10.5% 7.6%

Recurring NPAT margin 5.5% 7.9% 7.9% 8.5% 9.0% 9.4% 9.8% 10.0% 1.1% 2.1% 7.2% 6.1% 8.2% 7.1% 9.1% 6.6% 9.9% 7.2%

SG&A/Sales -22.9% -24.1% -27.5% -29.0% -29.1% -29.0% -29.1% -29.1% -1.6% -1.7% -24.8% -21.0% -24.4% -23.7% -24.4% -30.5% -28.1% -30.0%

Effective Tax Rate 5% -13% -16% -15% -15% -15% -15% -15% ` 17% -7% -14% -11% -16% -15% -15% -15%



Exhibit 77: Yili Summary Financials


Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E

Total revenue 60,359.9 63,611.8 68,278.7 73,121.1 Cash & equivalents 13,083.7 13,447.2 14,557.3 17,188.0

Cost of goods sold (38,626.6) (39,307.1) (41,717.9) (44,391.0) Accounts receivable 841.3 1,061.0 1,325.9 1,419.9

SG&A (16,581.5) (18,465.2) (19,877.4) (21,205.4) Inventory 4,663.1 4,960.7 5,493.5 5,845.5

R&D 0.0 0.0 0.0 0.0 Other current assets 1,198.9 1,198.9 1,198.9 1,198.9

Other operating profit/(expense) (146.6) (103.2) (114.0) (122.2) Total current assets 19,787.1 20,667.8 22,575.6 25,652.3

EBITDA 6,786.0 7,734.7 8,850.4 9,940.7 Net PP&E 15,340.6 16,876.5 18,063.6 18,660.5

Depreciation & amortization (1,780.8) (1,998.4) (2,281.0) (2,538.0) Net intangibles 967.1 976.2 995.9 1,017.8

EBIT 5,005.1 5,736.3 6,569.4 7,402.6 Total investments 1,107.3 1,275.6 1,460.1 1,662.6

Interest income 32.0 65.4 67.2 72.8 Other long-term assets 2,428.9 2,484.2 2,527.4 2,567.1

Interest expense (329.1) (183.4) (153.4) (153.4) Total assets 39,631.0 42,280.3 45,622.7 49,560.3

Income/(loss) from uncons. subs. 5.8 5.8 5.8 5.8

Others 809.8 751.7 758.0 785.9 Accounts payable 9,852.7 9,810.9 10,184.0 10,836.5

Pretax profits 5,523.5 6,375.8 7,246.9 8,113.6 Short-term debt 6,190.0 6,190.0 6,190.0 6,190.0

Income tax (869.1) (955.5) (1,086.2) (1,216.2) Other current liabilities 2,159.3 2,621.7 3,042.6 3,474.6

Minorities (22.6) (26.4) (30.0) (33.5) Total current liabilities 18,202.0 18,622.5 19,416.6 20,501.1

Long-term debt 0.3 0.3 0.3 0.3

Net income pre-preferred dividends 4,631.8 5,393.9 6,130.8 6,863.9 Other long-term liabilities 1,282.7 1,282.7 1,282.7 1,282.7

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,283.0 1,283.0 1,283.0 1,283.0

Net income (pre-exceptionals) 4,631.8 5,393.9 6,130.8 6,863.9 Total liabilities 19,485.1 19,905.6 20,699.6 21,784.1

Post-tax exceptionals 124.5 22.5 0.0 0.0

Net income 4,756.3 5,416.4 6,130.8 6,863.9 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 19,984.4 22,186.8 24,705.2 27,524.8

EPS (basic, pre-except) (Rmb) 0.76 0.89 1.01 1.13 Minority interest 161.5 187.9 217.8 251.4

EPS (basic, post-except) (Rmb) 0.78 0.89 1.01 1.13

EPS (diluted, post-except) (Rmb) 0.78 0.89 1.01 1.13 Total liabilities & equity 39,631.0 42,280.3 45,622.7 49,560.3

DPS (Rmb) 0.45 0.53 0.60 0.67

Dividend payout ratio (%) 57.4 58.9 58.9 58.9 BVPS (Rmb) 3.30 3.66 4.07 4.54

Free cash flow yield (%) 5.9 2.9 4.0 5.8

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E

Sales growth 10.9 5.4 7.3 7.1 ROE (%) 24.6 25.7 26.1 26.3

EBITDA growth 14.7 14.0 14.4 12.3 ROA (%) 12.0 13.2 13.9 14.4

EBIT growth 12.8 14.6 14.5 12.7 CROCI (%) 26.2 27.1 27.3 27.5

Net income growth 11.8 16.5 13.7 12.0 Inventory days 45.7 44.7 45.7 46.6

EPS growth 11.4 13.9 13.2 12.0 Receivables days 4.9 5.5 6.4 6.9

Gross margin 36.0 38.2 38.9 39.3 Payable days 86.3 91.3 87.5 86.4

EBITDA margin 11.2 12.2 13.0 13.6 Net debt/equity (%) (34.2) (32.4) (33.6) (39.6)

EBIT margin 8.3 9.0 9.6 10.1 Interest cover - EBIT (X) 16.8 48.6 76.2 91.8

Valuation 12/15 12/16E 12/17E 12/18E

Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 4,631.8 5,393.9 6,130.8 6,863.9 P/E (analyst) (X) 21.0 20.4 18.0 16.1

D&A add-back 1,780.8 1,998.4 2,281.0 2,538.0 P/B (X) 5.0 5.0 4.5 4.0

Minorities interests add-back 22.6 26.4 30.0 33.5 EV/EBITDA (X) 13.7 13.4 11.6 10.0

Net (inc)/dec working capital 2,621.5 (558.9) (424.6) 206.5 Dividend yield (%) 2.7 2.9 3.3 3.7

Other operating cash flow 479.8 (5.8) (5.8) (5.8)

Cash flow from operations 9,536.5 6,854.0 8,011.4 9,636.2

Capital expenditures (3,652.1) (3,607.8) (3,531.0) (3,196.5)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 26.4 0.0 0.0 0.0

Others 138.8 (162.5) (178.8) (196.6)

Cash flow from investments (3,486.9) (3,770.3) (3,709.8) (3,393.1)

Dividends paid (common & pref) (2,659.0) (2,729.2) (3,191.5) (3,612.4)

Inc/(dec) in debt (2,585.7) 0.0 0.0 0.0

Common stock issuance (repurchase) 0.0 0.0 0.0 0.0

Other financing cash flows (1,034.4) 0.0 0.0 0.0

Cash flow from financing (6,279.0) (2,729.2) (3,191.5) (3,612.4)

Total cash flow (243.9) 363.5 1,110.1 2,630.7 Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Want Want (Sell): Weaker brand could lead to further sales drop

Source of opportunity Want Want is one of the largest flavored milk and snack companies in China. We think the company’s products will lose ground in the consumer up-trade trend: (1) expect flavored milk category to have negative growth over the next 3 years as consumers shift to less-sweet and functional products. (2) company’s conservative stance in investing in the brand (less than 4% A&P

ratio) and distribution channel (still 95% is through traditional channel) put Want Want in a negative position relative to the competition. Net net, we expect 6% EPS decline and 540bps fall in cash returns for 2015-17E. We are 15%/22% below consensus for 2016-17E. Initiate with a Sell rating and

12-month target price of HK$4.20, implying 15% downside.

Catalyst 1) Want Want to record sales falls over 2015-17E (-5% decline CAGR):

we expect Want Want to see challenged sales and further market share losses in the dairy segment. For all its dairy products, Want Want uses imported milk powder to reconstitute milk. This has helped it maintain its high 25% OPM over past years, however with consumers now tending to focus more on health and function, we have observed that Want Want’s “Hot Kid Milk” is less popular with teenagers and Millennial mums. In addition, Want

Want continues to introduce new products each year, although due to lack of distribution in Modern trade channels, we think it will be difficult for the new products to gain traction with customers.

2) 1H16 net profit to fall 8% yoy in USD term: We expect 10% drop in

sales in 1H due to weaker dairy sales (1H overall demand was weaker and flavored milk sales to decline) and RMB depreciation. The sales fall will be

partially offset by stronger margin as the company benefit from lower milk powder prices (about 6-9month lag in milk inventory).

Want Want has introduced some new products YTD (yogurt drink in April and UHT yogurt in Aug) and also plans to launch premium UHT milk by end 2016. This shows company’s plan to diversify its product portfolios. However we see limited contribution to company sales due to 1) the new products are still

using reconstituted milk, 2) company is cautious on brand investment and distribution.

Valuation Our 12-month target price is based on 2017E EV/GCI vs. CROCI/WACC. The target price implies 15x 2017E PE. Our target price suggests 15% downside to the current price.

Key risks Stronger-than-expected sales growth, higher margin improvement.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Want Want China Holdings (0151.HK)


Key data Current

Price (HK$) 4.97

12 month price target (HK$) 4.20

Market cap (HK$ mn / US$ mn) 65,584.2 / 8,455.8


12/15 12/16E 12/17E 12/18E

EPS ($) 0.04 0.04 0.04 0.04

EPS growth (%) (12.0) (4.6) (6.9) (2.7)

EPS (diluted) ($) 0.04 0.04 0.04 0.04

EPS (basic pre-ex) ($) 0.04 0.04 0.04 0.04

P/E (X) 24.0 16.2 17.4 17.9

P/B (X) 6.8 4.1 3.7 3.4

EV/EBITDA (X) 13.0 9.7 10.1 10.3

Dividend yield (%) 1.9 3.1 2.9 2.8

ROE (%) 27.7 26.1 22.2 19.7

CROCI (%) 22.1 19.6 16.7 14.6

7,500

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0



Want Want China Holdings (L) Hang Seng China Ent. Index (R)


Absolute (15.6) (7.6) (34.3)

Rel. to Hang Seng China Ent. Index (23.3) (20.0) (20.6)



Asia Pacific Sell list




Financials

Income Statement Growth: We expect Want Want to record 7%/3%/2% sales fall (in US$ term) yoy over 2015-18E,

driven by the continued challenge in the dairy segments. We expect the flavored milk market to shrink and for WW to lose market share due to its thin promotion and advertising. The decline will more than offset the slight increase in sales from the rice cracker and snack food segments. 2016E sales decline also include a 4% depreciation in the RMB (as forecast by our macro team).

Margin: We forecast WW to see 180bps OPM decline over 2016-18E, driven by the tapering off

of raw material cost benefit and negative operating leverage. We expect the global milk powder price to gradually recover over the next two years and this will increase WW’s cost base starting 2017E. WW tends to be cautious on spending A&P expenses; however, we expect a higher

SG&A /Sales ratio given the declining sales over the the next two years.

Cash Flow Statement Capex: we expect WW to reduce its annual Capex in 2016-18E as it slows plant expansion. We

expect US$120-150mn capex vs. about US$230-350mn in 2012-2015. However, with lower operating cash flow, we estimate WW’s free cash flow to be lowered to US$450mn/year vs. 2015’s US$580mn.

Dividend and share buyback: the company has bought back a total of 160mn shares in total

YTD (1.3% of its share capital) and we expect further buyback over 2016-17 as the company has sufficient cash flow and no near term M&A plans. With this, we expect a more prudent dividend payout ratio of 50% over 2016-17E.

Balance Sheet Gearing: WW has been cash rich given its strong free cash flow generation and cautious stance

on capex/M&A. We expect company to have net cash of US$259mn/441mn over 2016-17E, implying 13%/20% net cash /equity ratio.

ROE and CROCI: compared to peers, WW has relatively higher return due to its high operating

margin. However, as we expect WW to post declining sales and margins over next 3 years, we

forecast its ROE to erode from 28% to 20% and CROCI to drop from 22% to 14.6% over 2015-18E.

Exhibit 78: We expect Want Want revenue to shrink in 2017/18E Want Want Revenue Forecast (in Rmb terms)

Exhibit 79: Hot Kid Milk sales peaked in 2013 and we expect years of decline ahead Want Want Hot Kid Milk sales forecast

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

21,937

21,316

20,771

20,408

20,239 20,230

-9%

-7%

-3%

-2%

-1%

0%

-8%

-3%-3%

-2%

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

19,000

19,500

20,000

20,500

21,000

21,500

22,000

22,500

2015 2016E 2017E 2018E 2019E 2020E

Want Want Revenue (Rmb mn)Revenues YoY Growth % (USD terms) YoY growth % (Rmb terms)

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Hot Kid Milk sales (US$mn) YoY growth (RHS)



Exhibit 82: Polyethylene price has high correlation with crude oil Polyethylene price

Exhibit 83: Sugar price are on an up-trend YTD China sugar price

Source: Bloomberg.

Source: Bloomberg.

Exhibit 84: Packaged material and milk powder account for more than 50% COGS WW COGS breakdown (2015)

Exhibit 85: Expect stable per ton GP over 2016-18E Per ton COGS and GP split



30

50

70

90

110

130

150

170

Ju

n-0

8

Dec-0

8

Ju

n-0

9

Dec-0

9

Ju

n-1

0

Dec-1

0

Ju

n-1

1

Dec-1

1

Ju

n-1

2

Dec-1

2

Ju

n-1

3

Dec-1

3

Ju

n-1

4

Dec-1

4

Ju

n-1

5

Dec-1

5

Ju

n-1

6

Crude Oil LDPE LLDPEIndex to 100

as Jan 2008

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000Sugar price (RMB/ton) yoy growth (RHS)

Salary

expense,

11.7% Depreciation ,

4.4%

Packaging,

30%Milk powder,

26%

Sugar, 9%

Other, 19%

858 877 875 882

838 759 770 776

0

500

1,000

1,500

2,000

2,500

2015 2016E 2017E 2018E

Others

D&A

Labor

Raw material

GP

US$/ton

Exhibit 80: We expect Want Want to see margins contractWant Want Margin Forecast

Exhibit 81: We expect milk powder price to rebound over

2016-18E and put pressure on WW’s GPM Milk powder price



43.9%45.6% 44.5% 43.8% 42.9% 42.0%

18.8% 19.5%18.1% 17.5% 16.5% 15.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2015 2016E 2017E 2018E 2019E 2020E

GP Margin OP

2016E: 2,300

2017E: US$2,700

2018E :US$3,000

-

1,000

2,000

3,000

4,000

5,000

6,000

Au

g-0

8

No

v-0

8

Feb

-09

May

-09

Au

g-0

9

No

v-0

9

Feb

-10

May

-10

Au

g-1

0

No

v-1

0

Feb

-11

May

-11

Au

g-1

1

No

v-1

1

Feb

-12

May

-12

Au

g-1

2

No

v-1

2

Feb

-13

May

-13

Au

g-1

3

No

v-1

3

Feb

-14

May

-14

Au

g-1

4

No

v-1

4

Feb

-15

May

-15

Au

g-1

5

No

v-1

5

Feb

-16

May

-16

Au

g-1

6

No

v-1

6

Feb

-17

May

-17

Au

g-1

7

No

v-1

7

Feb

-18

May

-18

Au

g-1

8

No

v-1

8

NZ Global Dairy Trade Wholemilk Powder Auction Price (US$/ton)US$/ton



Exhibit 88: Want Want is now trading at 17X fwd PE, lower than avg. 12m fwd PE

Exhibit 89: WW is still trading at 17X 2018E PE due to its declining EPS PE calculation



Key risks Stronger than expected dairy growth: if flavored milk growth were stronger or WW’s new

products contributed to higher profit, there would be upside risk to our sales forecasts.

Higher margin: we expect no benefit from raw material cost after 2016; however if milk or

sugar prices fell further, WW would likely see higher margins than we expected.

Potential M&A: WW has more than US$400mn net cash and potential M&A in the industry

could boost its sales and earnings.

What would make us more positive on the stock Company more actively invested in branding and distribution: If WW started to

invest more in A&P and cater to younger consumers, and if it were more focused on

expanding into the modern trade channel, then although its short term profit margin might narrow, it would be positive for sales in the mid-to-longer term.

27.2

17.9

13.2

-20%

-10%

0%

10%

20%

30%

40%

10

15

20

25

30

35

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Want Want fwd 12m P/E EPS Growth

+ 1 STDV

+ 2 STDV

- 1 STDV

- 2 STDV

Average = 22.5x

US$mn 2016E 2017E 2018ECurrent Equity value 7,840 NPAT 502.8 465.3 453.6 Current PE (X) 15.6 16.8 17.3 Net cash 259 441 652 Ex-cash PE (X) 15.1 15.9 15.8 Target price implied PE (X) 13.6 14.6 15.0

Exhibit 86: Want Want has 95% of sales in Traditional Trade Channels

Distribution Channel Breakdown comparison

Exhibit 87: Want Want spends the least on ANP due to conservative branding strategy Want Want ANP/Sales comparison



95%

45% 50% 55%45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

WW Mengniu Yili Tingyi UPC

Traditional channel Modern trade Online and others

3.8%

8.6%

10.2%10.9%

13.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

WW Mengniu Tingyi UPC Yili

ANP / Sales ratio



Exhibit 90: We expect Want Want’s dairy product segment to suffer a -11% 15-17E 2-yr Sales CAGR Want Want Summary Financials


Want Want (151.HK)USD mnDivisional P/L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E 2Yr CAGR

RevenuesRice crackers 320.1 589.8 304.3 507.6 335.4 499.5 324.2 503.7 909.9 811.9 834.9 827.9 849.0 860.3 872.2 884.7 1%Dairy Products and Beverages 942.2 1,056.7 986.8 1,006.1 935.7 785.3 793.3 703.2 1,998.9 1,993.0 1,721.0 1,496.5 1,371.9 1,286.0 1,230.0 1,199.1 -11%Snack foods 488.2 411.6 557.7 405.1 539.8 321.5 520.4 324.0 899.8 962.8 861.3 844.4 864.1 881.6 896.7 909.6 0%Others 4.0 5.2 3.8 3.8 6.4 4.1 6.3 6.3 9.2 7.6 10.5 12.6 15.1 18.1 21.7 26.1 20%Total 1,754.5 2,063.3 1,852.6 1,922.7 1,817.3 1,610.4 1,644.3 1,537.2 3,817.7 3,775.3 3,427.7 3,181.4 3,100.2 3,046.0 3,020.7 3,019.4 -5%

Gross ProfitRice crackers 113.9 257.3 117.5 206.5 135.8 218.2 141.6 216.0 371.2 324.0 354.0 357.7 364.2 367.4 370.7 376.0 1%Dairy Products and Beverages 400.4 425.1 379.9 385.4 391.1 364.3 372.0 329.9 825.5 765.3 755.5 701.9 617.7 559.5 510.4 470.9 -10%Snack foods 208.5 178.4 252.1 180.2 248.3 150.5 244.6 146.4 386.9 432.3 398.8 391.0 396.6 402.9 409.8 415.7 0%Others 0.9 1.5 -2.3 -0.1 -3.7 -0.3 -2.0 4.0 2.4 -2.3 -4.0 2.0 2.0 2.0 2.0 2.0Total 723.7 862.4 747.2 772.0 771.6 732.7 756.2 696.3 1,586.1 1,519.2 1,504.3 1,452.5 1,380.6 1,331.7 1,292.9 1,264.6 -4%

Operating IncomeRice crackers 37.8 146.7 50.2 102.5 50.1 123.7 65.4 106.0 184.6 152.6 173.9 171.4 173.2 173.8 174.4 176.9 0%Dairy Products and Beverages 272.8 286.9 242.6 245.2 235.8 229.3 221.3 196.3 559.7 487.8 465.2 417.6 350.2 315.1 276.7 243.1 -13%Snack foods 116.9 87.5 137.9 77.4 132.1 52.3 114.5 62.1 204.4 215.3 184.4 176.6 178.0 188.6 199.8 209.9 -2%Others 0.6 -1.4 -3.3 -1.5 -6.7 -1.3 -4.0 -4.0 -0.8 -4.8 -8.0 -8.0 -8.0 -8.0 -8.0 -8.0 0%Segment Total 428.1 519.8 427.4 423.5 411.4 404.1 397.2 360.3 947.8 850.9 815.5 757.5 693.4 669.5 643.0 621.9 -8%Unallocated -30.8 -33.9 -32.6 -41.5 -40.4 -46.2 -40.8 -40.8 -64.7 -74.1 -86.6 -81.5 -81.5 -89.7 -98.6 -108.5 -3%Group EBIT 397.3 485.9 394.7 382.0 370.9 357.9 356.4 319.6 883.2 776.8 728.8 676.0 611.9 579.8 544.3 513.4 -8%

YoY Growth % (USD terms)

RevenuesRice crackers 15% 10% -5% -14% 10% -2% -3% 1% 12% -11% 3% -1% 3% 1% 1% 1%Dairy Products and Beverages 18% 16% 5% -5% -5% -22% -15% -10% 17% 0% -14% -13% -8% -6% -4% -3%Snack foods 8% 8% 14% -2% -3% -21% -4% 1% 8% 7% -11% -2% 2% 2% 2% 1%Others 6% 18% -6% -26% 70% 6% -2% 54% 13% -17% 38% 20% 20% 20% 20% 20%Total 15% 13% 6% -7% -2% -16% -10% -5% 14% -1% -9% -7% -3% -2% -1% 0%

Operating IncomeRice crackers 10% 31% 33% -30% 0% 21% 30% -14% 26% -17% 14% -1% 1% 0% 0% 1%Dairy Products and Beverages 45% 17% -11% -15% -3% -6% -6% -14% 29% -13% -5% -10% -16% -10% -12% -12%Snack foods 15% 6% 18% -12% -4% -32% -13% 19% 11% 5% -14% -4% 1% 6% 6% 5%Others -236% 1084% -667% 6% 102% -12% -40% 208% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Total 32% 18% 0% -19% -4% -5% -3% -11% 24% -10% -4% -7% -8% -3% -4% -3%

Margins

GP MarginRice crackers 35.6% 43.6% 38.6% 40.7% 40.5% 43.7% 43.7% 42.9% 40.8% 39.9% 42.4% 43.2% 42.9% 42.7% 42.5% 42.5%Dairy Products and Beverages 42.5% 40.2% 38.5% 38.3% 41.8% 46.4% 46.9% 46.9% 41.3% 38.4% 43.9% 46.9% 45.0% 43.5% 41.5% 39.3%Snack foods 42.7% 43.4% 45.2% 44.5% 46.0% 46.8% 47.0% 45.2% 43.0% 44.9% 46.3% 46.3% 45.9% 45.7% 45.7% 45.7%Others 21.4% 29.5% -60.0% -2.1% -57.3% -8.1% -32.0% 63.8% 26.0% -30.7% -38.2% 15.9% 13.2% 11.0% 9.2% 7.7%Total 41.2% 41.8% 40.3% 40.2% 42.5% 45.5% 46.0% 45.3% 41.5% 40.2% 43.9% 45.7% 44.5% 43.7% 42.8% 41.9%

EBIT MarginRice crackers 11.8% 24.9% 16.5% 20.2% 14.9% 24.8% 20.2% 21.0% 20.3% 18.8% 20.8% 20.7% 20.4% 20.2% 20.0% 20.0%Dairy Products and Beverages 28.9% 27.2% 24.6% 24.4% 25.2% 29.2% 27.9% 27.9% 28.0% 24.5% 27.0% 27.9% 25.5% 24.5% 22.5% 20.3%Snack foods 23.9% 21.3% 24.7% 19.1% 24.5% 16.3% 22.0% 19.2% 22.7% 22.4% 21.4% 20.9% 20.6% 21.4% 22.3% 23.1%Others 14.7% -26.6% -88.2% -38.4% -104.6% -31.9% -63.6% -63.6% -8.7% -63.0% -76.3% -63.6% -53.0% -44.2% -36.8% -30.7%Total 24.4% 25.2% 23.1% 22.0% 22.6% 25.1% 24.2% 23.4% 24.8% 22.5% 23.8% 23.8% 22.4% 22.0% 21.3% 20.6%

Consolidated P&L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E 2Yr CAGRSales 1,754.5 2,063.3 1,852.6 1,922.7 1,817.3 1,610.4 1,644.3 1,537.2 3,817.7 3,775.3 3,427.7 3,181.4 3,100.2 3,046.0 3,020.7 3,019.4 -4.9%COGS -1,030.8 -1,200.9 -1,105.4 -1,150.7 -1,045.7 -877.8 -888.0 -840.9 -2,231.7 -2,256.1 -1,923.5 -1,728.9 -1,719.6 -1,714.3 -1,727.8 -1,754.8 -5.4%Gross Profit 723.7 862.4 747.2 772.0 771.6 732.7 756.2 696.3 1,586.1 1,519.2 1,504.3 1,452.5 1,380.6 1,331.7 1,292.9 1,264.6 -4.2%SG&A -367.9 -413.1 -393.2 -422.6 -451.6 -408.4 -432.2 -400.0 -781.0 -815.8 -860.1 -832.2 -820.2 -799.3 -797.6 -801.9 -2.3%Operating Profit 355.7 449.3 354.0 349.5 320.0 324.2 324.0 296.3 805.0 703.5 644.2 620.3 560.4 532.4 495.3 462.6 -6.7%Other income/expenses 41.5 36.6 40.7 32.6 51.0 33.7 32.4 23.3 78.1 73.3 84.6 55.7 51.4 47.4 49.0 50.8 -22.0%Reported EBIT 397.3 485.9 394.7 382.0 370.9 357.9 356.4 319.6 883.2 776.8 728.8 676.0 611.9 579.8 544.3 513.4 -8.4%D&A -48.3 -57.3 -60.1 -62.1 -68.9 -185.5 -72.0 -72.0 -105.6 -122.2 -254.3 -144.0 -146.3 -147.3 -153.6 -160.2 -24.2%EBITDA 445.6 543.2 454.8 444.1 439.8 543.4 428.5 391.6 988.8 899.0 983.2 820.0 758.1 727.1 697.9 673.6 -12.2%Net finance income / (costs) 21.9 27.0 31.5 21.8 20.6 20.6 19.0 19.0 48.9 53.3 41.2 37.9 42.9 52.9 62.9 67.9 2.1%Other non-operating income (expense) 0.6 0.9 0.0 -0.5 -0.8 -0.5 0.0 0.0 1.6 -0.5 -1.3 0.0 0.0 0.0 0.0 0.0 -100.0%Pretax income 419.9 513.8 426.2 403.4 390.7 378.0 375.4 338.5 933.7 829.5 768.8 714.0 654.8 632.8 607.2 581.3 -7.7%Provisions for taxes -112.4 -134.7 -108.2 -101.8 -105.6 -121.6 -112.6 -98.4 -247.1 -210.0 -227.2 -211.0 -190.2 -180.7 -170.4 -160.2 -8.5%Minority interest (I/S item) 0.2 -0.9 0.5 0.5 0.4 0.1 0.2 0.2 -0.7 1.0 0.5 0.5 0.4 0.4 0.4 0.4 -7.4%Reported NPAT 307.6 378.2 318.5 302.1 285.5 256.5 263.0 240.4 685.8 620.5 542.1 503.4 465.0 452.5 437.3 421.5 -7.4%

EPS 0.023 0.029 0.024 0.023 0.022 0.020 0.021 0.019 0.052 0.047 0.041 0.039 0.037 0.036 0.035 0.033

YoY Growth %Sales 14.9% 12.7% 5.6% -6.8% -1.9% -16.2% -9.5% -4.6% 13.7% -1.1% -9.2% -7.2% -2.6% -1.7% -0.8% 0.0%GP 27.8% 13.2% 3.3% -10.5% 3.3% -5.1% -2.0% -5.0% 19.4% -4.2% -1.0% -3.4% -5.0% -3.5% -2.9% -2.2%SG&A 25.9% 11.1% 6.9% 2.3% 14.9% -3.3% -4.3% -2.1% 17.6% 4.4% 5.4% -3.2% -1.4% -2.5% -0.2% 0.5%OP 29.8% 15.2% -0.5% -22.2% -9.6% -7.2% 1.3% -8.6% 21.2% -12.6% -8.4% -3.7% -9.7% -5.0% -7.0% -6.6%EBIT 33.4% 17.7% -0.6% -21.4% -6.0% -6.3% -3.9% -10.7% 24.3% -12.0% -6.2% -7.2% -9.5% -5.2% -6.1% -5.7%NPAT 33.2% 17.1% 3.5% -20.1% -10.3% -15.1% -7.9% -6.3% 23.8% -9.5% -12.6% -7.1% -7.6% -2.7% -3.4% -3.6%

MarginsGP 41.2% 41.8% 40.3% 40.2% 42.5% 45.5% 46.0% 45.3% 41.5% 40.2% 43.9% 45.7% 44.5% 43.7% 42.8% 41.9%EBIT 22.6% 23.6% 21.3% 19.9% 20.4% 22.2% 21.7% 20.8% 23.1% 20.6% 21.3% 21.2% 19.7% 19.0% 18.0% 17.0%OP 20.3% 21.8% 19.1% 18.2% 17.6% 20.1% 19.7% 19.3% 21.1% 18.6% 18.8% 19.5% 18.1% 17.5% 16.4% 15.3%NPAT 17.5% 18.3% 17.2% 15.7% 15.7% 15.9% 16.0% 15.6% 18.0% 16.4% 15.8% 15.8% 15.0% 14.9% 14.5% 14.0%

SG&A/Sales -21.0% -20.0% -21.2% -22.0% -24.9% -25.4% -26.3% -26.0% -20.5% -21.6% -25.1% -26.2% -26.5% -26.2% -26.4% -26.6%Effective tax rate (%) -27% -26% -25% -25% -27% -32% -30% -29% 26% 25% 30% 30% 29% 29% 28% 28%



Exhibit 91: Want Want Summary financials


Profit model ($ mn) 12/15 12/16E 12/17E 12/18E Balance sheet ($ mn) 12/15 12/16E 12/17E 12/18E


Cost of goods sold (1,923.5) (1,728.9) (1,719.6) (1,714.3) Accounts receivable 136.7 135.6 140.6 146.5

SG&A (860.1) (832.2) (820.2) (799.3) Inventory 441.8 411.3 423.2 426.6

R&D 0.0 0.0 0.0 0.0 Other current assets 111.9 111.9 111.9 111.9

Other operating profit/(expense) 84.6 55.7 51.4 47.4 Total current assets 2,133.7 2,176.8 2,378.1 2,600.8

EBITDA 983.2 820.0 758.1 727.1 Net PP&E 1,415.0 1,426.1 1,421.8 1,403.4

Depreciation & amortization (254.3) (144.0) (146.3) (147.3) Net intangibles 190.8 186.3 181.9 177.4

EBIT 728.8 676.0 611.9 579.8 Total investments 14.7 14.7 14.7 14.7

Interest income 62.0 60.0 65.0 75.0 Other long-term assets 51.1 53.4 55.7 58.2



Others (1.3) 0.0 0.0 0.0 Accounts payable 179.1 156.3 150.7 145.6

Pretax profits 768.8 714.0 654.8 632.8 Short-term debt 257.6 257.6 257.6 257.6

Income tax (227.2) (211.0) (190.2) (180.7) Other current liabilities 456.2 409.8 400.3 396.3

Minorities 0.5 0.5 0.4 0.4 Total current liabilities 892.9 823.6 808.6 799.5

Long-term debt 998.5 998.5 998.5 998.5

Net income pre-preferred dividends 542.1 503.4 465.0 452.5 Other long-term liabilities 41.7 41.7 41.7 41.7


Net income (pre-exceptionals) 542.1 503.4 465.0 452.5 Total liabilities 1,933.1 1,863.8 1,848.8 1,839.7


Net income 542.1 503.4 465.0 452.5 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) ($) 0.04 0.04 0.04 0.04 Minority interest 7.6 7.1 6.7 6.3

EPS (basic, post-except) ($) 0.04 0.04 0.04 0.04

EPS (diluted, post-except) ($) 0.04 0.04 0.04 0.04 Total liabilities & equity 3,805.3 3,857.3 4,052.1 4,254.5

DPS ($) 0.02 0.02 0.02 0.02

Dividend payout ratio (%) 45.0 50.0 50.0 50.0 BVPS ($) 0.15 0.16 0.17 0.19



Sales growth (9.2) (7.2) (2.6) (1.7) ROE (%) 27.7 26.1 22.2 19.7

EBITDA growth 9.4 (16.6) (7.5) (4.1) ROA (%) 13.4 13.1 11.8 10.9

EBIT growth (6.2) (7.2) (9.5) (5.2) CROCI (%) 22.1 19.6 16.7 14.6

Net income growth (12.6) (7.1) (7.6) (2.7) Inventory days 105.2 90.1 88.6 90.5

EPS growth (12.0) (4.6) (6.9) (2.7) Receivables days 14.3 15.6 16.3 17.2


EBITDA margin 28.7 25.8 24.5 23.9 Net debt/equity (%) (10.0) (13.1) (20.3) (27.3)

EBIT margin 21.3 21.2 19.7 19.0 Interest cover - EBIT (X) NM NM NM NM

Valuation 12/15 12/16E 12/17E 12/18E

Cash flow statement ($ mn) 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 542.1 503.4 465.0 452.5 P/E (analyst) (X) 24.0 16.0 17.2 17.7

D&A add-back 254.3 144.0 146.3 147.3 P/B (X) 6.8 4.0 3.6 3.3

Minorities interests add-back (0.5) (0.5) (0.4) (0.4) EV/EBITDA (X) 13.0 9.5 10.0 10.1

Net (inc)/dec working capital 109.3 (37.7) (32.0) (18.4) Dividend yield (%) 1.9 3.1 2.9 2.8

Other operating cash flow (100.8) (2.2) (2.4) (2.5)

Cash flow from operations 804.5 607.0 576.5 578.5

Capital expenditures (225.3) (150.7) (137.4) (124.5)

Acquisitions (0.1) 0.0 0.0 0.0


Others 2.1 0.0 0.0 0.0

Cash flow from investments (223.4) (150.7) (137.4) (124.5)

Dividends paid (common & pref) (239.1) (246.4) (254.7) (240.6)

Inc/(dec) in debt (152.1) 0.0 0.0 0.0

Common stock issuance (repurchase) (291.8) (135.3) 0.0 0.0

Other financing cash flows (104.6) 0.0 0.0 0.0

Cash flow from financing (787.7) (381.7) (254.7) (240.6)

Total cash flow (206.6) 74.7 184.4 213.4 Note: Last actual year may include reported and estimated data.




Mengniu (Neutral): Sales recovering, but margin drags earnings

Investment view We expect Mengniu to see sales recovery over next 2 years, although we expect earnings to grow more slowly due to a flat margin and lower associate profit:

Sales recovering to mid-single digit in 2016-17: post last year’s decline, we expect a recovering of Mengniu’s sales from higher UHT

sales and strong yogurt contribution.

Still-high inventory and higher share award will offset near-term GPM gain: Mengniu’s recent milk inventory is still comparable to last year’s level, so we think the company will need to continue offering high rebates to clear inventory in the near term. Also Mengniu is set to allocate a Rmb200mn share based award to its mgmt. team in 2016. We

think this will largely offset the benefit from lower raw milk cost.

Lower income from IMF and upstream business: We expect Mengniu’s IMF subsidiary Yashili and upstream associate Modern Dairy to face continued earnings pressure in 2016 due to competition and upstream pressure

Net net, we expect 3% 2015-17E EPS CAGR and a 60bps increase in cash

returns. We initiate coverage with a Neutral rating and a 12-month target price of HK$12.90.

Risks to the investment case Stronger/weaker than expected margin improvement, better/weaker than expected IMF business and associate profit.

Valuation Our 12-month target price is based on 2017E EV/GCI vs. CROCI/WACC framework. It implies 18x 2017E PE.


Neutral


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Mengniu Dairy (2319.HK)


Key data Current

Price (HK$) 13.28




12/15 12/16E 12/17E 12/18E

EPS (Rmb) 0.58 0.58 0.61 0.65

EPS growth (%) (47.9) 0.3 5.0 7.1

EPS (diluted) (Rmb) 0.61 0.57 0.61 0.65


P/E (X) 23.8 19.6 18.7 17.5

P/B (X) 2.4 1.9 1.7 1.6

EV/EBITDA (X) 15.4 12.1 11.7 11.0

Dividend yield (%) 1.0 1.2 1.2 1.3

ROE (%) 10.9 9.7 9.7 9.6

CROCI (%) 8.0 9.1 8.6 8.2

7,500

8,500

9,500

10,500

11,500

12,500

13,500

14,500

10

11

12

13

14

15

16

17



Mengniu Dairy (L) Hang Seng China Ent. Index (R)


Absolute 5.7 16.1 (20.5)

Rel. to Hang Seng China Ent. Index (3.9) 0.5 (4.0)




Financials

Income Statement Sales: we expect Mengniu 2016/17E sales to increase by 5.2%/5.8% yoy. This is driven by 2%

UHT sales CAGR and 18% yogurt CAGR.

1) Yogurt: we expect Mengniu to maintain the leading position in yogurt market with its

strong footprint in low temp yogurt and rapid growth of UHT yogurt over 2016-17E. We expect Just Yogurt to reach Rmb4bn sales in 2016.

2) UHT: expect Milk Deluxe to maintain mid to high single digit sales growth, although we

expect basic milk will continue to see subdued growth given the slower industry demand.

3) Milk Beverage: expect a smaller 3% sales drop in 2016 vs. 12.5% decline last year.

The sequential better performance is due to company’s increased investment in

SuanSuanRu etc. (sponsoring the Super Girl program this summer).

4) Milk powder: expect Yashili to see continued organic sales drop in 2016 due to the

high competition.

Margin: we see Mengniu’s OPM to slightly decline by 40bps over 2015-17E, due to higher A&P

expenses and larger restricted share expenses. This will more than offset the GPM expansion from lower raw milk prices.

Associate profit: we expect a Rmb230mn lower associate profit, mainly dragged down by

Modern Dairy’s weak performance.

Cash Flow Statement Free cash flow: expect gradual improvement of FCF from 1) lower capex of Rmb1.6-1.8bn over

the next two years, and 2) less working capital drag vs. 2015.

Dividend: expect stable payout ratio of 23% over next 3 yrs.

Balance Sheet Gearing: with slower capex and no major M&A expected over the next two years, we see

Mengniu’s net gearing will gradually reduce to 25% in 2018E vs. 29% in 2015.

ROE and CROCI: expect 80bps ROE drop over 2015-18E due to lower margin and lower

leverage ratio. CROCI is more flattish over three years.

Key risks to our rating, TP and earnings estimates 1. Stronger/Weaker than expected liquid milk sales: if the UHT milk or yogurt business saw

stronger or weaker growth as the company gained/lost market share, it would has significant impact on company’s topline.

2. Slower turnaround of IMF and upstream dairy business: if the IMF business or upstream farming had further weakness before recovery, it might drag on Mengniu’s near term earnings.



Exhibit 94: We see intensifying competition in the premium UHT market Premium UHT milk market share

Exhibit 95: IMF and Associate loss (upstream) is a near term drag for the company IMF and associate income



Exhibit 96: We expect Mengniu EPS to fall 1% in 1H16 Mengniu interim earnings growth yoy

Exhibit 97: Mengniu is now trading at 20X 12m fwd P/E Mengniu 12m fwd P/E

Source: Bloomberg


43%36%

32% 30% 28% 28%

20%

23%

22% 23% 23% 23%

12% 15%18% 20% 22% 22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016E 2017E 2018E

Other domestic

Modern Dairy

Imports

Yili JinDian

Mengniu Milk Deluxe

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2014 2015 2016E 2017E 2018E

Liquid Milk Associate profit (CMD) Ice cream Milk powder

24%

37% 36.4%

-21.9%

-0.7%

3.9%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1H14 2H14 1H15 2H15 1H16E 2H16E

Recurring NPAT yoy growth

36.0

12.2

19.5

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

6.0

11.0

16.0

21.0

26.0

31.0

36.0

Jul

-07

Jan

-08

Jul

-08

Jan

-09

Jul

-09

Jan

-10

Jul

-10

Jan

-11

Jul

-11

Jan

-12

Jul

-12

Jan

-13

Jul

-13

Jan

-14

Jul

-14

Jan

-15

Jul

-15

Jan

-16

Jul

-16

Mengniu Fwd 12m P/E EPS Growth

+ 1 STDV

- 1 STDV

Hist. avg 22x

Exhibit 92: We expect Mengniu sales to grow at 5-6% out to 2020 Mengniu Sales Forecast

Exhibit 93: We expect Mengniu margins to stay relatively flat Mengniu Margins Forecast



49,027

51,58654,589

57,827 61,356 64,854

-2%

5.2%

5.8% 5.9% 6.1%5.7%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2015 2016E 2017E 2018E 2019E 2020E

Mengniu Sales (Rmb mn)

31.4% 32.0% 31.8% 31.9% 32.5% 33.1%

5.2% 5.5% 5.2% 5.1% 5.4% 5.7%

0%

5%

10%

15%

20%

25%

30%

35%

2015 2016E 2017E 2018E 2019E 2020E

GP OPM



Exhibit 98: We expect Mengniu’s 15-17E 2yr Sales CAGR to be 6% Mengniu Summary Financials

Note: data includes share option/award expenses.


Mengniu (2319.HK)RMB mnDivisional P/L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E CAGRRevenue…UHT Milk 10,941 11,113 12,365 11,336 10,710 10,654 10,925 10,603 20,838 19,706 22,053 23,702 21,365 21,528 22,179 23,169 24,360 25,628 1.9%…Milk Bev 4,732 5,693 5,826 6,094 5,658 4,777 5,545 4,599 8,310 8,039 10,426 11,921 10,435 10,144 10,195 10,247 10,390 10,539 -1.2%…Yoghurt 2,590 2,834 3,573 3,841 5,573 5,955 6,687 7,300 4,554 4,592 5,424 7,414 11,527 13,987 16,026 17,829 19,228 20,427 17.9%Liquid Milk 18,263 19,640 21,765 21,271 21,941 21,386 23,156 22,502 33,701 32,336 37,903 43,036 43,327 45,659 48,399 51,245 53,978 56,593 5.7%Ice-Cream 1,954 1,069 1,988 728 1,644 497 1,445 482 3,259 3,171 3,023 2,716 2,141 1,927 1,848 1,809 1,809 1,808 -7.1%Milk Powder and Other Dairy 451 1,980 2,083 2,214 1,979 1,580 1,931 2,069 428 572 2,431 4,297 3,559 4,000 4,342 4,528 4,727 4,938 10.5%

Yashili 1,499 1,546 1,271 1,162 1,600 1,494 1,557 1,499 2,816 2,762 3,051 3,325 3,449 3,582 3,722Total Revenue 20,668 22,689 25,836 24,213 25,564 23,462 26,533 25,053 37,388 36,079 43,357 50,049 49,027 51,586 54,589 57,582 60,514 63,338 5.5%

YoY Growth %Revenue…UHT Milk 14% 10% 13% 2% -13% -6% 2% 0% 24% -5% 12% 7% -10% 1% 3% 4% 5% 5%…Milk Bev 19% 41% 23% 7% -3% -22% -2% -4% 13% -3% 30% 14% -12% -3% 1% 1% 1% 1%…Yoghurt 11% 25% 38% 35% 56% 55% 20% 23% 66% 1% 18% 37% 55% 21% 15% 11% 8% 6%Liquid Milk 15% 20% 19% 8% 1% 1% 6% 5% 25% -4% 17% 14% 1% 5% 6% 6% 5% 5%Ice-Cream -9% 6% 2% -32% -17% -32% -12% -3% 5% -3% -5% -10% -21% -10% -4% -2% 0% 0%Milk Powder and Other Dairy 269% 520% 362% 12% -5% -29% -2% 31% 52% 34% 325% 77% -17% 12% 9% 4% 4% 4%Total Revenue 13% 28% 25% 7% -1% -3% 4% 7% 24% -3% 20% 15% -2% 5.2% 5.8% 5.5% 5.1% 4.7%Organic Revenue 20% 18% 8% 0% -5% 3% 7% 24% -3% 16% 12.8% -2% 4.9% 5.6% 5.5% 5.1% 4.7%

Consolidated P&L 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-2017E CAGRSales 20,668 22,689 25,836 24,213 25,564 23,462 26,533 25,053 37,388 36,079 43,357 50,049 49,027 51,586 54,589 57,582 60,514 63,338 5.5%COGS -15,149 -16,511 -17,454 -17,162 -17,422 -16,229 -17,976 -17,126 -27,796 -27,050 -31,660 -34,616 -33,651 -35,101 -37,238 -39,258 -41,095 -42,733 5.2%Gross Profit 5,519 6,178 8,382 7,052 8,143 7,233 8,557 7,927 9,592 9,029 11,697 15,434 15,375 16,485 17,351 18,325 19,419 20,605 6.2%SG&A -4,529 -5,041 -6,722 -5,610 -6,506 -6,328 -6,885 -6,783 -7,668 -7,381 -9,571 -12,332 -12,834 -13,668 -14,519 -15,401 -16,427 -17,352 6.4%Other income/(expense) -95 -180 -439 2 -165 272 -95 -38 -28 39 -275 -437 107 -133 -78 -44 11 -28EBIT 894 958 1,221 1,444 1,472 1,176 1,577 1,106 1,896 1,687 1,852 2,665 2,648 2,683 2,755 2,880 3,003 3,224 2.0%D&A -580 -636 -636 -705 -699 -745 -788 -745 -864 -1,017 -1,216 -1,342 -1,444 -1,533 -1,557 -1,548 -1,666 -1,803 3.8%EBITDA 1,474 1,594 1,857 2,149 2,171 1,921 2,366 1,851 2,761 2,704 3,068 4,006 4,092 4,217 4,311 4,428 4,669 5,028 2.6%Net finance costs 99 100 78 130 139 105 106 106 112 179 199 208 245 213 223 238 238 248 -4.6%Other non-operating income (expense 30 125 183 95 143 -6 -69 -23 52 -53 154 278 138 -92 47 131 305 317 -41.7%Pretax income 1,022 1,183 1,481 1,669 1,754 1,276 1,615 1,189 2,061 1,813 2,205 3,150 3,030 2,804 3,024 3,249 3,546 3,790 -0.1%Provisions for taxes -186 -181 -253 -207 -321 -189 -288 -170 -276 -245 -367 -459 -510 -458 -494 -514 -544 -581 -1.6%Minority interest (I/S item) -101 -130 -180 -160 -94 -59 -49 -59 -195 -186 -231 -340 -153 -107 -131 -166 -203 -238 -7.4%Discontinued business 14 10 0 0 0 0 0 0 0 0 24 0 0 0 0 0 0 0Reported NPAT 749 882 1,049 1,302 1,339 1,029 1,279 960 1,590 1,382 1,631 2,351 2,367 2,239 2,399 2,569 2,800 2,971 0.7%Net one-off's -26 -2 88 91 28 83 -23 -23 -137 -16 -28 179 111 -46 0 0 0 0Recurring NPAT 776 884 961 1,211 1,310 946 1,301 983 1,726 1,398 1,659 2,172 2,256 2,284 2,399 2,569 2,800 2,971 3.1%

Reported EPS (basic) 0.43 0.49 0.49 0.62 0.34 0.24 0.33 0.25 0.99 0.79 0.92 1.12 0.58 0.58 0.61 0.66 0.71 0.76 2.7%Reported EPS (diluted) 0.43 0.48 0.49 0.62 0.34 0.24 0.33 0.25 0.98 0.79 0.91 1.11 0.58 0.58 0.61 0.65 0.71 0.76 2.6%

YoY Growth %Sales 13% 27% 25% 7% -1.1% -3.1% 3.8% 6.8% 24% -3% 20% 15% -2% 5.2% 5.8% 5.5% 5.1% 4.7%GP 19% 41% 52% 14% -2.9% 2.6% 5.1% 9.6% 23% -6% 30% 32% 0% 7% 5% 6% 6% 6%Operating profit (GP less SG&A) -1% 74% 68% 27% -1.4% -37.3% 2.2% 26.5% 19% -14% 29% 46% -18% 11% 1% 3% 2% 9%EBIT 3% 17% 37% 51% 20.6% -18.5% 7.2% -6.0% 30% -11% 10% 44% -1% 1% 3% 5% 4% 7%NPAT 16% 20% 40% 48% 27.7% -21.0% -4.5% -6.6% 28% -13% 18% 44% 1% -5% 7% 7% 9% 6%Recurring NPAT 3% 37% 24% 37% 36.4% -21.9% -0.7% 3.9% 13% -19% 19% 31% 4% 1% 5% 7% 9% 6%

MarginsGP 26.7% 27.2% 32.4% 29.1% 31.9% 30.8% 32.3% 31.6% 25.7% 25.0% 27.0% 30.8% 31.4% 32.0% 31.8% 31.8% 32.1% 32.5%Operating profit (GP less SG&A) 4.8% 5.0% 6.4% 6.0% 6.4% 3.9% 6.3% 4.6% 5.1% 4.6% 4.9% 6.2% 5.2% 5.5% 5.2% 5.1% 4.9% 5.1%EBIT 4.3% 4.2% 4.7% 6.0% 5.8% 5.0% 5.9% 4.4% 5.1% 4.7% 4.3% 5.3% 5.4% 5.2% 5.0% 5.0% 5.0% 5.1%NPAT 3.6% 3.9% 4.1% 5.4% 5.2% 4.4% 4.8% 3.8% 4.3% 3.8% 3.8% 4.7% 4.8% 4.3% 4.4% 4.5% 4.6% 4.7%Recurring NPAT 3.8% 3.9% 3.7% 5.0% 5.1% 4.0% 4.9% 3.9% 4.6% 3.9% 3.8% 4.3% 4.6% 4.4% 4.4% 4.5% 4.6% 4.7%SG&A/Sales -21.9% -22.2% -26.0% -23.2% -25.4% -27.0% -25.9% -27.1% -20.5% -20.5% -22.1% -24.6% -26.2% -26.5% -26.6% -26.7% -27.1% -27.4%Effective tax rate (%) -18.2% -15.3% -17.0% -12.4% -18.3% -14.8% -17.8% -14.3% -13.4% -13.5% -16.6% -14.6% -16.8% -16.3% -16.3% -15.8% -15.3% -15.3%



Exhibit 99: Mengniu Summary financials




Cost of goods sold (33,651.0) (35,101.5) (37,238.0) (39,258.0) Accounts receivable 1,426.3 1,642.1 1,887.2 1,990.7

SG&A (12,834.5) (13,668.4) (14,518.7) (15,401.2) Inventory 4,339.5 4,430.4 4,394.0 4,309.7



EBITDA 3,981.3 4,262.1 4,311.2 4,428.1 Net PP&E 13,868.1 14,801.7 15,401.1 15,874.0

Depreciation & amortization (1,444.3) (1,533.2) (1,556.6) (1,548.3) Net intangibles 7,544.9 7,521.0 7,497.0 7,473.1

EBIT 2,537.0 2,729.0 2,754.6 2,879.8 Total investments 4,185.9 4,093.9 4,140.7 4,271.3



Income/(loss) from uncons. subs. 137.7 (92.0) 46.8 130.6


Pretax profits 2,919.3 2,849.6 3,024.0 3,248.9 Short-term debt 6,080.8 6,080.8 6,080.8 6,080.8

Income tax (510.0) (458.0) (493.9) (514.4) Other current liabilities 6,910.9 6,910.9 6,910.9 6,910.9


Long-term debt 4,969.5 4,969.5 4,969.5 4,969.5

Net income pre-preferred dividends 2,256.3 2,284.5 2,398.9 2,568.8 Other long-term liabilities 3,091.5 3,091.5 3,091.5 3,091.5


Net income (pre-exceptionals) 2,256.3 2,284.5 2,398.9 2,568.8 Total liabilities 24,037.4 24,069.9 24,253.5 24,427.2

Post-tax exceptionals 110.8 (45.6) 0.0 0.0

Net income 2,367.2 2,238.9 2,398.9 2,568.8 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) (Rmb) 0.58 0.58 0.61 0.66 Minority interest 4,478.9 4,586.1 4,717.3 4,883.1



DPS (Rmb) 0.14 0.13 0.14 0.15


Free cash flow yield (%) (1.9) 1.9 3.0 3.6


Sales growth (2.0) 5.2 5.8 5.5 ROE (%) 10.9 9.7 9.7 9.6



Net income growth 3.9 1.2 5.0 7.1 Inventory days 47.1 45.6 43.2 40.5

EPS growth (47.9) 0.3 5.0 7.1 Receivables days 9.1 10.9 11.8 12.3


EBITDA margin 8.1 8.3 7.9 7.7 Net debt/equity (%) 11.7 8.4 2.9 (2.8)

EBIT margin 5.2 5.3 5.0 5.0 Interest cover - EBIT (X) NM NM NM NM

Valuation 12/15 12/16E 12/17E 12/18E


Net income pre-preferred dividends 2,256.3 2,284.5 2,398.9 2,568.8 P/E (analyst) (X) 23.8 19.6 18.7 17.4

D&A add-back 1,444.3 1,533.2 1,556.6 1,548.3 P/B (X) 2.4 1.9 1.7 1.6


Net (inc)/dec working capital 1,099.0 (274.2) (25.1) 154.5 Dividend yield (%) 1.0 1.2 1.2 1.3

Other operating cash flow (3,043.4) (282.5) (473.2) (656.0)




Divestitures 949.7 22.7 22.7 22.7

Others 2,622.1 527.3 537.3 547.3

Cash flow from investments 536.6 (1,892.9) (1,572.0) (1,427.3)


Inc/(dec) in debt 881.7 0.0 0.0 0.0


Other financing cash flows 608.9 (200.0) 0.0 0.0

Cash flow from financing 835.9 (747.6) (517.9) (555.0)

Total cash flow 3,281.7 727.6 1,498.5 1,799.0 Note: Last actual year may include reported and estimated data.




Biostime (Neutral): Swisse offset by weak IMF; Policy the key focus

Investment view Biostime is a leading Infant Milk Formula (IMF) and Health Food provider in China. After it acquired Swisse (an Australian brand) in Sep 2015, its health food business is the main growth driver of the company (50% of operating profit in 2016E). We expect:

1. Swisse to maintain growth in 2016 but with uncertainty in 2017:

We expect 18% sales 2015-17E CAGR (full-year basis) driven by continued China market share gain. The vitamin market still has low penetration in China and a majority of sales are made through direct selling channels. Therefore we see multi-year growth potential for Swisse, although we see potential slowdown sequentially from 1) greater competition as more small foreign brands are entering market, 2) the strong Swisse growth in past year

led to considerable purchases of distributors, which has driven high inventory in the channel.

2. Cross border Ecommerce policy a major hurdle: we estimate about 30% of Swisse China sales is made through the Free Trade Zone (FTZ) channel. A new policy introduced on Apr 8, 2016 stipulates that FTZ trade should be regarded the same as regular imports, which means distributors

will need a full set of customs clearance documents. These include Certificates of Origin, Inspection and Quarantine etc., which a majority of distributors do not have as they purchase from wholesalers. Although the govt. has granted a one year grace period (to Apr 2017), we envision some there will remain uncertainty around how the policy will be implemented after the grace period.

3. IMF business will not recover near term: expect avg. 6% annual sales decline for 2015-17E, driven by lower volume. The China IMF market faces intense competition from consumers shifting to online channel. We think Biostime’s products are uncompetitive on retail ASP vs. trending MNC brands such as Wyeth, Abbott etc.

Net net, we expect 8%% sales and 7% EPS 2016-18E CAGR. For 2016, we

expect Swisse to contribute Rmb3bn in revenue. We initiate coverage of Biostime with a Neutral and a 12-month target price of HK$26.9.

Risks to the investment case Stronger/weaker than expected IMF sales/margin, unfavorable policy on Cross border Ecommerce related to Vitamin, faster/slower Swisse topline growth.

Valuation Our 12-month target price is based on a Sum of the Parts. We value IMF at

14X and Vitamins (Swisse) at 19X 2017E PE. Our target price implies 17.5X PE.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Biostime International Holdings (1112.HK)


Key data Current

Price (HK$) 23.10




12/15 12/16E 12/17E 12/18E

EPS (Rmb) 0.37 1.23 1.33 1.42

EPS growth (%) (72.3) 231.4 8.3 6.3

EPS (diluted) (Rmb) 0.40 1.23 1.33 1.42


P/E (X) 45.7 16.1 14.8 14.0

P/B (X) 2.9 2.7 2.3 2.0

EV/EBITDA (X) 23.6 9.4 8.8 8.0

Dividend yield (%) 0.6 1.6 1.7 1.8

ROE (%) 7.7 19.2 17.4 15.9

CROCI (%) 9.0 14.5 14.5 14.8

7,500

8,500

9,500

10,500

11,500

12,500

10

15

20

25

30

35



Biostime International Holdings (L) Hang Seng China Ent. Index (R)


Absolute (0.6) 7.2 53.6

Rel. to Hang Seng China Ent. Index (11.0) (12.9) 83.6



Neutral




Exhibit 100: We expect 2016E sales to be boosted by Swisse revenue Biostime Revenue Forecast

Exhibit 101: We expect margins to start declining out to 2020E Biostime Margins Forecast



Biostime IMF business

Exhibit 102: Newest IMF regulation aims to cut down on # of brands in market Recent Regulation on IMF

Exhibit 103: Newest Nutritional/Supplement regulation switches to a 2 tier (registration+ filing) system Recent Regulation on Nutritional Supplements

Source: CFDA

Source: CFDA

Biostime Vitamin business (Swisse)

Exhibit 104: We expect Swisse’s sales/margins to slowly decline to 2020E Swisse Sales and margin forecast

Exhibit 105: Swisse achieved c.Rmb 54mn in sales for June 16 on Tmall/Taobao Tmall/Taobao sales


Source: Tmall/Taobao

3,969 3,6603,596

3,740

2,457 3,009 3,5214,049

1.8%

38.4%

6.7%

9.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2015 2016E 2017E 2018E

Biostime Sales (Rmb mn)

IMF revenue Swisse revenue YoY Growth %

61.9% 59.9%

58.2% 56.6%

55.2% 53.8%

15.1%

26.4% 25.7% 24.8% 23.7% 22.7%

0%

10%

20%

30%

40%

50%

60%

70%

2015 2016E 2017E 2018E 2019E 2020E

GP OP

IMF Key RegulationsName Date Key Features Key Effects/Rationale Stage

IMF�Registration�Law�(婴幼儿配方乳粉产品配方注册管理办法)

8-Jun-16

* One manufacturer no more

than 3 series and 9 formulas

* The above applies to

imported/local products

* Clear, unambigious labels

* Valid for 5 years

* Violation will result in 3 year

ban in applying

* Finalized version stating enforcement stageEnforcing on

Oct 1

Nutritional Supplements Category Regulation Date Key Features Notes

1-Jul-16

*Two tier system (both registration and filing)

- Registration requires more paperwork/longer

process, could take up to 2-3 yrs

- Filing is a much quicker process than registration

*Pre-approved ingredients list exempted from

registration for 1st time import

- This is a list of ingredients/raw materials that are

exempted from registration - even if it is a 1st time import, only filing is needed

*Only products not on pre-approved list and 1st time

imports of non-vitamins/minerals - will need to register

* Enforced on July 1, 2016

20.8%

15.6% 15.0%13.0%

11.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2016E 2017E 2018E 2019E 2020E

Net margin (after MI) EBITDA margin

Swisse revenue growth yoy

BKL, Rmb 13.66

Swisse, Rmb 53.91

Healthy care, Rmb 8.30

GNC, Rmb 14.76

10

20

30

40

50

60

70

Rmb mnTmall Sales

BKL Swisse Healthy care GNC



Exhibit 106: Swisse has a 9% market share of vitamins and supplements on Tmall Tmall/Taobao market share

Exhibit 107: ASP has been trending downwards for TmallTmall/Taobao ASP trend



Exhibit 108: We value Biostime IMF and Vitamin business at 14X and 19X 2017E PE Biostime SOTP valuation

Exhibit 109: Biostime currently trading at 19X 12m fwd P/E, vs. avg of 18X since 2013 Biostime 12m fwd PE



BKL, 2%

Swisse, 8.9%

Healthy care, 1%

GNC, 2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jan

-15

Feb

-15

Mar-

15

Ap

r-15

May

-…

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oct

-15

No

v-1

5

Dec-

15

Jan

-16

Feb

-16

Mar-

16

Ap

r-16

May

-…

Ju

n-1

6

Market Share Tmall Market Share by Value


BKL, Rmb129.78

Swisse, Rmb 97.54

Healthy care,

Rmb133.48

GNC, Rmb115.79

RMB80

RMB100

RMB120

RMB140

RMB160

RMB180

RMB200ASP Trend


SOTP PE (RMB mn) 2017 NPAT Multiple Equity ValueInfant milk formula 245 14.0x 3,429 Vitamin Supplements (83%) 588 19.0x 11,180 Total 833 17.5x 14,609 Diluted outstanding shares (mn) 625Exchange rate: CNYHKD 1.15Implied value per share (HK$) 26.9

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

Biostime 12m fwd PE

Avg. 18X



Exhibit 110: We expect Biostime’s IMF segment to continue to be challenged, with a 15-17E 2yr -6% revenue CAGR Biostime Summary Financials


Biostime (1112.HK)

Divisional P/L (Rmb mn) 1H14 2H14 1H15 2H15 1H16E 2H16E 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-17E 2-yr CAGR

RevenuesProbiotic Supplements 186 239 173 216 173 216 379 458 425 389 389 401 413 425 438 1%Infant Formula 1,859 2,123 1,698 1,658 1,528 1,522 2,715 3,752 3,982 3,356 3,050 2,971 3,073 3,200 3,332 -6%Dried Baby Food Products 71 81 43 71 41 67 135 199 151 114 108 108 113 119 125 -3%Baby Care Products 73 100 49 61 50 62 106 152 173 110 112 117 140 165 192 3%Subtotal 2,189 2,543 1,963 2,006 1,792 1,867 3,382 4,561 4,732 3,969 3,660 3,596 3,740 3,910 4,088 -5%Vitamin and Supplements (Swisse) 850 1,329 1,641 2,457 2,969 3,433 3,948 4,461 4,951Total 2,189 2,543 1,963 2,856 3,121 3,508 3,382 4,561 4,732 6,426 6,629 7,029 7,688 8,370 9,039

Gross ProfitProbiotic Supplements 133 170 110 148 114 143 295 360 304 259 257 277 297 306 316 3%Infant Formula 1,146 1,321 995 1,129 903 857 1,769 2,422 2,467 2,124 1,761 1,648 1,676 1,710 1,737 -12%Dried Baby Food Products 32 42 19 37 19 34 77 111 74 56 53 55 58 61 64 -1%Baby Care Products 34 48 18 7 18 9 58 82 82 25 28 31 40 51 59 12%Subtotal 1,346 1,581 1,143 1,321 1,913 2,055 2,229 2,975 2,927 2,985 2,099 2,011 2,072 2,128 2,176 -18%Vitamin and Supplements (Swisse) 1,485 1,869 2,078 2,282 2,489 2,688Total 2,229 2,975 2,927 4,470 3,968 4,089 4,354 4,617 4,865

YoY Growth %

RevenuesProbiotic Supplements -18% 4% -7% -9% 0% 0% 14% 21% -7% -8% 0% 3% 3% 3% 3%Infant Formula 11% 3% -9% -22% -10% -8% 61% 38% 6% -16% -9% -3% 3% 4% 4%Dried Baby Food Products 15% -41% -39% -13% -5% -5% 39% 47% -24% -25% -5% 0% 5% 5% 5%Baby Care Products 15% 13% -33% -39% 2% 2% 122% 44% 14% -37% 2% 4% 20% 18% 16%Vitamin and Supplements (Swisse) 93% 21% 16% 15% 13% 11%Total 6% 2% -10% -21% -9% -7% 54% 35% 4% 36% 3% 6% 9% 9% 8%

Margins

GP Margin PptProbiotic Supplements 71.6% 71.3% 63.8% 68.5% 65.8% 66.2% 77.7% 78.6% 71.4% 66.4% 66.0% 69.0% 72.0% 72.0% 72.0% 2.6%Infant Formula 61.7% 62.2% 58.6% 68.1% 59.1% 56.3% 65.1% 64.5% 62.0% 63.3% 57.7% 55.5% 54.5% 53.4% 52.1% -7.8%Dried Baby Food Products 46.0% 51.8% 44.6% 52.1% 46.6% 50.9% 56.9% 55.6% 49.1% 49.2% 49.2% 51.2% 51.2% 51.2% 51.2% 2.0%Baby Care Products 46.0% 48.2% 36.8% 11.6% 36.8% 15.2% 54.9% 54.2% 47.2% 22.8% 24.8% 26.8% 28.8% 30.8% 30.8% 4.0%Subtotal 61.5% 62.2% 58.2% 65.8% 106.8% 110.0% 65.9% 65.2% 61.9% 75.2% 57.4% 55.9% 55.4% 54.4% 53.2% -19.3%Vitamin and Supplements (Swisse) 60.4% 62.9% 60.5% 57.8% 55.8% 54.3%Total 65.9% 65.2% 61.9% 69.6% 59.9% 58.2% 56.6% 55.2% 53.8%

EBIT MarginIMF and baby care 29.4% 26.9% 22.9% -8.5% 13.3% 13.9% 13.8% 12.9% 11.7%Vitamin and Supplements (Swisse) 38.3% 39.5% 35.1% 32.3% 30.6% 29.2%Total 29.4% 26.9% 22.9% 9.4% 25.0% 24.2% 23.3% 22.3% 21.3%

EBITDA MarginIMF and baby care 30.1% 27.5% 24.0% -6.2% 17.8% 18.5% 18.7% 18.0% 17.1%Vitamin and Supplements (Swisse) 39.5% 40.9% 36.3% 33.5% 31.7% 30.2%Total 30.1% 27.5% 24.0% 11.3% 28.1% 27.2% 26.3% 25.3% 24.3%

Consolidated P&L 1H14 2H14 1H15 2H15 1H16E 2H16E 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015-17E 2-yr CAGRSales 2,189 2,543 1,963 2,856 3,121 3,508 3,382 4,561 4,732 4,819 6,629 7,029 7,688 8,370 9,039 21%COGS (843) (961) (820) (1,014) (1,208) (1,453) (1,153) (1,586) (1,805) (1,834) (2,661) (2,940) (3,334) (3,753) (4,175) 27%Gross Profit 1,346 1,581 1,143 1,842 1,913 2,055 2,229 2,975 2,927 2,985 3,968 4,089 4,354 4,617 4,865 17%Selling expenses (800) (787) (746) (1,230) (934) (1,037) (1,078) (1,513) (1,588) (1,976) (1,971) (2,049) (2,206) (2,381) (2,554) 2%Administrative expenses (86) (89) (80) (200) (123) (136) (117) (177) (175) (280) (259) (261) (273) (285) (299) -4%Operating Profits 459 705 317 412 855 882 1,034 1,285 1,164 729 1,738 1,780 1,875 1,951 2,012 56%Other income/expenses (39) (40) (57) (68) (43) (36) (39) (56) (79) (126) (79) (78) (81) (85) (89) -21%EBIT 420 664 259 344 812 846 996 1,229 1,085 603 1,659 1,702 1,794 1,866 1,923 68%D&A (25) (26) (30) (91) 0 0 (23) (27) (51) (121) (207) (211) (229) (251) (274) 32%EBITDA 445 690 289 434 812 846 1,018 1,256 1,135 724 1,866 1,913 2,023 2,116 2,197 63%Finance Costs (40) (46) (48) (106) (200) (273) (2) (11) (87) (154) (473) (478) (478) (406) (334) 76%Finance Income 49 64 63 56 28 28 44 88 113 119 56 85 76 87 45 -16%JV / Associate income (0) 1 (0) 0 12 12 0 0 1 (0) 24 34 36 38 41Other Income and Gains 5 2 6 (69) 1 1 12 19 7 (63) 3 20 23 25 27One-off / Exceptional items 0 0 0 0 0 0 0 (163) 0 0 0 0 0 0 0Pretax income 433 685 280 224 653 615 1,051 1,162 1,118 504 1,268 1,363 1,450 1,610 1,703 64%Provisions for taxes (121) (190) (75) (135) (196) (184) (307) (341) (312) (211) (380) (409) (435) (483) (511) 39%Minority interest (I/S item) 0 0 0 (42) (57) (61) 0 0 0 (42) (118) (121) (129) (140) (150)Reported NPAT 312 495 205 46 400 369 743 821 807 251 769 833 886 987 1,042 82%Net Extraordinary Items (4) (13) 0 21 0 0 (58) (222) (17) 21 0 0 0 0 0Recurring NPAT 316 507 205 26 400 369 801 1,043 823 231 769 833 886 987 1,042 90%

Recurring EPS (Rmb/Sh) 0.52 0.83 0.33 0.04 0.64 0.59 1.31 1.70 1.34 0.37 1.23 1.33 1.42 1.58 1.67 89%

YoY Growth %Sales 6.2% 1.7% (10.3%) 12.3% 59.0% 22.8% 54.5% 34.9% 3.7% 1.8% 37.6% 6.0% 9.4% 8.9% 8.0%GP (1.8%) (1.5%) (15.1%) 16.5% 67.4% 11.6% 53.1% 33.5% (1.6%) 2.0% 32.9% 3.1% 6.5% 6.1% 5.4%SG&A 18.8% (7.2%) (6.8%) 63.1% 28.0% (18.0%) 51.1% 41.5% 4.3% 28.0% (1.2%) 3.6% 7.3% 7.6% 7.0%OP (26.4%) 6.6% (31.1%) (41.5%) 170.2% 114.2% 55.4% 24.2% (9.4%) (37.4%) 139% 2.4% 5.4% 4.0% 3.1%EBIT (29.8%) 5.4% (38.3%) (48.3%) 213.2% 146.4% 55.1% 23.4% (11.8%) (44.4%) 175% 2.6% 5.4% 4.0% 3.1%Reported NPAT 4.9% (5.5%) (34.4%) (90.6%) 95.3% 693.7% 40.9% 10.4% (1.7%) (68.8%) 206% 8.3% 6.3% 11.4% 5.5%Recurring NPAT (35.4%) (8.4%) (35.2%) (94.9%) 95.3% 1,324.1% 50.2% 30.2% (21.0%) (72.0%) 233% 8.3% 6.3% 11.4% 5.5%

Margins PptGP 61.5% 62.2% 58.2% 64.5% 61.3% 58.6% 65.9% 65.2% 61.9% 61.9% 59.9% 58.2% 56.6% 55.2% 53.8% (3.8%)OP 21.0% 27.7% 16.1% 14.4% 27.4% 25.2% 30.6% 28.2% 24.6% 15.1% 26.2% 25.3% 24.4% 23.3% 22.3% 10.2%EBIT 19.2% 26.1% 13.2% 12.0% 26.0% 24.1% 29.4% 26.9% 22.9% 12.5% 25.0% 24.2% 23.3% 22.3% 21.3% 11.7%Reported NPAT 14.3% 19.5% 10.4% 1.6% 12.8% 10.5% 22.0% 18.0% 17.1% 5.2% 11.6% 11.9% 11.5% 11.8% 11.5% 6.6%Recurring NPAT 14.4% 19.9% 10.4% 0.9% 12.8% 10.5% 23.7% 22.9% 17.4% 4.8% 11.6% 11.9% 11.5% 11.8% 11.5% 7.1%

SG&A/Sales (40.5%) (34.5%) (42.1%) (50.1%) (33.9%) (33.4%) (35.3%) (37.1%) (37.3%) (46.8%) (33.6%) (32.9%) (32.2%) (31.9%) (31.6%) 14.0%Effective tax rate (%) (27.9%) (27.8%) (26.8%) (60.5%) (30.0%) (30.0%) (29.3%) (29.4%) (27.9%) (41.8%) (30.0%) (30.0%) (30.0%) (30.0%) (30.0%) 11.8%



Exhibit 111: Biostime Summary Financials




Cost of goods sold (1,834.0) (2,660.9) (2,939.9) (3,333.9) Accounts receivable 622.8 544.8 577.7 631.9

SG&A (2,276.6) (2,229.9) (2,309.6) (2,478.8) Inventory 856.2 947.7 1,087.4 1,278.8



EBITDA 703.0 1,865.8 1,912.9 2,022.5 Net PP&E 547.0 598.2 648.1 792.0

Depreciation & amortization (120.7) (207.3) (211.3) (228.7) Net intangibles 2,863.0 2,764.5 2,666.1 2,567.7

EBIT 582.3 1,658.5 1,701.6 1,793.9 Total investments 0.0 0.0 0.0 0.0



Income/(loss) from uncons. subs. (0.4) 24.0 33.6 36.0

Others (63.2) 2.8 20.5 22.5 Accounts payable 618.7 801.9 886.0 1,004.7

Pretax profits 483.3 1,268.0 1,362.7 1,450.4 Short-term debt 4,740.5 0.0 0.0 0.0

Income tax (210.6) (380.4) (408.8) (435.1) Other current liabilities 1,320.2 1,320.2 1,320.2 1,320.2


Long-term debt 2,687.8 7,510.5 6,587.5 6,587.5

Net income pre-preferred dividends 230.9 769.3 833.3 885.8 Other long-term liabilities 863.9 863.9 863.9 863.9






EPS (basic, pre-except) (Rmb) 0.38 1.25 1.36 1.44 Minority interest 0.0 0.0 0.0 0.0



DPS (Rmb) 0.10 0.31 0.34 0.36




Sales growth 1.8 37.6 6.0 9.4 ROE (%) 7.7 19.2 17.4 15.9

EBITDA growth (39.0) 165.4 2.5 5.7 ROA (%) 2.5 5.4 5.6 5.8

EBIT growth (47.1) 184.8 2.6 5.4 CROCI (%) 9.0 14.5 14.5 14.8

Net income growth (72.0) 233.2 8.3 6.3 Inventory days 164.5 123.7 126.3 129.5



EBITDA margin 14.6 28.1 27.2 26.3 Net debt/equity (%) 173.0 120.1 89.8 68.4


Valuation 12/15 12/16E 12/17E 12/18E



D&A add-back 120.7 207.3 211.3 228.7 P/B (X) 2.9 2.8 2.4 2.0

Minorities interests add-back (41.9) (118.3) (120.5) (129.5) EV/EBITDA (X) 23.6 9.4 8.8 8.1

Net (inc)/dec working capital (345.8) 169.7 (88.5) (126.8) Dividend yield (%) 0.6 1.6 1.7 1.8

Other operating cash flow 401.8 531.2 567.2 577.9

Cash flow from operations 365.7 1,559.2 1,402.8 1,436.1

Capital expenditures (111.6) (160.1) (162.8) (274.1)

Acquisitions (5,998.9) 0.0 0.0 0.0


Others 1,946.7 57.9 86.8 78.0

Cash flow from investments (4,163.8) (102.1) (76.1) (196.1)


Inc/(dec) in debt 4,740.5 4.4 (923.0) 0.0


Other financing cash flows (2,907.1) (510.5) (598.1) (607.1)

Cash flow from financing 1,649.1 (454.1) (1,593.0) (685.9)

Total cash flow (2,148.9) 1,003.0 (266.2) 554.1 Note: Last actual year may include reported and estimated data.




Financials

Income Statement Sales: we expect Biostime to post 5% sales CAGR in 2016/17E, assuming Swisse on a full year

basis. The stronger growth for Swisse is partially offset by decline in IMF.

Margin: after a jump in OPM in 2016 (due to the Swisse acquisition), we expect the company’s

margin to gradually decline over 2016-18E, due to the intense competition in the IMF business .

Balance Sheet Gearing: Biostime’s net gearing ratio went up substantially post the Swisse acquisition, to 206%.

We expect it will be reduced gradually to 127% in 2017E.

ROE: expect gradual fall in ROE after 2016 as company sales growth slows down and margins

decline.

Cash Flow Statement Capex: In the absence of major M&A in near term, we expect the company’s capex will stabilize

around Rmb150mn annually over 2016-17E.

FCF: We expect the company to generate Rmb1.3-1.4bn free cash flow each year, contributed by

Swisse profit.

Valuation

We value Biostime on a Sum of the Part and assign different PE multiples to the IMF and Vitamin (Swisse) businesses. This is due to Biostime having recently bought Swisse and which is still in a high growth stage, whereas the IMF business is already in a mature stage.

We assign 19X 2017E PE to Swisse, in line with large cap China staples companies avg. PE (Yili, Mengniu, WW and Tingyi), given its high single digit growth profile.

We assign 14X 2017E PE to the IMF business, about 1SD below historical avg. level due to its slower sales and lower margin.

From this we derive our 12m target price of HK$26.9/share, implying 17.5X 2017E PE.

Key risks to our rating, TP and earnings estimates Weaker than expected Swisse sales: higher competition or channel inventory destocking could potentially slow Swisse sales and drive lower profit

Higher/lower than expected IMF margin: we expect gradual decline of Biostime IMF margin as

competition is still intense.



Bright Dairy (Neutral): Stalled sales, GPM expansion offset by ANP

Investment view We initiate coverage of Bright Dairy with a Neutral rating and a 12-month target price of Rmb13.2 (on 2017E EV/GCI vs. CROCI/WACC), implying a c.11 % downside. We forecast 2015-17E 2-year sales CAGR of 3.1% on the back of continued growth in star-product room temperature yogurt Momchilovtski — albeit at a much slower pace than in the past few years.

Specifically, we expect the growth rate of Momchilovtksi to stall as we expect it to continue to lose share to Yili/Mengniu’s room temperature yogurt Ambrosial/Just Yogurt, respectively, as the two have invested a lot more in their brands and have superior distribution systems in place.

We see Momchilovtski’s total contribution to revenue to increase minimally to 32% in 2016E-18E from 2015’s 30%. Regionally, we believe Bright Dairy,

based in Shanghai and thus traditionally a stronger player in Eastern China, will achieve solid growth in North/Central/South China as management has signaled efforts to expand its reach.

On the margin side, we expect solid GP margin improvement over 2015-2017E (expanding by 120bps to 36.9% in 2017E from 2015’s 35.6%) on the back of lower raw milk cost. However the majority of expansion will be offset

by higher ANP spending. As a result we expect OPM to remain flat at 4.3% by 2017E. We expect Bright Dairy to achieve an 8% 2015-17E NPAT 2-year CAGR. Given the stock has rallied c.15% in the last 3 months, mainly due to historically high GPM and better performance in North/Central/South China during 1Q16, we see the valuation as fair as it is currently trading at 34X 12m fwd P/E, vs. an historical average of 36X.

Risks to the investment case Higher/lower than expected growth momentum of Momchilovtski; higher/lower than expected promotional activity in market

Valuation Our 12-month target price is Rmb13.2, based on our 2017E EV/GCI vs. CROCI/WACC. It implies 2017E 31XPE. On an EV/EBITDA basis, Bright Dairy is trading on par with peers (Exhibit 104), at c. 10-12X 2017E EV/EBITDA, whereas it is trading much above peers on P/E due to its higher

financing expenses associated with the upstream dairy farm and its thin profit margin.


Neutral


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Bright Dairy (600597.SS)


Key data Current

Price (Rmb) 14.66

12 month price target (Rmb) 13.20

Market cap (Rmb mn / US$ mn) 17,951.1 / 2,702.3


12/15 12/16E 12/17E 12/18E

EPS (Rmb) 0.35 0.39 0.41 0.44

EPS growth (%) (34.4) 8.7 6.8 6.6

EPS (diluted) (Rmb) 0.35 0.39 0.41 0.44


P/E (X) 51.0 38.0 35.6 33.4

P/B (X) 4.9 3.7 3.5 3.4

EV/EBITDA (X) 16.5 13.1 12.8 13.0

Dividend yield (%) 0.7 1.3 1.4 1.4

ROE (%) 9.6 10.1 10.2 10.3

CROCI (%) 15.2 12.0 11.4 10.6

2,800

3,000

3,200

3,400

3,600

3,800

4,000

4,200

10

12

14

16

18

20

22

24



Bright Dairy (L) Shanghai - Shenzhen 300 (R)


Absolute 11.2 37.3 (27.8)

Rel. to Shanghai - Shenzhen 300 6.1 25.8 (9.2)




Financials

Income Statement Sales: we expect 3% sales CAGR over 2015-18E, slower than Yili/Mengniu’s mid to high single

digit. The East China region is more saturated and offers less growth potential while it will take time for Bright Dairy to expand in other region such as North and Central China given its smaller

scale and intense competition. For UHT yogurt, we expect Bright Dairy to lose market share to Yili due to Yili’s extensive marketing campaign.

Margin: expect flattish OP margin over the next three years. We expect Bright Dairy will benefit

further from lower raw milk price in 2016 but this will be offset by higher A&P expenses as company continued to push its UHT yogurt and expand into other regions.

Balance Sheet Gearing: expect company’s net debt to increase over the next two years and net gearing of 11%

in 2018E.

CROCI: expect lower cash return over the next three years due to the still low profit margin and

high capex.

Cash Flow Statement Capex: expect a slower capex of Rmb1.6bn/year, due to slower expansion of upstream dairy

farming and new plant built-up. However the absolute capex level is still high compared to the company’s operating cash flow.

FCF: despite the slower capex, we expect the company’s FCF will be negative over the next two

years due to the subdued margin increase.

Key risks to our rating, TP and earnings estimates Stronger/weaker than expected UHT yogurt growth: we expect a stabilized 5% sales

growth for Bright Dairy’s UHT yogurt product. However a faster/slower growth would have significant impact on the company’s topline/profit.

Higher/lower than expected margin: the company makes a thin 4% OPM or only 2.3% NPM. Any increase in the gross margin or fluctuation of selling expenses will impact its profit margin.

Potential M&A of Israel Tnuva: Bright offered to buy 70% of Tnuva in 2H15 but postponed the acquisition due to financing hurdles earlier this year. If this deal takes place it would alter Bright’s capital structure and earnings composition.



Exhibit 112: We expect Bright Dairy to grow sales at around 3-4% for the next few years Bright Dairy Sales Forecast

Exhibit 113: We expect Bright to see flat OPM until 2018E at 4.3% Bright Dairy GPM/OPM forecast



Exhibit 114: We expect Bright’s star product, Momchilovts, as % of revenue growth to stall Momchilovtski as % of Bright’s Sales

Exhibit 115: Bright Dairy’s plants are mainly in Eastern China Bright Dairy Plants Location



Exhibit 116: On a EV/EBITDA basis Bright is trading on par with peers at 2017E EV/EBITDA of 10-11X Bright EV/EBITDA vs peers

Exhibit 117: Bright is currently trading at 34X Fwd 12m P/E vs avg of 36X Bright Dairy Fwd 12m P/E



19,373

19,885

20,606 21,252

22,055

22,902

-5%

3%4%

3%4% 4%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

17,000

18,000

19,000

20,000

21,000

22,000

23,000

24,000

FY15 FY16E FY17E FY18E FY19E FY20E

Bright Dairy Sales (Rmb mn)Total Revenue YoY Growth (%)

35.6%36.8% 36.9% 37.0% 37.2% 37.3%

4.3% 4.2% 4.3% 4.3% 4.4% 4.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY15 FY16E FY17E FY18E FY19E FY20E

Group GPM OPM

2%

6%

11%

20%

29%30%

32% 32% 32%

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Momchilovtsi % of Total Revenue

Province/City TypeShanghai Sales

Shanghai Processing/Sales

Nanjing Processing/Sales

Heilongjiang Processing/Sales

Wuhan Processing/Sales

Beijing Processing/Sales

Guangzhou Processing/Sales

Chengdu Processing/Sales

Tianjin Processing/Sales

Bright Dairy China Plants Location

18.0

10.5

18.8

11.7

17.9

11.3

17.0

9.6

33.4

12.1

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2017E PE 2017E EVEBITDA

Want Want China

China Mengniu

Yili

Biostime

Bright Dairy33.8

‐150%

‐100%

‐50%

0%

50%

100%

0

10

20

30

40

50

60

70

80

90

Jul‐06

Oct‐06

Jan‐07

Apr‐07

Jul‐07

Oct‐07

Jan‐08

Apr‐08

Jul‐08

Oct‐08

Jan‐09

Apr‐09

Jul‐09

Oct‐09

Jan‐10

Apr‐10

Jul‐10

Oct‐10

Jan‐11

Apr‐11

Jul‐11

Oct‐11

Jan‐12

Apr‐12

Jul‐12

Oct‐12

Jan‐13

Apr‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jul‐14

Oct‐ 14

Jan‐15

Apr‐15

Jul‐15

Oct‐15

Jan‐16

Apr‐16

Jul‐16

Fwd 12m P/E

Historical Avg: 36x

+1SD

‐1SD

+2SD

‐2SD

50.8



Exhibit 118: We expect a 3% top line 15-17E 2 year CAGR for Bright Dairy Bright Dairy Summary Financials


Bright Dairy & Food (600597.SS)Rmb millionsDivisional P/L FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 15-'17 2yr CAGR 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E


Liquid milk 10,109 11,813 15,208 14,110 14,556 15,037 15,763 16,246 16,433 3.2% 4,730 5,379 5,417 6,395 7,220 7,988 7,578 6,532 7,818 6,738

Other Dairy 3,164 3,792 3,983 3,075 2,922 2,922 2,922 2,922 2,922 -2.5% 1,476 1,688 1,684 2,107 2,097 1,887 1,772 1,303 1,684 1,238

Others 502 687 1,194 2,188 2,407 2,648 2,780 2,919 3,065 10.0% 255 247 341 345 556 638 711 1,478 748 1,659

Tnuva

Total Revenue 13,775 16,291 20,385 19,373 19,885 20,606 21,464 22,086 22,420 3.1% 6,461 7,314 7,443 8,848 9,872 10,513 10,061 9,312 10,249 9,636

Gross Profit

Liquid milk 4,244 4,958 6,329 6,055 6,347 6,552 6,853 7,059 7,145 2,021 2,224 2,319 3,628 3,060 3,268 3,282 2,772 3,448 2,899

Other Dairy 445 570 493 523 561 561 561 561 561 246 198 333 739 314 179 244 279 323 238

Others 149 133 233 322 408 482 535 593 657 27 121 44 -1,403 51 181 49 272 295 377

Tnuva

Total Gross Profit 4,837 5,660 7,054 6,899 7,317 7,595 7,949 8,213 8,363 4.9% 2,294 2,543 2,697 2,964 3,426 3,628 3,576 3,323 4,066 3,514

Group OP 576 766 1,005 825 839 883 913 974 1,014 3.4% 179 397 285 481 374 630 354 471 536 566

YoY Growth (%) FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E


Liquid milk 15% 17% 29% -7% 3% 3% 5% 3% 1% 15% 19% 33% 25% 5% -18% 3% 3%

Other Dairy 20% 5% -23% -5% 0% 0% 0% 0% 14% 25% 24% -10% -15% -31% -5% -5%

Others -83% 37% 74% 83% 10% 10% 5% 5% 5% 34% 40% 63% 85% 28% 132% 5% 12%

Tnuva

Total Revenue 17% 18% 25% -5% 3% 4% 4% 3% 2% 16% 17% 15% 21% 33% 19% 2% -11% 2% 3%

Gross Profit

Liquid milk 17% 28% -4% 5% 3% 5% 3% 1% 15% 63% 32% -10% 7% -15% 5% 5%

Other Dairy 28% -13% 6% 7% 0% 0% 0% 0% 35% 273% -6% -76% -22% 56% 32% -15%

Others -11% 75% 38% 27% 18% 11% 11% 11% 60% -1257% 17% -113% -4% 50% 498% 38%

Tnuva

Total Gross Profit 25% 17% 25% -2% 6% 4% 5% 3% 2% 23% 22% 18% 17% 27% 22% 4% -8% 14% 6%

Margins 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E

Gross Profit

Liquid milk 42.0% 42.0% 41.6% 42.9% 43.6% 43.6% 43.5% 43.5% 43.5% 42.7% 41.3% 42.8% 56.7% 42.4% 40.9% 43.3% 42.4% 44.1% 43.0%

Other Dairy 14.1% 15.0% 12.4% 17.0% 19.2% 19.2% 19.2% 19.2% 19.2% 16.7% 11.7% 19.8% 35.1% 15.0% 9.5% 13.8% 21.4% 19.2% 19.2%

Others 29.6% 19.3% 19.5% 14.7% 17.0% 18.2% 19.2% 20.3% 21.4% 10.7% 49.1% 12.8% -406.5% 9.3% 28.4% 6.9% 18.4% 39.4% 22.7%

Tnuva

Group GPM 35.1% 34.7% 34.6% 35.6% 36.8% 36.9% 37.0% 37.2% 37.3% 35.5% 34.8% 36.2% 33.5% 34.7% 34.5% 35.5% 35.7% 39.7% 36.5%

Consolidated P/L (HK mn) FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E 15-'17 2yr CAGR 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16E 2H16E

Revenue 13,775 16,291 20,385 19,373 19,885 20,606 21,464 22,086 22,420 3.1% 6,461 7,314 7,443 8,848 9,872 10,513 10,061 9,312 10,249 9,636

COGS -8,938 -10,630 -13,331 -12,474 -12,568 -13,011 -13,516 -13,873 -14,057 -4,167 -4,771 -4,747 -5,884 -6,446 -6,885 -6,485 -5,989 -6,183 -6,122

GP 4,837 5,660 7,054 6,899 7,317 7,595 7,949 8,213 8,363 2,294 2,543 2,697 2,964 3,426 3,628 3,576 3,323 4,066 3,514 SG&A (excl. other rev/exp) -4,262 -4,894 -6,050 -6,074 -6,478 -6,713 -7,035 -7,239 -7,349 -2,115 -2,146 -2,412 -2,483 -3,052 -2,998 -3,222 -2,852 -3,530 -2,948

Sales tax - - - - - - - - -

Selling Exp. -3,820 -4,410 -5,469 -5,392 -5,777 -5,987 -6,279 -6,461 -6,559 -1,915 -1,904 -2,186 -2,224 -2,785 -2,684 -2,956 -2,435 -3,217 -2,560

Admin Exp. -442 -484 -581 -683 -701 -726 -756 -778 -790 -200 -242 -226 -258 -266 -314 -266 -417 -313 -387

OP 576 766 1,005 825 839 883 913 974 1,014 3.4% 179 397 285 481 374 630 354 471 536 566Other income/expenses (88) (19) (142) (16) (26) (26) (26) (26) (26) -51 -110 -13 -5 -38 -104 -7 -10 -24 -2

EBIT (reported) 487 747 863 809 813 857 887 948 988 2.9% 128 286 271 476 337 526 347 462 512 564D&A (323) (325) (406) (538) (609) (640) (634) (628) (650) -156 -167 -160 -165 -181 -225 -406 -132 -227 -

EBITDA 811 1,072 1,269 1,347 1,422 1,497 1,521 1,576 1,639 5.4% 285 453 431 641 518 751 753 329 739 564

Net Finance Exp. -65 -53 -78 -140 -91 -93 -92 -91 -97 -45 -19 -33 -21 -16 -62 -56 -83 -55 -37

Other Non-Op Income 69 98 16 36 36 36 36 36 36 14 55 -20 34 -22 -48 -28 64 -49 -179

Profit Before Tax 492 792 800 705 758 800 832 893 927 6.5% 97 322 219 489 298 416 263 442 409 349

Tax -84 -234 -131 -209 -212 -216 -208 -223 -232 4 -88 -63 -170 -58 -73 -36 -172 -116 -96

Minority Interest -24 -68 -15 -78 -90 -96 -103 -110 -114 -4 -20 -8 -61 -31 16 -26 -52 -70 -20

NPAT Attributable to S/holders 384 490 654 418 456 488 521 560 581 8.0% 97 215 148 258 209 359 201 217 223 233

One-off's after tax

Recurring NPAT 384 490 654 418 456 488 521 560 581 8.0% 97 215 148 258 209 359 201 217 223 233

WA Shares - Basic 1,137 1,224 1,228 1,231 1,231 1,231 1,231 1,231 1,231

WA Shares - Diluted 1,225 1,224 1,231 1,231 1,231 1,231 1,231 1,231 1,231

EPS - Basic (Rmb/Sh) 0.27 0.33 0.46 0.34 0.37 0.40 0.42 0.45 0.47 0.09 0.18 0.12 0.21 0.17 0.29 0.16 0.18 0.18 0.19

EPS - Diluted (Rmb/Sh) 0.25 0.33 0.46 0.34 0.37 0.40 0.42 0.45 0.47 8.0%

Growth

Sales 17% 18% 25.1% -5.0% 3% 4% 4% 3% 2% 16% 17% 15% 21% 33% 19% 2% -11% 2% 3%

GP 23% 17% 25% -2% 6% 4% 5% 3% 2% 23% 22% 18% 17% 27% 22% 4% -8% 14% 6%

SG&A 18% 15% 24% 0% 7% 4% 5% 3% 2% 20% 17% 14% 16% 27% 21% 6% -5% 10% 3%

Operating profit (GP less SG&A) 68% 33% 31% -18% 2% 5% 3% 7% 4% 83% 62% 59% 21% 32% 31% -5% -25% 51% 20%

EBIT 60% 53% 15% -6% 1% 5% 4% 7% 4% 104% 60% 111% 66% 24% 10% 3% -12% 48% 22%

Recurring NPAT 27% 27% 34% -36% 9% 7% 7% 7% 4% 32% 30% 53% 20% 41% 39% -4% -39% 11% 7%

Margins

GP margin 35.1% 34.7% 34.6% 35.6% 36.8% 36.9% 37.0% 37.2% 37.3% 35.5% 34.8% 36.2% 33.5% 34.7% 34.5% 35.5% 35.7% 39.7% 36.5%

Operating profit (GP less SG&A) 4.2% 4.7% 4.9% 4.3% 4.2% 95.2% 4.3% 4.4% 4.5% 2.8% 5.4% 3.8% 5.4% 3.8% 6.0% 3.5% 5.1% 5.2% 5.9%

EBIT margin 3.5% 4.6% 4.2% 4.2% 4.1% 4.2% 4.1% 4.3% 4.4% 2.0% 3.9% 3.6% 5.4% 3.4% 5.0% 3.4% 5.0% 5.0% 5.9%

Recurring NPAT margin 2.8% 3.0% 3.2% 2.2% 2.3% 2.4% 2.4% 2.5% 2.6% 1.5% 2.9% 2.0% 2.9% 2.1% 3.4% 2.0% 2.3% 2.2% 2.4%

SG&A/Sales -30.9% -30.0% -29.7% -31.4% -32.6% -32.6% -32.8% -32.8% -32.8% -32.7% -29.3% -32.4% -28.1% -30.9% -28.5% -32.0% -30.6% -34.4% -30.6%

Effective Tax Rate -17% -30% -16% -30% -28% -27% -25% -25% -25% 4% -27% -29% -35% -19% -18% -14% -39% -28% -28%



Exhibit 119: Bright Dairy Summary Financials




Cost of goods sold (12,474.0) (12,568.2) (13,010.5) (13,515.7) Accounts receivable 1,754.2 1,855.0 1,922.2 2,002.3

SG&A (6,074.2) (6,478.0) (6,712.9) (7,035.5) Inventory 1,852.8 1,866.8 1,896.9 1,933.5



EBITDA 1,346.5 1,421.8 1,497.0 1,520.9 Net PP&E 5,925.1 6,454.2 6,951.5 7,459.5

Depreciation & amortization (537.8) (608.8) (640.3) (633.5) Net intangibles 532.7 519.2 505.7 492.1




Income/(loss) from uncons. subs. (0.3) 0.0 0.0 0.0


Pretax profits 704.9 757.8 800.2 831.6 Short-term debt 1,441.4 1,441.4 1,441.4 1,441.4

Income tax (208.8) (212.2) (216.0) (207.9) Other current liabilities 862.8 862.8 862.8 862.8


Long-term debt 1,088.8 1,088.8 1,088.8 1,088.8

Net income pre-preferred dividends 418.3 455.8 488.0 521.0 Other long-term liabilities 2,025.0 2,025.0 2,025.0 2,025.0






EPS (basic, pre-except) (Rmb) 0.34 0.37 0.40 0.42 Minority interest 724.6 814.4 910.5 1,013.2



DPS (Rmb) 0.12 0.19 0.20 0.21


Free cash flow yield (%) (1.3) (2.3) (1.2) (1.0)


Sales growth (5.0) 2.6 3.6 4.2 ROE (%) 9.6 10.1 10.2 10.3



Net income growth (26.3) 9.0 7.1 6.8 Inventory days 56.8 54.0 52.8 51.7



EBITDA margin 7.0 7.2 7.3 7.1 Net debt/equity (%) (15.0) (3.4) 4.4 11.1


Valuation 12/15 12/16E 12/17E 12/18E



D&A add-back 537.8 608.8 640.3 633.5 P/B (X) 4.9 3.8 3.7 3.5


Net (inc)/dec working capital 296.0 (10.0) 145.4 155.9 Dividend yield (%) 0.7 1.2 1.3 1.4

Other operating cash flow 536.4 0.0 0.0 0.0





Others (2.4) 0.0 0.0 0.0

Cash flow from investments (2,027.8) (1,594.0) (1,600.9) (1,613.5)


Inc/(dec) in debt 1,915.4 0.0 0.0 0.0


Other financing cash flows (156.6) 0.0 0.0 0.0

Cash flow from financing 1,416.7 (147.7) (227.9) (244.0)

Total cash flow 1,282.5 (597.2) (459.0) (444.4) Note: Last actual year may include reported and estimated data.




CMD (Neutral): Weak upstream to persist, brand expansion slower

Investment view We initiate coverage of China Modern Dairy with a Neutral rating and a DCF-based 12-month target price of HK$1.05. We are cautious on upstream dairy companies given we expect the weak raw milk price to persist.CMD’s downstream liquid milk expansion has slowed in 2016, due to the intense premium UHT milk competition and the company’s adjustments to its

distribution network. The stock has fallen 40% ytd on concerns of lower raw milk price and margin decline. We see current valuation as fair.

1) Expect tight upstream cash margin on weak raw milk price: we expect Modern Dairy’s raw milk price to remain at a low level (Rmb3.85-3.95/kg) over next 3 years given industry’s weak demand and high inventory. This is 20% lower than the peak level in 2014. We think this will hamper

CMD’s upstream margin and free cash flow.

2) Brand milk to slow down due to high competition: we expect its brand milk sales to grow at a slower 17% CAGR for 2015-17E, vs. the 100% in the past 2 years. We expect continued intense competition in the premium UHT market from the influx of import players and promotions from Yili/Mengniu. CMD announced it is to buy back the minority stake of its

distributors and build up its own sales team starting 2Q16. We expect it to take some time for the company to expand its distribution team.

As a result, for FY16E we forecast a net loss of Rmb 559mn, with expectations of a more benign upstream environment in 2H16. This also includes Rmb400mn loss from JV valuation impairment and Rmb870mn biological asset loss.

Risks to the investment case Upstream: upside/downside as better/worse-than-expected raw milk price inflation, herd management risks such as disease, higher/lower yield. Downstream: better/worse-than-expected sales growth and operating margin.

Valuation We value Modern Dairy using DCF, with a WACC of 7.6% and a terminal growth rate of 3%. We believe the DCF better reflects the actual state of Modern Dairy’s operations (including cash outflows of feed cost for heifers

and calves, which is capitalized under IFRS and not depreciated). Our 12-month target price of HK$1.05 implies 10x 2017E PE excluding biological assets.


Neutral


Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





China Modern Dairy Holdings (1117.HK)


Key data Current

Price (HK$) 1.11


Market cap (HK$ mn / US$ mn) 5,596.5 / 721.5


12/15 12/16E 12/17E 12/18E

EPS (Rmb) 0.06 (0.10) 0.00 0.06

EPS growth (%) (58.1) (255.5) 97.7 2,607.0

EPS (diluted) (Rmb) 0.06 (0.10) 0.00 0.06

EPS (basic pre-ex) (Rmb) 0.06 (0.10) 0.00 0.06

P/E (X) 32.6 NM NM 17.1

P/B (X) 1.4 0.7 0.7 0.7

EV/EBITDA (X) 15.6 26.7 15.9 9.0

Dividend yield (%) 0.6 0.0 0.0 1.2

ROE (%) 4.5 (7.2) (0.2) 4.1

CROCI (%) 12.0 8.7 8.1 7.4

7,500

8,500

9,500

10,500

11,500

12,500

13,500

0.0

0.5

1.0

1.5

2.0

2.5

3.0



China Modern Dairy Holdings (L) Hang Seng China Ent. Index (R)


Absolute (22.9) (20.7) (53.8)

Rel. to Hang Seng China Ent. Index (30.0) (31.3) (44.2)




Financials

Income Statement Sales: we expect a 7% sales fall in 2016 followed by 10% rebound in 2017E. The fall is mainly

due to lower sales volume in the upstream dairy farm segment as the company has had to pour raw milk into milk powder inventory. For its brand milk business, we see slower expansion in 2016,

but still expect double digit CAGR over the next three years as the company further expands its POS after it consolidated its distributors.

Margin: we expect the raw milk ASP to fall 10% yoy in 2016 but more or less stabilize in 2017.

This drives our estimates of 430bps OPM decline in 2016.

Balance Sheet Gearing: expect slight decline of gearing ratio due to slower capex but it is still high at 58% over the next three years.

ROE and CROCI: We expect returns to decrease further as profitability declines.

Cash Flow Statement Capex: expect total Rmb1.4bn/year capex over 2016-18E, slower than Rmb2bn in the past two

years, due to 1) slower dairy farm expansion, 2) high culling rate of cows to generate cash flow.

FCF: despite the sharp capex reduction, we see limited positive free cash flow over the next two

years, due to the lower profit margin and working capital drag from higher inventory.

Key risks to our rating, TP and earnings estimates Higher/lower than expected raw milk price: we expect a more stabilized raw milk price after

2017E, but higher or lower price will have significant impact on the company’s upstream margin.

Stronger/weaker than expected brand milk sales: the company has consolidated its

distributors and started to build up its own sales team. The stronger or weaker brand milk performance will have impact on company’s free cash flow and profit margin.



Exhibit 120: Global Raw Milk still trading at a discount to China milk Global and China Raw Milk Price

Exhibit 121: China Milk Powder import experienced a strong rebound since late 2014 China Milk Powder Import

Source: Ministry of Agriculture

Source: Bloomberg

Exhibit 122: China Milk Powder imports have rebounded strongly since late 2014 China Liquid milk Import

Exhibit 123: We expect Modern dairy to see -7% sales in 2016E Modern dairy Sales Forecast

Source: Wind


1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00China raw milk price (Rmb/Kg)

NZ WMP equivalent price (auction only)

NZ WMP equivalent price (auction plus transport, VAT)

-100%

-50%

0%

50%

100%

150%

200%

-

20

40

60

80

100

120

140

160

180

Import milk powder volume ('000 ton) Yoy growth (%)

-

500

1,000

1,500

2,000

2,500

3,000

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Import liquid milk volume ('000 ton) Import price (US$/ton)

4,826.3 4,477.5

4,920.5

5,549.5

‐4%

‐7%

10%

13%

‐10%

‐5%

0%

5%

10%

15%

0

1,000

2,000

3,000

4,000

5,000

6,000

2015 2016E 2017E 2018E

Modern Dairy Sales (Rmb mn)

Revenue YoY Growth %



Exhibit 124: We expect CMD to have tight FCF over 2016-17E from the culling of more cows Modern dairy Free cash flow

Exhibit 125: CMD is now trading at 10X fwd 12m P/E vs avg. of 12X (excluding biological assets) CMD Fwd 12m P/E

Source: Bloomberg


Exhibit 126: Our Modern Dairy DCF valuation yields a 12m target price of HK$1.05 Modern dairy DCF valuation


(700)

(600)

(500)

(400)

(300)

(200)

(100)

-

100

200

2014 2015 2016E 2017E

FCF (RMB mn)

6.9

9.8

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Modern Dairy Fwd 12m P/E (exc. Biological assets) EPS Growth

+ 1 STDV

- 1 STDV

Average = 11.9x

WACC: DCF Valuation Rmb mn HKDCost of Equity 9.0% Sum of PV of FCF 3,014 Cost of Debt (Pre-tax) 5.7% Terminal Value 18,180 Cost of Debt (After tax) 5.1% Discounted TV 6,977 Target Debt weight 35.0% Enterprise Value 9,991 Target Equity weight 65.0% Less: 2017 net debt 4,444 Tax Rate 10.0% Less: 2017 MI 366 WACC 7.6% Equity Value 5,180 Terminal Growth 3.0% No. of diluted shares (mn) 5,683

Value per share, HKD 0.9 1.05

=L72*L86 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030ESales 5,027 4,826 4,478 4,921 5,550 6,175 6,729 7,321 7,964 8,676 9,379 10,169 11,072 12,095 13,075 14,136 15,281 GP 1,865 1,659 1,586 1,702 2,126 2,487 2,772 3,080 3,424 3,809 4,136 4,501 4,914 5,381 5,771 6,185 6,627 Reported EBITDA 1,014 658 (4) 545 850 1,603 1,689 1,906 2,155 2,434 2,622 2,969 3,275 3,628 3,868 4,142 4,470 Less: Govt Grants (11) (16) (12) (17) (21) (28) (35) (45) (55) (65) (75) (84) (98) (112) (125) (144) (162) Less: Associate/JVC gains (0) (5) (4) (5) (5) (5) (6) (6) (7) (7) (8) (8) (9) (10) (11) (12) (13) Add: Loss/(Gain) from FV Chg 329 475 873 640 456 271 404 427 442 457 513 445 460 469 551 626 667 Change in net WC (187) (86) 216 5 (53) (34) (15) (14) (17) (21) (3) 1 4 2 25 28 31 Less: Tax (14) (18) 30 1 (19) (62) (67) (80) (96) (115) (128) (154) (179) (207) (226) (247) (273) Operating CF 1,130 1,008 1,098 1,169 1,208 1,744 1,970 2,187 2,421 2,682 2,922 3,169 3,454 3,770 4,082 4,393 4,721

Less: Capex - PPE (861) (197) (358) (362) (632) (609) (907) (933) (975) (1,019) (1,062) (1,419) (1,488) (1,559) (1,969) (2,064) (2,160) Less: Capex - Land Use Rights - (60) - - - - - - - - - - - - - - - Less: Capex - Biological Assets (78) (469) 170 167 167 167 162 162 162 162 162 162 162 162 162 162 162 Less: Breeding/Feeding Cost (1,133) (1,313) (1,216) (1,211) (1,254) (1,302) (1,362) (1,437) (1,521) (1,612) (1,711) (1,834) (1,981) (2,137) (2,307) (2,486) (2,677) Less: Acqusitions (55) (66) - - (1,342) - - - - - - - - - - - - Add: Proceeds from disposal of cows 462 447 377 396 398 394 412 436 460 487 515 535 572 614 662 719 774 FCF for valuation (536) (650) 72 159 (1,454) 395 275 415 548 700 827 613 719 851 630 724 820 PV of FCF 159 (1,351) 341 221 309 379 450 494 340 370 407 280 299 315



Exhibit 127: We expect a 1% 15-17E 2 yr CAGR for sales as we see the dairy Farming business continue to be under pressure Modern Dairy summary financials

Source: Company data, Goldman Sachs Global investment Research

Modern Dairy (1117.HK)(RMB mn)Divisional P/L and Key Drivers 1H14 2H14 1H15 2H15 1H16E 2H16E 2014 2015 2016E 2017E 2018EYr-end Jun-14 Dec-14 Jun-15 Dec-15 Jun-15 Dec-15 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Segment RevenuesDairy Farm 2,299.9 1,943.4 1,647.8 1,676.6 1,322.4 1,370.9 4,194.0 3,324.5 2,693.3 2,858.4 3,154.4 (7.3%)Branded Liquid Milk 284.6 548.0 789.5 712.4 880.7 903.5 832.7 1,501.9 1,784.2 2,062.1 2,395.2 17.2%Total 2,584.5 2,491.5 2,437.3 2,389.0 2,203.1 2,274.5 5,026.7 4,826.3 4,477.5 4,920.5 5,549.5 1.0%

41% 39%Segment GP (consolidated)Dairy Farm 941.8 836.2 663.7 620.9 530.7 514.6 1,728.7 1,287.1 1,045.4 1,084.8 1,391.6Branded Liquid Milk 68.2 68.5 225.2 150.2 280.9 259.7 136.7 375.4 540.6 617.7 734.1Total 1,010.0 904.7 888.9 771.1 811.6 774.4 1,865.4 1,662.6 1,586.0 1,702.4 2,125.7

Key DriversRaw milk price (RMB/kg) 5.15 4.9 4.5 4.3 4.0 3.9 5.0 4.4 4.0 3.9 3.9 (6.1%)

Calves + Heifers (head) 82,511 93,929 95,240 110,791 110,591 110,359 93,929 110,791 110,359 114,323 118,395 1.6%Milkable cows (head) 107,516 107,578 102,593 114,751 115,251 115,697 107,578 114,751 115,697 119,319 124,624 2.0%Total Herd Size (head) 190,027 201,507 197,833 225,542 225,842 226,055 201,507 225,542 226,055 233,642 243,019 1.8%

Milk yield (tons per milkable cow) 9.0 8.7 9.1 9.1 9.1 9.2 8.9 9.1 9.3 9.5 9.7 2.0%Raw milk volumes produced (K tons) 469.5 461.8 450.8 473.3 425.0 454.3 931.3 924.1 879.3 965.5 1,076.0 2.2%

YoY Growth %

Segment RevenuesDairy Farm 81% 15% -28% -14% -20% -18% 41% -21% -19% 6% 10%Branded Liquid Milk 143% 168% 177% 30% 12% 27% 159% 80% 19% 16% 16%Total 86% 31% -6% -4% -10% -5% 53% -4% -7% 10% 13%

Key DriversRaw milk price (RMB/kg) 23% -4% -13% -12% -11% -9% 10% -13% -10% -2% 0%

Calves + Heifers (head) -10% 3% 15% 18% 16% 0% 7% 18% 0% 4% 4%Milkable cows (head) 24% 24% -5% 7% 12% 1% 9% 7% 1% 3% 4%Total Herd Size (head) 7% 13% 4% 12% 14% 0% 8% 12% 0% 3% 4%

Milk yield (tons per milkable cow) 7% 2% 1% 5% 0% 1% 5% 2% 2% 2% 2%Raw milk volumes produced (K tons) 53% 24% -4% 2% -6% -4% 37% -1% -5% 10% 11%

Consolidated P&L 1H14 2H14 1H15 2H15 1H16E 2H16E 2014 2015 2016E 2017E 2018E 2015-17E 2YSales 2,584.5 2,442.2 2,437.3 2,389.0 2,203.1 2,274.5 5,026.7 4,826.3 4,477.5 4,920.5 5,549.5 1.0%COGS (1,579.2) (1,582.2) (1,548.4) (1,618.9) (1,272.7) (1,945.4) (3,161.3) (3,167.3) (2,891.5) (3,218.1) (3,423.8) 0.8%Gross Profit 1,005.4 860.0 888.9 770.1 930.4 329.1 1,865.4 1,659.0 1,586.0 1,702.4 2,125.7 1.3%SG&A (158.9) (172.2) (185.0) (258.3) (392.0) (343.7) (331.1) (443.3) (650.3) (735.8) (822.6) 28.8%EBIT 846.4 687.9 703.9 511.9 423.8 542.9 1,534.3 1,215.8 935.7 966.7 1,303.1 (10.8%)EBITDA 954.0 580.2 703.9 511.9 423.8 542.9 1,534.3 1,215.8 935.7 966.7 1,303.1 (10.8%)Net interest income / (expense) (123.6) (119.9) (142.2) (160.1) (126.8) (126.8) (243.5) (302.3) (253.6) (257.7) (231.4) (7.7%)Net income from associates 4.7 (4.5) 4.0 0.6 0.0 4.2 0.2 4.6 4.2 4.7 5.0 1.3%Gain from chg in fair value less costs to se (84.6) (244.5) (199.3) (275.6) (449.3) (423.9) (329.1) (474.9) (873.1) (639.8) (456.1) 16.1%Other non-operating income / (expense) (91.0) (100.5) 155.5 (243.3) (400.0) 12.7 (191.5) (87.8) (387.3) (87.3) (284.4)Profit before tax (reported) 552.0 218.4 521.9 (166.5) (552.2) 9.1 770.4 355.4 (574.0) (13.4) 336.1Profit before tax (excl. Biological gain/lo 636.5 462.9 721.2 109.1 190.0 436.4 1,099.4 830.3 299.1 626.4 792.2 (13.1%)Income tax (6.6) (0.9) (14.6) 2.9 23.9 6.0 (7.5) (11.7) 29.8 0.7 (18.8)Minority interests (22.2) (5.4) (30.4) 7.9 (22.7) 22.7 (27.6) (22.4) (14.7) 0.0 0.0Reported NPAT 523.2 212.2 477.0 (155.7) (466.7) (92.2) 735.3 321.3 (558.9) (12.7) 317.3Underlying NPAT (excl. biological gain/ 604.7 447.8 663.2 102.0 (5.3) 331.7 1,052.5 765.2 337.9 627.2 773.4 (9.5%)

YoY Growth %Sales 86.2% 28.5% (5.7%) (2.2%) (9.6%) (4.8%) 52.8% (4.0%) (7.2%) 9.9% 12.8%GP 175.9% 38.5% (11.6%) (10.4%) 4.7% (57.3%) 89.3% (11.1%) (4.4%) 7.3% 24.9%EBIT 211.7% 37.1% (16.8%) (25.6%) (39.8%) 6.0% 98.4% (20.8%) (23.0%) 3.3% 34.8%Reported NPAT 240.7% (35.2%) (8.8%) (173.4%) (197.9%) (40.8%) 52.9% (56.3%) (274.0%) (97.7%) (2,607.0%)Recurring NPAT 179.3% 30.5% 9.7% (77.2%) (100.8%) 225.2% 88.1% (27.3%) (55.8%) 85.6% 23.3%

Margins PptGP 38.9% 35.2% 36.5% 32.2% 42.2% 14.5% 37.1% 34.4% 35.4% 34.6% 38.3% -1.7%EBIT 32.7% 28.2% 28.9% 21.4% 19.2% 23.9% 30.5% 25.2% 20.9% 19.6% 23.5% -9.6%Reported NPAT 20.2% 8.7% 19.6% (6.5%) (21.2%) (4.1%) 14.6% 6.7% (12.5%) (0.3%) 5.7% -27.1%Recurring NPAT 23.4% 18.3% 27.2% 4.3% (0.2%) 14.6% 20.9% 15.9% 7.5% 12.7% 13.9% -13.4%

Staff cost & opex /Sales (5.8%) (5.5%) (6.0%) (12.8%) (14.2%) (14.8%) (6.6%) (9.3%) (14.5%) (15.0%) (14.8%) -7.9%Effective tax rate (%) (1.2%) (0.4%) (2.8%) (1.8%) (4.3%) 65.3% (1.0%) (3.3%) (5.2%) (5.4%) (5.6%) -4.2%

2015-17E 2Yr CAGR



Exhibit 128: Modern Dairy Summary Financials

Note: Numbers include Biological Assets gains/losses.



Total revenue 4,826.3 4,477.5 4,920.5 5,549.5 Cash & equivalents 833.6 1,780.0 794.4 579.2

Cost of goods sold (3,167.3) (2,891.5) (3,218.1) (3,423.8) Accounts receivable 1,097.8 895.8 984.4 1,110.2

SG&A (925.7) (1,523.4) (1,375.6) (1,278.7) Inventory 834.1 877.2 945.8 998.9


Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 2,952.9 3,740.3 2,911.8 2,875.6

EBITDA 1,008.5 378.8 627.5 1,129.7 Net PP&E 12,967.8 12,745.4 12,755.4 13,277.7

Depreciation & amortization (275.2) (316.2) (300.6) (282.7) Net intangibles 1,441.5 1,441.5 1,441.5 1,441.5


Interest income 12.8 25.4 0.0 0.0 Other long-term assets 120.6 118.1 115.7 113.4



Others (80.2) (387.3) (87.3) (284.4) Accounts payable 2,013.0 2,070.4 2,232.3 2,357.8

Pretax profits 355.4 (574.0) (13.4) 336.1 Short-term debt 5,225.5 3,238.9 2,172.3 2,154.6

Income tax (11.7) 29.8 0.7 (18.8) Other current liabilities 0.3 16.2 19.9 27.2

Minorities (22.4) (14.7) 0.0 0.0 Total current liabilities 7,238.8 5,325.4 4,424.6 4,539.7

Long-term debt 821.7 3,110.9 3,066.5 3,039.9

Net income pre-preferred dividends 321.3 (558.9) (12.7) 317.3 Other long-term liabilities 1,497.3 1,930.4 2,072.0 2,152.4


Net income (pre-exceptionals) 321.3 (558.9) (12.7) 317.3 Total liabilities 9,557.8 10,366.7 9,563.1 9,732.0


Net income 321.3 (558.9) (12.7) 317.3 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) (Rmb) 0.06 (0.10) 0.00 0.06 Minority interest 168.1 182.9 182.9 182.9

EPS (basic, post-except) (Rmb) 0.06 (0.10) 0.00 0.06

EPS (diluted, post-except) (Rmb) 0.06 (0.10) 0.00 0.06 Total liabilities & equity 17,507.8 18,202.7 17,386.5 17,875.2

DPS (Rmb) 0.01 0.00 0.00 0.01


Free cash flow yield (%) (6.2) 1.8 (2.6) (9.7)


Sales growth (4.0) (7.2) 9.9 12.8 ROE (%) 4.5 (7.2) (0.2) 4.1

EBITDA growth (29.6) (62.4) 65.6 80.0 ROA (%) 2.0 (3.1) (0.1) 1.8

EBIT growth (39.1) (91.5) 422.2 159.1 CROCI (%) 12.0 8.7 8.1 7.4

Net income growth (56.3) (274.0) 97.7 2,607.0 Inventory days 85.0 108.0 103.4 103.7

EPS growth (58.1) (255.5) 97.7 2,607.0 Receivables days 72.8 81.3 69.7 68.9


EBITDA margin 20.9 8.5 12.8 20.4 Net debt/equity (%) 65.6 58.3 56.8 56.7


Valuation 12/15 12/16E 12/17E 12/18E


Net income pre-preferred dividends 321.3 (558.9) (12.7) 317.3 P/E (analyst) (X) 32.6 NM NM 16.2

D&A add-back 273.0 313.7 298.1 280.3 P/B (X) 1.4 0.7 0.7 0.6


Net (inc)/dec working capital 558.6 216.4 4.7 (53.5) Dividend yield (%) 0.6 0.0 0.0 1.2

Other operating cash flow 266.5 1,512.7 978.7 664.4





Others 986.8 525.8 519.4 567.9

Cash flow from investments (1,111.3) (877.6) (885.8) (1,150.4)

Dividends paid (common & pref) (49.0) (64.3) 0.0 2.5

Inc/(dec) in debt 259.4 174.5 (1,110.9) (44.3)


Other financing cash flows (264.2) 215.4 (257.7) (231.4)

Cash flow from financing (53.8) 325.6 (1,368.6) (273.2)

Total cash flow 276.6 946.5 (985.6) (215.2) Note: Last actual year may include reported and estimated data.




Appendix: China dairy overview

China dairy overview

Exhibit 129: We initiate on 1 upstream dairy farming and 5 downstream dairy processors in this report Dairy industry value chain

Source: Company data, China Dairy Association, Goldman Sachs Global Investment Research.

Key Players

UHT Milk Profit

Flow (Rmb/Kg)

Corn Soybean Meal Alfalfa Other Forage

Upstream ‐ Dairy

Farming

Culled

Import Milk

(102K tons)

Import Milk

Powder

(572K tons)

Food

Ingredients

Modern

Trade (2011:

148K POS)

E‐commerce

Mother/Baby

Store (55K

POS)

Modern Dairy (1117.HK),

Huishan (6863.HK),

Shengmu (1432.HK)

Calves (c.10mn heads) Milkable Cows (c.7mn heads)

Mengniu (2319.HK),

Yili (600887.SS),

Bright Dairy (600597.SS),

Want Want (151.HK)

IMF: Biostime (1112.HK),

Yashili (1230.HK),

Beingmate (002570.SZ)

Dairy farmers (2011: 2.2mn farmers)

Domestic Raw Milk Output (37mn tons, estiamted supply gap 8‐9mn tons)

D&A and

Other Cost

(11%)

Salary (9%)

Other

Farming Opex

(10%)

Forage (40% volume)Grain (60% volume)

Feed (70% of cost)

Retailers

Dairy processors (649), IMF processors (128), USD 40bn industry sales for total dairy products.

UHT/Pasteurized Milk

(Wholesale:US$10bn )

Downstream ‐

Processors

Yoghurt (Wholesale:US$5.1bn)Milk Beverages

(Wohelsale:US$8.9bn)IMF (Wholesale:US$7.4bn)

Industry Supply Chain

UHT/Pasteurized Milk

(Retail:US$13.5bn)Milk Beverages (Retail:US$12bn) Yoghurt (Retail:US$7.2bn) IMF (Retail:US$12.1bn)

Traditional Trade (2011: 3.2mn POS)Retailer/Distributor GPM c.25%

Processor GPM 30‐35%

Dairy farmers free cash flow are typically thin due to half of its cow herd is not milkable.

20‐24mths 5‐6 lactation cycles

3rd party distributors direct distribution



Exhibit 130: Stock performance closely correlated with dairy sector earnings Stock perf. Vs dairy earnings index

Exhibit 131: Divergence between companies, as Yili has outperformed and Mengniu has dipped Dairy stock performance by company

Source: Datastream.

Source: Datastream.

Exhibit 132: Industry ROIC has declined over the past 5 years due to higher expansion of asset base Dairy downstream ROIC

Exhibit 133: We expect dairy industry capex to slow down in next 3 years Total dairy industry capex



0

100

200

300

400

500

600

700

800

0

100

200

300

400

500

600

700

800

Stock Perf. Index Dairy Earnings Index (RHS)

2000-2007:

Expansion of UHT milk

2008-09:

Melamine Incident

2010-13:

Demand for Quality Milk:

Kids milk, Premium Infant

formula

2014-16:

Milk Oversupply, High

Inventory and Promotion

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Dairy Stock PerformanceIndex to 100

Yili, 12X

Mengniu,

6X

Biostime,

2.5X

CMD,

0.5X

WW, 2X

2000-2007:

Expansion of UHT milk:

Yili and Mengniu

2008-09:

Melamine Incident

2010-13:

Demand for Quality Milk

Growth of Kids milk, Premium

Infant formula:

WW, Biostime, Upstream dairy

2014-16:

Milk Oversupply, High

Inventory and Promotion;

IMF online shift

1,5812,608

613

4,1931,895

2,018

1,862

5,864

5,3994,620 4,353

2,800

1,969

2,553

3,068

3,691

3,807

3,5713,203

3,472

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2011 2012 2013 2014 2015 2016E 2017E 2018E

Total Dairy Industry Capex (RMB mn)

Downstream Capex PPE/Land use capex Biological Assets (Capex)



Exhibit 134: Yili and Mengniu are highly involved in advertising/promotions Dairy Key Brands Marketing Strategy

Source: Channel Checks, Company data.

Company Product Category Product Feature15-16 Sponsoring

Program/Promotions/Movies

Yili Brand Entire Brand Olympic Strategic Partner

Satine UHT Milk

- Organic

- High Protein Content

- Low Fat Content

- I am Singer 4

- Biggest Brain 2

ShuHua UHT Milk - Suitable for Lactose Intolerant Consumers -Transformers 4

- LeeHom Wang

MeiYiTian Yoghurt Drink - Low Sugar Content

- High level of lactive acid bacteria- Happy Camp

ChangYi Probiotic Drink - Good for Digestive System

- Aids Weight loss process- Challenger's League 2

Ambrosial UHT Yoghurt

- High Protein Content

- Organic and Nautral

- "Greek Yoghurt"

- Running Man 4

- AngelaBaby

QQ Star Flavored Milk- Nutritional for Kids

- High amount of Vitamin D - Dad, where we going 3

YouSuanRu Yoghurt Drink- Targets younger customers

- Flavourful- Jay Chou

ChangQing Low Temp Yoghurt

- Light taste

- Aids weight loss process

- High probiotic content

- Fermented from 100% fresh milk

- Gao Yuan Yuan

Mengniu Brand Entire Brand Olympic Sponsor

Milk Deluxe UHT Milk

- Superior Milk Source

- High Protein content

- High end premium product

- Independence Day 2

XinYangDao UHT Milk - Suitable for Lactose Intolerant Consumers - Very Perfect

YouYiC Yoghurt Drink- High level of probiotics

- Good for Digestive system- WoShiMoWang

Just Milk UHT Yoghurt - 0 additives, all natural

- Full Speed 2

- China is Listening

- Deng Chao

- The Mermaid

Future Star Flavored Milk- Organic and nutritional

- 0 additives- Disney

SourSour Yoghurt Yoghurt Drink - Flavorful and nutritional- TF Boys

- 2016 Super Female Voice

GuanYiRu Low Temp Yoghurt- Good for digestive system

- High probiotic content- Sun Li

U+Milk UHT Milk- 0 Additives

- Natural Flavor

ChangYou Yoghurt Drink - Contains lactobacillus plantarum

Momchilovtsi UHT Yoghurt- Bulgarian Probiotics

- Exotic/Scientific

- Ultimate Challenge

- Olympics Sponsor

Want W

ant

WangZai Milk Flavored Milk- Suitable for kids

- Flavorful

Mengniu

Bright

Yili/Mengniu/Bright/Want Want Main Products Marketing Strategy

Yili



Exhibit 135: Yili sources its milk from a variety of regions via different partnerships Dairy Company Global Sourcing and Partnerships


Case study of Meiji and Danone We take a look at two of the larger dairy companies in developed markets and their growth story over the last 10-20 years as a way to gauge the possible future development trajectory of Chinese dairy companies. Danone, the largest dairy company in the world, and Meiji, the largest dairy company in Japan were our focus.

Meiji, a Japanese Confectionary giant and household name has a strong market positions in

Chocolate, Snacks, Dairy, and Packaged food in their home market. Specifically in the dairy market, Meiji has had a strong foothold in the fresh milk category. In the yogurt category, Meiji has two star products that were launched in the 1970s, Plain Yogurt and Bulgaria Yogurt (named after the birthplace of yogurt). These are yogurt still in their semi-solid state as opposed to “drinking yogurt” and are usually the healthier in terms of protein/sugar/caloric content (see Exhibit 24). After a series of Chocolate/Snacks/Packed food launches in the 1990s, the company

shifted towards the yogurt market to find a new source of growth at the turn of the century; in particular they started developing their Functional Yogurt portfolio that paved the way to a series of successful products throughout the 2000s. Moreover, their turn to Functional Yogurt has successfully created a new market in the Dairy industry that did not exist in the past. Its success was also partially driven by the desire for healthier products in the ageing Japanese population.

In the early 2000s, Meiji launched the “Probio Yogurt LG21”, a yogurt that contains a type of

LG21 lactobacillus that reduces helicobacter pylori, a microbe that causes gastritis. Subsequently in 2009, Meiji launched another probiotic yogurt named Meiji Yogurt R-1, which in a study “Reducing the Risk of infection in the elderly by dietary intake of yoghurt fermented with Lactobacillus delbrueckii”, published in the British Journal of Nutrition, showed it could potentially lead to lower incidence of influenza. More recently, the company released the “Meiji PA-3” yogurt, which a study showed it was able to break down purines (a chemical compound found in many

meat products that may increase risk of gout and contain high levels of uric acid).

These successful new probiotic products now accounts for near half of its yogurt category sales and has replaced the declining sales of Meiji Bulgaria yogurt (see Exhibit 136). In the last decade,

New Zealand/Australia China EU US Middle EastName Oceania Dairy (NZ) Sterilgarda Alimenti SpA (Italy) Dairy Farmers of AmericaType Wholly Owned Equity Minority Stakes (1%-5%) JV JVFunction Dairy Production Plant Milk Supply Liquid Milk Supply Milk Powder PlantAmount (USD mn) $262 mn $30mnComments Bought in 2013 Eg. Huishan (~1%) Since late 2013 Late 2014, KansasName Wageningen University (Netherlands)Type Cooperation Function R&D CenterAmount (USD mn)Comments Dairy product researchName Yashili New Zealand Dairy Co. Modern Dairy Arla (Denmark)Type Subsidiary ~25% Stake Holds 5% MengniuFunction Production/processing Plant 10 year supply agreement (until 201Processing/DistributionAmount (USD mn) $409 mnComments Founded in 2012 ~ 20% of milk supply China-Denmark Milk Tech. CenterNameTypeFunctionAmount (USD mn)CommentsName Synlait Milk (NZ) Shanghai Dairy FarmType Controlling ownership Equity Minority Stake (<10%)Function Farm Cooperative/Milk Processing Milk Processing/farmingAmount (USD mn)Comments Invested in 2010, IPO in 2013Name Pactum Dairy Group (AU)Type Strategic supply agreementFunction Manufacturing of UHT beverageAmount (USD mn)Comments Signed in 2014

N/A

Main Global Sourcing/Partnerships

Do

wn

stre

am

Co

mpa

nie

s

Bright

Purchases WMP from Fonterra N/A

N/AN/A

N/A

N/A

N/A

N/A

N/A

Mengniu

Want Wan N/A

Yili



Meiji has slowly transformed itself into a company more catered to the health conscious Japanese population.

Exhibit 136: Meiji’s Functional yogurt has outgrown Bulgaria yogurt (plain yogurt) in recent years Yogurt growth

Exhibit 137: Danone launched its yogurt drink, Actimel, in the 1990s to compete against Yakult Danone milestones in dairy business



Exhibit 138: Meiji turned its focus to functional/probiotic yogurt drinks in the 2000s Meiji Sales growth


On the other hand, the French dairy giant, Danone, has a slightly different story. As a leader in the global dairy market, the company pioneered the concept of sweetening yogurt. In the 1950’s the company came up with a sweetened strawberry yogurt product, marketing it as a “dessert” rather than a health-oriented product such as that of Meiji’s Plain/Bulgaria yogurt. In 1987, the company introduced Activia, a type of semi-solid state yogurt, which is often sweetened with other

flavors. In 1994, with the invasion of Japan’s popular Yakult yogurt drink into Europe and the rest of the international market, Danone decided to launch its own version of a yogurt drink, Actimel.

3538

58

70

87.2

68

7572.3 71.6

9%

53%

21%

25%

0%

10%

20%

30%

40%

50%

60%

0

10

20

30

40

50

60

70

80

90

100

2011 2012 2013 2014 2015

Bn Yen Functional Yoghurt Meiji Bulgaria Yoghurt Functional Growth (RHS)

*Source: Company website

1910s 1919 Isaac Carrasso began producing own yoghurt in Barcelona

1920s Started advertising beneficial effects of Danone yoghurt

1950 In the US, decided to put sweet strawberry in bottom…emphasized "A delicious dessert"

1959 Hit annual sales of $3mn , produced 3/4 of country's yoghurt

1990s 1994 Launched Actimel, (probiotic yoghurt drink)

2004 Activia rolled out in Germany/Canada/Mexico/Netherlands

2006 Activia grew by 48% to reach 1.3bn Euro

Danone Historical Milestones in Dairy

1950s

2000s

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0

200

400

600

800

1,000

1,200

FY

1989

FY

1990

FY

1991

FY

1992

FY

1993

FY

1994

FY

1995

FY

1996

FY

1997

FY

1998

FY

1999

FY

2000

FY

2001

FY

2002

FY

2003

FY

2004

FY

2005

FY

2006

FY

2007

FY

2008

FY

2009

FY

2010

FY

2011

FY

2012

FY

2013

FY

2014

FY

2015

MeijiTotal Sales (JPY Bn) Dairy Segment Confectionery/Nutritional Growth

Launches Meiji

Probio Yoghurt Launches Meiji

"Probio Yoghurt R-1"

Focus on

Functional/Probiotic

drinks

Consolidated into Meiji

Holdings: Restructured

Dairy/Processed food

segment

Launches Meiji

"Probio Yoghurt PA-3"



Like Yakult, Actimel is a Lactobacillus casei based product, a specific strand of bacteria documented to be nutritional to the digestive system. It was successful and the product remains popular to this day.

The paths of both Meiji and Danone in our view shed some light on the possible development for the Chinese dairy, more specifically, yogurt, market. First of all, unlike France and Japan, it is estimated by a third party consultant Dr. ChunYu (a reputable healthcare app/platform in China, as reported in SoHu in April 2016) that almost 25% of China’s population is lactose intolerant (i.e., has trouble digesting fresh milk) – thus the appeal of yogurt as a source of protein instead of milk. Meiji/Danone’s story tells us that yogurt can be either marketed as a flavorful dessert, functional

food that helps digestion, a healthy source of protein or a combination of these. We believe the Chinese consumer will gradually shift from their relatively high consumption of flavored milk/UHT milk/UHT Yogurt towards a relatively healthier type of yogurt – that is low temperature yogurt.

Exhibit 139: Danone’s Fresh dairy segment has seen sales almost double in the last 10 years Danone Sales growth


6,510.0

11,057.0

-10%

-5%

0%

5%

10%

15%

20%

0.3

2,000.3

4,000.3

6,000.3

8,000.3

10,000.3

12,000.3

14,000.3

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Eur mn Danone Fresh Dairy Product Segment Fresh Dairy Products Sales Growth



信息披露附录申明本人，廖绪发, CFA，在此申明，本报告所表述的所有观点准确反映了本人对上述公司或其证券的个人看法。此外，本人薪金的任何部分不曾与，不与，也将不

会与本报告中的具体推荐意见或观点直接或间接相关。

投资摘要投资摘要部分通过将一只股票的主要指标与其行业和市场相比较来评价该股的投资环境。所描述的四个主要指标包括增长、回报、估值倍数和波动性。增长、

回报和估值倍数都是运用数种方法综合计算而成，以确定该股在地区研究行业内所处的百分位排名。

每项指标的准确计算方式可能随着财务年度、行业和所属地区的不同而有所变化，但标准方法如下：

增长是下一年预测与当前年度预测的综合比较，如每股盈利、EBITDA 和收入等。回报是各项资本回报指标一年预测的加总，如 CROCI、平均运用资本回报率

和净资产回报率。估值倍数根据一年预期估值比率综合计算，如市盈率、股息收益率、EV/FCF、EV/EBITDA、EV/DACF、市净率。波动性根据 12个月的历史

波动性计算并经股息调整。

Quantum Quantum 是提供具体财务报表数据历史、预测和比率的高盛专有数据库，它可以用于对单一公司的深入分析，或在不同行业和市场的公司之间进行比较。

GS SUSTAIN GS SUSTAIN是侧重于长期做多建议的相对稳定的全球投资策略。GS SUSTAIN关注名单涵盖了我们认为相对于全球同业具有持续竞争优势和出色的资本回

报、因而有望在长期内表现出色的行业领军企业。我们对领军企业的筛选基于对以下三方面的量化分析：现金投资的现金回报、行业地位和管理水平（公司管

理层对行业面临的环境、社会和企业治理方面管理的有效性）。

信息披露

相关的股票研究范围

廖绪发, CFA：中国传媒业、中国食品及饮料行业、亚太消费品及零售行业。

亚太消费品及零售行业：Ace Hardware Indonesia、Amorepacific、BGF Retail、合生元、光明乳业、现代牧业、华润创业、CJ CheilJedang、CP ALL PCL、E-Mart、Eclat Textile Co.、GS Retail Co.、Hyundai Department Store、KT&G、LG Household & Healthcare、Lotte Shopping、Makalot Industrial Co、Matahari Department Store、蒙牛乳业、MOMO.COM Inc.、Orion、PChome Online Inc.、宝胜国际控股有限公司、统一超商、PT Gudang Garam Tbk、PT Hanjaya Mandala Sampoerna Tbk、PT Indofood CBP Sukses Makmur、PT Indofood Sukses Makmur Tbk、PT Kalbe Farma Tbk、PT Unilever Indonesia Tbk、Shenzhou International Group Holdings Ltd、Shinsegae、九兴控股、高鑫零售、康师傅控股、青岛啤酒(A)、青岛啤酒(H)、统一企业、统一企业、中国

旺旺、万洲国际、伊利股份、裕元工业。

中国食品及饮料行业：古井贡酒、洋河股份、贵州茅台、泸州老窖、青青稞酒、山西汾酒、五粮液。

中国传媒业：奥飞娱乐、光线传媒、歌华有线、华录百纳、蓝色光标、中南传媒、分众传媒、省广股份、华谊兄弟、IMAX中国、凤凰传媒、乐视网、东方明

珠、掌趣科技、万达院线、华策影视。

与公司有关的法定披露

以下信息披露了高盛高华证券有限责任公司（“高盛高华”）与北京高华证券有限责任公司（“高华证券”）投资研究部所研究的并在本研究报告中提及的公司之间

的关系。

没有对下述公司的具体信息披露：合生元 (HK$23.20)、光明乳业 (Rmb15.00)、现代牧业 (HK$1.09)、蒙牛乳业 (HK$13.54)、中国旺旺 (HK$4.88)、伊利股份 (Rmb18.50)

公司评级、研究行业及评级和相关定义

买入、中性、卖出：分析师建议将评为买入或卖出的股票纳入地区投资名单。一只股票在投资名单中评为买入或卖出由其相对于所属研究行业的潜在回报决定。

任何未获得买入或卖出评级的股票均被视为中性评级。每个地区投资评估委员会根据 25-35%的股票评级为买入、10-15%的股票评级为卖出的全球指导原则来

管理该地区的投资名单；但是，在某一特定行业买入和卖出评级的分布可能根据地区投资评估委员会的决定而有所不同。地区强力买入或卖出名单是以潜在回

报规模或实现回报的可能性为主要依据的投资建议。

潜在回报：代表当前股价与一定时间范围内预测目标价格之差。分析师被要求对研究范围内的所有股票给出目标价格。潜在回报、目标价格及相关时间范围在

每份加入投资名单或重申维持在投资名单的研究报告中都有注明。

研究行业及评级：分析师给出下列评级中的其中一项代表其根据行业历史基本面及／或估值对研究对象的投资前景的看法。具吸引力(A)：未来 12个月内投资前

景优于研究范围的历史基本面及／或估值。中性(N)：未来 12个月内投资前景相对研究范围的历史基本面及／或估值持平。谨慎(C)：未来 12个月内投资前景

劣于研究范围的历史基本面及／或估值。

暂无评级(NR)：在高盛高华于涉及该公司的一项合并交易或战略性交易中担任咨询顾问时并在某些其他情况下，投资评级和目标价格已经根据高华证券的政策予

以除去。暂停评级(RS)：由于缺乏足够的基础去确定投资评级或价格目标，或在发表报告方面存在法律、监管或政策的限制，我们已经暂停对这种股票给予投

资评级和价格目标。此前对这种股票作出的投资评级和价格目标(如有的话)将不再有效，因此投资者不应依赖该等资料。暂停研究(CS)：我们已经暂停对该公司

的研究。没有研究(NC)：我们没有对该公司进行研究。不存在或不适用(NA)：此资料不存在或不适用。无意义(NM)：此资料无意义，因此不包括在报告内。

一般披露

本报告在中国由高华证券分发。高华证券具备证券投资咨询业务资格。



本研究报告仅供我们的客户使用。除了与高盛相关的披露，本研究报告是基于我们认为可靠的目前已公开的信息，但我们不保证该信息的准确性和完整性，客

户也不应该依赖该信息是准确和完整的。报告中的信息、观点、估算和预测均截至报告的发表日，且可能在不事先通知的情况下进行调整。我们会适时地更新

我们的研究，但各种规定可能会阻止我们这样做。除了一些定期出版的行业报告之外，绝大多数报告是在分析师认为适当的时候不定期地出版。

高盛高华为高华证券的关联机构，从事投资银行业务。高华证券、高盛高华及它们的关联机构与本报告中涉及的大部分公司保持着投资银行业务和其它业务关

系。

我们的销售人员、交易员和其它专业人员可能会向我们的客户及自营交易部提供与本研究报告中的观点截然相反的口头或书面市场评论或交易策略。我们的资

产管理部门、自营交易部和投资业务部可能会做出与本报告的建议或表达的意见不一致的投资决策。

本报告中署名的分析师可能已经与包括高华证券销售人员和交易员在内的我们的客户讨论，或在本报告中讨论交易策略，其中提及可能会对本报告讨论的证券

市场价格产生短期影响的推动因素或事件，该影响在方向上可能与分析师发布的股票目标价格相反。任何此类交易策略都区别于且不影响分析师对于该股的基

本评级，此类评级反映了某只股票相对于报告中描述的研究范围内股票的回报潜力。

高华证券及其关联机构、高级职员、董事和雇员，不包括股票分析师和信贷分析师，将不时地对本研究报告所涉及的证券或衍生工具持有多头或空头头寸，担

任上述证券或衍生工具的交易对手，或买卖上述证券或衍生工具。

在高盛组织的会议上的第三方演讲嘉宾（包括高华证券或高盛其它部门人员）的观点不一定反映全球投资研究部的观点，也并非高华证券或高盛的正式观点。

在任何要约出售股票或征求购买股票要约的行为为非法的地区，本报告不构成该等出售要约或征求购买要约。本报告不构成个人投资建议，也没有考虑到个别

客户特殊的投资目标、财务状况或需求。客户应考虑本报告中的任何意见或建议是否符合其特定状况，以及(若有必要)寻求专家的意见，包括税务意见。本报告

中提及的投资价格和价值以及这些投资带来的收入可能会波动。过去的表现并不代表未来的表现，未来的回报也无法保证，投资者可能会损失本金。

某些交易，包括牵涉期货、期权和其它衍生工具的交易，有很大的风险，因此并不适合所有投资者。外汇汇率波动有可能对某些投资的价值或价格或来自这一

投资的收入产生不良影响。

投资者可以向高华销售代表取得或通过 http://www.theocc.com/about/publications/character-risks.jsp取得当前的期权披露文件。对于包含多重期权买卖的期权

策略结构产品，例如，期权差价结构产品，其交易成本可能较高。与交易相关的文件将根据要求提供。

所有研究报告均以电子出版物的形式刊登在高华客户网上并向所有客户同步提供。高华未授权任何第三方整合者转发其研究报告。有关某特定证券的研究报

告、模型或其它数据，请联络您的销售代表。

北京高华证券有限责任公司版权所有 © 2016 年

未经北京高华证券有限责任公司事先书面同意，本材料的任何部分均不得(i)以任何方式制作任何形式的拷贝、复印件或复制品，或(ii)再次分发。

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