Company Profile

BRIGHT DAIRY & FOOD CO., LTD. is a China-based company, principally engaged in the development, production and distribution of dairy products. The Company's products mainly include fresh milk, fresh yogurt, lactobacillus drinks, normal temperature yogurt, milk powder for infants and middle-aged and old people, cheese and butters.

The Company is also engaged in raising and breeding of dairy cow, as well as logistics and distribution businesses.

The Company distributes its products within domestic markets and to overseas

markets. （Source: Reuters）

Event

BRIGHT DAIRY & FOOD CO., LTD. （“BRIGHT”/ the company） announced its latest quarterly numbers.

In 1Q23, BRIGHT achieved revenue/ net income attributable to shareholders/ net income deducting non-recurring items of CNY 7.071 billion/ CNY 187 million/ CNY 175 million, down 2.42%YoY/ up 13.05%YoY/ up 25.20%YoY.

Comments

The decline in BRIGHT’s Q1 revenue moderated, showing its operation was heading better steadily.

In 1Q23, the company’s liquid milk/ other dairy products/ animal husbandry products contributed CNY 4.071 billion/ CNY 2.153 billion/ CNY 476 million to its revenue, accounting for 57.9%/ 30.6%/6.8%, up 1.02%YoY/ down 0.18%YoY/ down 31.20%YoY.

The mild decline in Q1 revenue was due to high base last year, the COVID disruptions and the different arrival date of the 2023 Spring Festival. The company’s operating has been heading better, as its revenue decline narrowed quarter by quarter since 2Q22.

By products, the company’s fresh milk is expected to see double-digit growth while its room temperature and low-temperature products are expected to see a mild decline.

Due to less sales volume of feeds and raw milk, the revenue from animal husbandry products saw a decline from a year earlier, as the company has promoted to improve quality and efficiency of its trade business and actively contracted non-core businesses with low gross profits.

Thanks to a mild lift in gross margin and an obvious improvement in selling expense rate, the company’s profitability enhanced greatly.

In 1Q23, the company’s gross margin was 19.96%, up 0.18 percentage points （pps） from a year earlier, mainly thanks to 1） decreased costs of raw milk in the upstream, as fresh and raw milk price in Q1 was CNY 4.04/ kg, down 4.61% from a year ago and 2.12% from a quarter ago; 2） relatively lower gross margin of Synlait, which offset partial cost advantages.

The selling expense rate in Q1 was 11.78%, down 1.53pps from a year earlier, mainly due to fluctuations of quarterly available products, but the full-year selling expense rate is expected to maintain stable.

Given the above factors, the company’s net margin attributable to shareholders came in at 2.65%, up 0.36pps from a year prior.

Earnings forecast and investment recommendation

We remain our earlier earnings forecasts and estimate its revenue at CNY 32.137 billion/ CNY 35.828 million/ CNY 39.617 billion, up 13.90%YoY/ 11.49%YoY/ 10.58%YoY; its net income attributable to shareholders at CNY 685 million/ CNY 815 million/ CNY 950 million, 89.98%/18.94%/16.61% higher than it was a year ago; its EPS at CNY 0.50/ CNY 0.58/ CNY 0.68, implying a P/E ratio to 20.60x/ 17.32x/ 14.86x based on the closing price on April 27.Reiterate “Outperform”。

Potential risks

intensified competition; hikes in raw material prices; food safety