Macquarie Research said it still has concerns over the advertising and promotion (A&P) deleverage of China Mengniu Dairy (02319) as its channel check shows that competition remains intense.
Mengniu announced last Friday that it will issue zero coupon bonds that are exchangeable into shares of China Modern Dairy (01117). Mengniu hopes to reduce its financing cost via the bond issuance and plans to use the proceeds to refinance certain existing debts.
The research house believes Mengniu is still on track to see high single digit top line growth with UHT yogurt drinks and Deluxe as the key drivers. However, the gross profit margin (GPM) expansion from product mix will be offset by high input costs. As a result, it expects overall GPM to remain flattish on a YoY basis if excluding WMP sales impact in 1H16. Management still guided that the A&P to revenue ratio will remain flattish. However, Macquarie still has concerns over the A&P deleverage.
Macquarie maintained its target price of HK$14 and a rating of "neutral" for Mengniu Dairy.
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