Company Profile

Maiquer Group Co., Ltd.'s primary businesses are production and marketing of dairy products andbakery chain operations. The company's main products are dairy beverages and bread, cake, pastryand moon cake.

Investment Highlights

Incorporating Xinmeixin’s financial results drove fast growth in operating revenue.Maiquer Group acquired Xinmeixin in 2015 and started incorporating its earnings in June this year. IHrevenue from bakery business grew by 173.85% YoY to CNY 130 million. Bakery, with its proportion intotal revenue increasing by 27.67 percentage point YoY to 54.45%, becomes the main source ofrevenue. Sales channel adjustment led to a 23.49% drop YoY in revenue from dairy product and itsration in total fell by 27.40 percentage points to 36.03%. This acquisition expanded markets outsideXinjiang, as revenue from Zhejiang surged by 418.15% YoY.

Gross profit margin remained, yet rise in expense rate dragged down growth of net profit.

1H gross profit margin went up by 2.61 percentage points to 45.34%, with 2Q gross margin profit grewby 1.56 percentage point to 45.79%. 1H16 gross profit margin of core products, including dairyproducts, bakery products and holiday food, kept stable, grew by 0.01/2.59/12.63 percentage pointsrespectively to 40.95%/47.74%/59.29%. M&A caused a 6.35 percentage point YoY rise to 28.45% in 1Hselling expense rate, mainly attributed to the increase of payrolls. Administrative expense rate fell by1.51 percentage point to 9.36%. High expense rate impacted profit. 1H net profit down 4.17percentage point YoY to 9.02%, with 2Q net profit down 2.81 percentage point YoY to 12.62%.

Restructuring dairy farm helps Maiquer enhance control over raw material supply.New project will add fresh milk production capacity. 1) the company was licensed to participate in therestructuring process of Xinjiang Hutubi Cattle Farm with no less than CNY 1 billion investment. 25,000high quality cows are bred in Hutubi, producing over 60,000 metric tons of milk every year. In additionto providing milk to the Company, Xiyuchun, subsidiary of Hutubi, has advantages in producing coldmilk. 2) the Company is building a production line which is enable to process 300 metric tons offresh milk per day. It is expected to be put into operation in 2017.

The company’s bakery business is soaring after the acquisition. Offline bakery stores have spread toXinjiang, Ningbo and Beijing. Maiquer redecorated some of the stores, notably raising their revenue. Itmay continue carrying out cross region integration for years to come.

Earnings forecast and investment grading:

We forecast the company’s revenue at CNY 632 million in 2016, CNY 896 million in 2017 and CNY 1.18billion in 2018. We made EPS forecast at CNY 0.74 in 2016, CNY 0.84 in 2017 and CNY 1.11 in 2018,implying 65.4x 16PE, 57.7x 17PE, 43.8x 18PE. Maiquer shows optimistic outlook: dairy productbusiness will be further invigorated by industry chain integration and production capacity expansion;bakery business gains a good momentum outside Xinjiang and may be further expanded, which isworth attention.

Potential Risk: M&A fails expectations, the price of dairy products may fluctuate.