Company Profile

More M&As Expeted to Maiquer Group is the only dairy company directly selling its products via itsown bakery chain stores. The company’s main products include sterilized milk, modulation milk andmilk-containing beverages.

Event

Maiquer Group (002719. SZ) recently released its 16Q3 financial report, stating that in the first threequarters of 2016, it made operating revenue of CNY 425 million, up 16.26% YoY. The net profitattributable to the parent company was CNY 46 million, down 19.3% YoY. In the third quarter, thecompany received operating revenue of CNY 186 million, down 1.15% YoY. The net profit attributableto the parent company for the third quarter dropped by 27.12% YoY to CNY 25 million.

Comments

The weaker-than-expected moon cake dragged down 16Q3 revenue.

Due to economic downturn, the company’s revenue and earnings from moon cake sales missedexpectation; the sales growth slowed down somewhat from the year-ago period, but at adecelerated pace. In 16Q3, the company’s operating revenue slipped by 1.15%. The gross margin for16Q4 stands at 48.46%, down 3.50 percentage points YoY. The dairy product business, which sufferedfrom a 24% sales drop, has started stabilizing in the third quarter.

Increase in financial expense ratio put pressure on net profit.

In the third quarter, the company’s sales expense ratio went up by 3.59 percentage points to 27.84%.The administration rate increased by 0.65 percentage points to 8.23%. The increase in expense,coupled with gross margin deteriorating, led to sharp drop profitability. The company’s net profitmargin for the third quarter dropped by 4.71 percentage points to 13.21%.

Maiquer Group plans to acquire Xiyuchun, as part of the efforts to develop itself in China’s dairyproduct leader. We expect the company y to carry out more M&As in the future.

1) Maiquer Group has been approved to participate in the restructuring of Hutubi Cattle Farm, whichcurrently raises 25,000 cows and produces more than 70,000 metric tons of milk. The farm’ssubordinate milk producer Xiyuchun is the second largest dairy product brand in Xinjiang, generatingearnings of CNY 60 million. So far its earnings for this year slightly increased. The upstream cattlefarm will continue supplying high-quality raw milks. The yogurt products produced by thedownstream Xiyuchun milk production company will become a good complement to MaiquerGroup’s product mix. 2) The company has taken various measures to streamline business andimprove overall performance of its newly acquired Zhejiang Xinmeixin Food Industry, whoseprofitability improved substantially. In the future, the company will continue ramping up its bakerychain business in Jiangsu Province, Zhejiang Province and the North China Region through M&As.

Earnings Forecast and Investment Grading:

Without considering the impact of financial consolidation due to acquisition of Xiyuchun, weestimate the company’s net profit at CNY 68 million in 2016, CNY 77 million in 2017 and CNY 88million in 2018. The earnings per share was CNY 0.63 in 2016, CNY 0.71 in 2017 and CNY 0.81 in2018, implying 95x 16E PE, 84x 17E PE and 73x 18E PE. The company’s dairy product and bakerychain businesses have engaged in industrial consolidation. With clear business strategy and firmimplementation, Maiquer Group has strong potential to deliver breakthrough in both dairy productand bakery chain businesses. Reiterate BUY.

Potential Risks: Company’s M&A efforts failing expectations, food safety problems