On Tuesday, JPMorgan (NYSE:JPM) took a more conservative stance on China Mengniu Dairy Company Limited (2319:HK) (OTC: CIADY), downgrading the stock from Overweight to Neutral.
The firm also significantly reduced the price target to HK$13.00 from the previous HK$30.00. The revision follows a series of concerns regarding the dairy company's current financial trajectory and market challenges.
The decision to downgrade Mengniu Dairy's stock was driven by several factors as outlined by the analyst. Key issues include anticipated further declines in raw milk costs due to weakening demand, which is expected to result in increased discounting and the provision of bulk milk powder. These factors are likely to negatively impact the company's sales and margins.
Additionally, the lack of new, strong products to drive sales was cited as a concern, along with the company's relatively weaker execution flexibility in the face of an economic downturn.
JPMorgan also highlighted the low probability of Mengniu Dairy increasing its dividend payout quickly from the current 40% to rival that of its competitor Yili, which stands at 73%. This is significant as the analyst projects a sales and earnings decline of 1.0% and 10.5% respectively for the year 2024.
Furthermore, the sales and earnings compound annual growth rate (CAGR) from 2024 to 2026 is estimated to be 3% and 8%, underperforming when compared to Yili's projected growth.
The firm's 2024 earnings per share (EPS) estimate for Mengniu Dairy is 21% below the Bloomberg consensus. The analyst also noted that despite the stock's marked decline, which stands at a 35% year-to-date decrease compared to the Hang Seng China Enterprises Index's 6% increase, the current price-to-earnings ratio for 2025 is now seen as adequately reflecting the discount to Yili.
InvestingPro Insights
In light of JPMorgan's recent downgrade of China Mengniu Dairy Company Limited, a look at the real-time data from InvestingPro provides additional context for investors. With a market capitalization of $6.38 billion and trading at a P/E ratio of 9.61, Mengniu Dairy is positioned as a prominent player in the Food Products industry. The company's adjusted P/E ratio for the last twelve months as of Q4 2023 stands at 10.06, indicating a valuation that could be appealing for value-oriented investors.
InvestingPro Tips suggest that despite the stock trading near its 52-week low and having experienced a significant price drop over the last year, analysts predict Mengniu Dairy will be profitable this year. This is corroborated by the company's profitability over the last twelve months. Furthermore, the company's revenue growth for the same period was 6.51%, with a gross profit margin of 36.82%, indicating solid operational performance.
For investors seeking additional insights, there are more InvestingPro Tips available that could provide a deeper analysis of Mengniu Dairy's financial health and market potential. To access these tips and make an informed investment decision, consider using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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