Click "Read Original" for details This article is from the WeChat public account "GF Securities Food & Beverage" (ID: gfzqspyl) by Wang Yongfeng's team, authorized for distribution by New Distribution.
Core Views
I. Infant formula is a 100-billion-yuan market, with domestic brands having advantages in third-tier and below cities.
1. Infant formula is a 100-billion-yuan market, with newborn infants affecting demand growth. In 2015, terminal sales of infant formula reached 112.9 billion yuan, with growth slowing to 7.4%, mainly due to the decline in newborns in 2015, which caused sales volume growth to drop from 16.7% in 2013 to 4.3% in 2015. It is expected to remain low in 2016.
2. Foreign brands occupy half of the market. The top five foreign brands account for 43%; in first- and second-tier cities, major foreign brands account for over 80%.
3. In recent years, the maternal and child channel has risen rapidly, lowering channel barriers, resulting in a proliferation of miscellaneous milk powder brands and chaotic industry competition, with over 3,000 formula brands in the market. In 2015, growth rates for maternal/child, e-commerce, and supermarket channels were 15.5%, 2.5%, and -10.8%, respectively, with maternal/child accounting for 48% and supermarkets 30%. Domestic leading brands and domestic and foreign miscellaneous brands compete for market share in third-tier and below cities, with domestic and foreign miscellaneous brands offering high gross margins (50-70%) to maternal/child channels, successfully capturing over 50% of the market in fourth-tier and below cities.
II. Universal second-child policy and consumption upgrade drive industry demand recovery.
The universal second-child policy and consumption upgrade are driving demand recovery in the milk powder industry:
According to sample data from the National Bureau of Statistics, the birth population in 2016 was 17.86 million, an increase of 1.31 million, with a growth rate of 8% (the National Health and Family Planning Commission counted 18.46 million live births in hospitals in 2016). The demand for milk powder lags behind newborns by about 6 months, so significant growth in milk powder demand is expected from the first half of 2017. We believe the birth peak and second-child policy will continue to drive the growth rate of the 0-3 year old population to 6.1%/8.2%/4.3% in 2017-2019, and short-term demand for milk powder will recover. It is expected that sales of first and second stage milk powder will grow faster in 2017, while third stage milk powder will grow rapidly from 2018.
Consumption upgrade will increase the proportion of mid-to-high-end milk powder, coupled with the rise in raw milk prices, which will push up terminal prices and ease competition. Based on volume and price analysis, we expect the infant formula industry to achieve a compound growth rate of 10%-20% over the next three years.
III. Registration system adjusts industry supply side, new cross-border e-commerce policy slows foreign brand impact.
Policy dividends are prominent: 1. The registration system implemented on January 1, 2018, will adjust the industry supply side. Each factory is limited to no more than 3 formulas. Currently there are over 3,000 brands; after registration, the brand cap is 543, but the requirements are high, so it is expected that only 200-300 brands will be registered, and 90% of brands will be eliminated. From a brand perspective, the top five domestic brands have clear big single products and 16 qualified factories, so they are less affected by the policy. Domestic and foreign miscellaneous brands are expected to cede 22% of market space, concentrated in third-tier and below cities, with 90% from maternal/child stores. We expect the industry turning point to appear in the second half of this year, industry concentration will increase, and domestic leading brands will fully benefit from policy dividends due to their strong channel capabilities in third-tier and below cities, seizing the share vacated by miscellaneous brands.
- Cross-border purchase supervision is tightening, and the B2C model is significantly affected by the new policy, with a substantial increase in tax burden, weakening the cost-effectiveness advantage of foreign brands, which helps slow the impact of foreign milk powder brands.
IV. Investment advice: Strategically recommend domestic leaders Biostime, Beingmate, and Yili.
Domestic milk powder leaders have obvious advantages in third-tier and below cities and are expected to seize the market vacated by miscellaneous brands. We recommend Biostime (obvious advantages in maternal/child channels and strong channel execution), Beingmate (company fundamentals have bottomed out, channel policy adjustments bring quarterly performance improvements), and Yili (first in overall channel market share for domestic milk powder, can fully leverage to seize share).
V. Risk warnings
Economic growth decline exceeding expectations; food safety issues; policy implementation not timely.
The following is the main text
I. Infant formula is a 100-billion-yuan market, with domestic brands having advantages in third-tier and below cities
- Infant formula market size exceeds 100 billion yuan, with newborn numbers affecting demand growth.
The infant formula market has exceeded 100 billion yuan in sales. In recent years, the slowdown in newborn growth has led to a decline in milk powder demand. Since 2006, China's infant formula industry has developed rapidly, exceeding 100 billion yuan in 2014, reaching 112.9 billion yuan in 2015 with a compound growth rate of 22%, of which sales volume compound growth rate was as high as 15%. Decomposing volume and price, before 2013, the high growth rate was mainly driven by both volume and price. In recent years, industry growth has slowed (growth rate fell to 7.42% in 2015), mainly due to the decrease in the number of births in 2015, leading to a decline in sales volume growth (birth population in 2015 was 16.55 million, a decrease of 320,000 from 2014, down 1.9% year-on-year), with sales volume growth falling from 16.67% in 2013 to 4.29% in 2015.
- Maternal/child channel is dominant, e-commerce develops rapidly.
E-commerce and maternal/child channels are seizing share from supermarkets. In China's infant formula industry, channel costs account for as high as 20-40%, much higher than other countries (4-14%). Before 2009, the industry's sales channels were mainly supermarkets, achieving channel sinking, with supermarkets having a solid foundation but high channel costs. In 2009, maternal/child stores began to segment from supermarket channels and developed rapidly. Compared to supermarkets, maternal/child stores have simpler procedures and lower costs, but require higher gross margins. Currently, there are about 170,000 registered maternal/child stores in China. In 2015, maternal/child store sales accounted for 48%, an increase of 6.1 percentage points from 2014. In 2013, with the impact of internet development, cross-border e-commerce became an important channel for imported milk powder sales, with low channel costs and high growth. The proportion of e-commerce channels continued to rise. In 2015, the proportions of maternal/child stores, e-commerce, and supermarkets were 48%, 30%, and 22%, respectively. In recent years, supermarkets have shown a clear downward trend, while maternal/child stores and e-commerce channels have increased significantly. In 2015, maternal/child channel sales revenue grew the fastest, reaching 15.5%, while supermarket channels declined.
In e-commerce channels, foreign brands dominate, and the B2C model drives channel growth. In e-commerce channels, the proportion of foreign brands is significantly higher than domestic brands. In 2015, among infant formula e-commerce sales brands, the top seven sales brands were all foreign brands, with the top seven alone accounting for over 64%. From the perspective of production country, in the first quarter of 2016, online sales of infant formula showed imported formula accounting for 54% and domestic formula 46%, with imported formula revenue slightly higher than domestic. Additionally, e-commerce channels can be subdivided into B2C and C2C. The C2C model is mainly personal purchasing agents, but due to disadvantages such as unguaranteed product quality and after-sales service, its proportion has gradually declined. In 2015, C2C e-commerce sales fell 13.1% due to the drag of personal purchasing agents, while B2C benefited from cross-border purchases and guaranteed product quality and after-sales, with sales rising 23.9%, driving overall e-commerce channel growth of 2.5%. In 2015, B2C accounted for 52.8% of e-commerce channels, surpassing C2C for the first time, and e-commerce channel development mainly relies on B2C growth.
Maternal/child channels are mainly distributed in third-tier and below cities, with low distribution concentration. Maternal/child channels provide professional services and experiences, giving them obvious advantages over other channels, ensuring they remain the main sales channel in the future. Maternal/child stores are generally small: in 2015, 65.5% had sales under 5 million yuan, 78.6% had operating area under 200 square meters, and the main types were shopping district stores (45%) and community stores (32%). They mainly operate domestic brands: mass maternal/child stores operating domestic brands account for 39%, while boutique stores focusing on imports account for about 20%.
Maternal/child stores are mainly distributed in the eastern and central regions, with fewer in the western region, and 70% are in third-tier and below cities. From 2015 growth, first-tier cities grew fastest, mainly at 10-20%, which we believe is due to the small base, but due to high rent and labor costs in first-tier cities, their maternal/child store expense ratio is also the highest, reaching 50%.
- Imported brands impact severely, local major brands focus on third- and fourth-tier cities.
Currently, infant formula is severely impacted by foreign brands, with many small brands and low concentration. In 2007, the top 3 domestic milk powder brands (Sanlu, Yili, Wandashan) had a market share of about 40%. After the 2008 melamine incident, consumer confidence in domestic milk powder declined, and foreign brands entered the domestic market. With further impact from cross-border e-commerce and original imported milk powder, the proportion of foreign brands continued to rise, reaching a peak of 57%. With gradual industry regulation and recovery of consumer confidence, foreign brands currently maintain about 50% market share. Industry concentration is low: the top three companies hold 37%, and the industry leader only 15%. Among foreign brands, Mead Johnson and Wyeth have outstanding competitive advantages, together accounting for over 50%. The domestic brand market is relatively fragmented, with the top two domestic producers, Beingmate and Biostime, together accounting for 34% of domestic share. Industry operations are chaotic—currently there are 103 infant formula production enterprises in China, corresponding to nearly 2,000 formulas, with some enterprises even having 180 formulas. Enterprises implement OEM but products are undifferentiated.
In first- and second-tier cities, foreign brands dominate, while local brands seize third- and fourth-tier cities, with miscellaneous brands accounting for 60% in third-tier and below markets. Consumers in first- and second-tier cities show a more obvious preference for imported infant formula. According to Analysys data, up to 73% of first-tier consumers are willing to choose imported or original imported infant formula. Therefore, foreign brands account for as high as 98% of sales in first-tier cities (Beijing, Shanghai, Guangzhou, Shenzhen) and 80% in first- and second-tier cities. Domestic milk powder brands mostly choose to develop lower-cost third- and fourth-tier cities (80%) and township markets, attracting consumers by giving more profit to terminal agents, such as foreign brand dealer channel gross margins of 3-5%, while local brand channel gross margins are 10-20%, indirectly attracting consumers.
International brands like Abbott and Nutrilon penetrate from first- and second-tier markets to third-tier, with little presence in third-tier and below. Local brands like Yili, Beingmate, and Feihe focus on third-tier and below cities. Additionally, domestic and foreign miscellaneous brands attract third-tier and below maternal/child stores with high terminal gross margins (50-70%), seizing market share. Currently, domestic and foreign miscellaneous brands account for over 60% of revenue in third-tier and below cities.
II. Universal second-child policy and consumption upgrade drive industry demand recovery
- Birth peak combined with second-child policy drives demand recovery.
(1) Growth in newborn numbers drives industry expansion.
Suppressed second-child demand was released in the second half of 2016, temporarily boosting 2017 sales demand. The second-child effect combined with the preference for monkey babies led to rapid growth in birth demand. In the first half of 2016, the number of pregnant women filing records (around the 12th week of pregnancy) increased 36.2% year-on-year, with Beijing growing fastest at 103.7%. In the second half, hospital filing numbers continued to grow at over 30% year-on-year. The rapid increase in filing numbers indicates that the increase in newborns will expand in the second half of 2016 and 2017. According to the National Bureau of Statistics' 1/1000 sample survey, the birth population in 2016 was 17.86 million, an increase of 1.31 million from 2015, with a year-on-year growth rate of 8%. According to the National Health and Family Planning Commission, the number of live births in hospitals in 2016 was 18.46 million. Since the demand for milk powder lags behind newborns by about 6 months, significant growth in milk powder demand is expected in the fourth quarter of 2016 and the first half of 2017.
Birth peak + second-child policy expand long-term development space, with industry sales expected to grow 8-14% annually from 2017-2019. The number of women of childbearing age peaked in 2016 and will decline slightly in the coming years. The number of women of childbearing age (15-49 years old) is the basis for changes in newborn numbers. Based on calculations of women aged 10-44 from 2008-2015, the number of women of childbearing age is expected to peak in 2016 and 2017, laying a good foundation for an increase in newborns. In the coming years, the number of women of childbearing age will slowly decline, with an absolute annual decrease of about 5 million, a decline of about 2%, consistent with the decline rate in 2014 and 2015.
Increase in main childbearing groups + second-child effect raises second-child birth rate, driving the number of newborns in 2017-2019. From an age structure perspective, 20-29 years old is the main group for first births, and 25-34 years old is the main group for second births. Based on calculations of the 15-24 and 20-29 age groups from 2003-2015, the main childbearing groups for first and second children are expected to peak in 2016. The number of the main first-child group will slowly decline after 2017, with the decline expanding in 2019 and 2020, which is expected to drive the overall first-child birth rate to rise temporarily from 2016-2019. The main second-child group benefits from the birth peak during 1980-1990 (the birth rate peaked at 23.33% in 1987), with a growth rate of over 20% in 2016, remaining stable in the coming years, which is expected to drive the overall second-child birth rate up.
Additionally, the universal second-child policy at the end of 2015 is expected to increase the second-child birth rate. The separate second-child policy implemented at the end of 2013 drove the second-child birth rate up 2.3 percentage points in 2014 compared to 2013. The universal second-child policy at the end of 2015 affects a broader group, and is expected to drive the second-child birth rate to continue rising in the coming years, with the greatest impact in the first 2-3 years. Combined with the increase in the main second-child group, we believe the rise in the second-child birth rate is the main driver of newborn population growth in the coming years. Based on the above analysis, the rapid growth in pregnant women filing numbers in 2016 suggests a rapid increase in newborns in 2017. Additionally, according to the National Health and Family Planning Commission's estimates, the annual birth population during the "13th Five-Year Plan" period will be between 17.5 million and 21 million. Nielsen analysis suggests that 2018 will see a new peak in births, with 2017 expected to exceed 20 million and 2018 reaching 21 million. We believe that although the birth population may not be as optimistic as some experts predict, the National Health and Family Planning Commission's statistics of 18.46 million hospital live births in 2016 is higher than the NBS sample data of 17.86 million, so we believe the birth population will maintain single-digit growth from 2017-2019.
The main consumer group for infant formula is infants aged 0-3. Benefiting from the increase in newborns in 2016 and 2017, the growth rate of the 0-3 year old population is expected to reach over 4% from 2017-2019, with the highest growth in 2018 (8.18%). The sales volume growth of the infant formula industry comes from the increase in the number of consumers and the increase in penetration rate (the proportion of those able and willing to consume milk powder). Benefiting from rising household income, the penetration rate is expected to maintain stable growth in the coming years, driven by e-commerce development, pushing the infant formula industry sales volume to achieve 9-14% growth annually from 2017-2019, with 11.20% growth expected in 2017 and a peak of 13.59% in 2018.
First and second stage milk powder will see faster sales growth in 2017, while third stage milk powder will grow rapidly from 2018. In 2017, the infant population aged 0-12 months will grow at 11.98%, expected to drive rapid growth of first (0-6 months) and second (6-12 months) stage milk powder. Due to the lower birth population in 2015, the growth rate of children aged 12-36 months in 2017 remains low, so the driving force for third stage milk powder is weak. The number of children aged 12-36 months will see rapid growth in 2018, with a growth rate of 10.03%, driving third stage milk powder growth.
(2) Maternal and child demand is geographically sinking.
Maternal and child demand in third-, fourth-, and fifth-tier cities is growing rapidly, with demand gradually sinking geographically. Due to lower living costs in third-tier and below cities, the willingness to have a second child is significantly higher than in first- and second-tier cities. According to a 2015 CTR report, 68.76% of second-child mothers are distributed in third-tier and below cities. Therefore, consumption demand for infant formula in third-tier and below cities is increasing faster. Data shows that currently, searches for maternal and child products in third-tier and below cities account for 55% of the total, with growth rates above 50%. By region, cities like Beijing and Shanghai have maternal and child industry growth below 10%, while Anhui, Sichuan, Henan, Hunan, and Hubei provinces currently account for only 4-8% of searches but are growing rapidly, all above 50%. Additionally, the "2015 CBME China Maternal and Child Industry Survey Report" shows that 46% of brand owners, 48% of agents, and 50% of retailers believe that third- to fifth-tier cities will be the industry's future development focus.
- Consumption upgrade increases mid-to-high-end proportion, raw milk price rise eases competition.
(1) Consumption upgrade in infant formula is obvious, with mid-to-high-end proportion continuously increasing.
In recent years, consumption upgrade in the domestic infant formula market has been obvious. The market below 100 yuan is shrinking, while the market above 200 yuan is expanding, reaching over 50% in 2013, with sales volume growth maintaining above 20%. Between 2012 and 2016, high-end and ultra-high-end milk powder grew rapidly, with CAGRs of 14.4% and 17.8%, respectively. In 2015, the growth rate of per capita disposable income reached 8.4%, with rural residents' per capita disposable income growing at 9.5%, providing conditions for consumers to pursue high-quality infant formula. Additionally, among new parents, mothers born in the 1980s account for 85.1%, and those born in the 1990s account for 6.4%. This group has a higher proportion of only children, pays more attention to quality, and is less price-sensitive. Their high consumption willingness and quality upgrade needs will drive high growth in high-end and ultra-high-end infant consumption, further raising the average price of infant formula.
(2) Moderate rise in raw milk prices will stabilize the price system and ease competition.
It is expected that raw milk costs will rise moderately again in July 2017, increasing the industry average price, which is beneficial for stabilizing the price system of the infant formula industry and expanding gross margins. As the raw material for formula milk powder, raw milk price changes reflect supply and demand. When supply exceeds demand, prices fall, and lower costs prompt milk powder companies to increase production, oversupplying the market and leading to price competition, disrupting the original price system and channel profit distribution. Conversely, when raw milk prices rise, dairy companies can raise prices accordingly, increasing the industry average price and passing on cost increases downstream, thereby stabilizing the industry price system. During the raw milk price increase from 2008 to 2009, milk powder companies raised prices and achieved gross margin growth. During this period, the gross margins of the three major domestic infant formula companies' milk powder products all increased significantly.
Based on the above analysis, the increase in the mid-to-high-end proportion is expected to drive the average price of infant formula to maintain low growth (higher than CPI), achieving 3-4% growth. Combined with sales volume growth, industry revenue is expected to achieve 11%-18% growth from 2017-2019, with 16.6% growth in 2017.
III. Registration system shrinks industry supply side, new cross-border e-commerce policy slows foreign brand impact
- Registration system adjusts industry supply side, miscellaneous brands cede 24 billion yuan space.
(1) Strictest new policy issued, miscellaneous brands cede market share.
The strictest new milk powder policy has been issued, and small brands that cannot apply for registration will cede market share. The "Measures for the Registration Management of Infant Formula Milk Powder Product Formulas" clearly stipulates that each milk powder production enterprise may not have more than 3 formula series and 9 product formulas. This registration system has clear quantitative regulations compared to past policies, implemented on January 1, 2018. Small brands that cannot apply for registration will exit the market, ceding some market share. January 1, 2018 is a key time node for industry competition improvement: from January 1, 2018, unregistered imported milk powder will not be allowed to enter China (according to Ministry of Finance requirements for imported products), and domestic production is expected to be earlier than this time point.
The change of infant formula from filing system to registration system will, on one hand, strengthen the cleanup of existing brands, reduce the number of miscellaneous brands, and increase industry concentration. On the other hand, since the registration system requires formulas to have more than 40% difference, it will stimulate enterprises to increase investment in formula research and development.
(2) Miscellaneous brands cede 22% of the market, concentrated in maternal/child channels in third-tier and below cities.
With higher thresholds, 80% of brands will be eliminated. Currently, there are 103 infant formula production enterprises in China with over 2,000 brands, with some enterprises even having 180 formulas. There are 233 foreign infant formula brands registered in China, but more brands enter China through cross-border e-commerce and purchasing agents, resulting in over 1,000 foreign brands in the market, meaning over 3,000 infant formula brands in total. After the registration system is implemented, each production enterprise can only retain 3 brands, and foreign brands can only be imported and sold (including cross-border e-commerce) through registered production enterprises. Currently, there are 103 registered domestic production enterprises and 77 foreign ones, meaning the maximum number of brands that can be retained after registration is 540, with 80% of brands eliminated.
Miscellaneous brands cede 22% of market space, concentrated in third-tier and below cities. From the previous industry competition pattern analysis, foreign major brands mainly occupy first- and second-tier cities. According to Euromonitor data in 2015, the top five foreign brands—Mead Johnson (15%), Wyeth (13%), Abbott (7%), Nestlé (4%), and Friso (4%)—together accounted for 43% of sales. Domestic major brands mainly occupy third- and fourth-tier cities, with the top five domestic brands—Beingmate (9%), Biostime (8%), Yili (6%), Yashili (4%), and Feihe (4%)—together accounting for 31%. Domestic and foreign miscellaneous brands mainly rely on high channel gross margins to seize third-tier and below cities. From the above analysis, imported brands currently account for about 50%, so it can be calculated that foreign miscellaneous brands (foreign production enterprises, mainly small foreign brands and OEM producers) currently account for 7%, and domestic miscellaneous brands (domestic production enterprises, smaller scale) account for 19%.
Currently, the top five domestic enterprises have a total of 13 infant formula production factories domestically and 3 abroad, meaning the maximum number of brands they can apply for in the future is 48, higher than the current 33 brands. Foreign major milk powder enterprises mainly adopt a high-profile big single product system, generally with only one or two big single product brands, so they are less affected by the registration system. According to data from the China Food and Drug Administration, there are currently 77 foreign infant formula production factories registered in China. Excluding the top five brands and the 3 qualified factories corresponding to domestic major brands, foreign miscellaneous brands currently have 69 qualified factories, corresponding to at most 207 brands. Compared to the current situation of 1,000 brands with 7% market share, it is expected that the share of foreign miscellaneous brands will shrink to below 1.4%, ceding 5.6% of market share. Currently, there are 103 domestic qualified factories. Excluding the 13 corresponding to the top five brands, domestic miscellaneous brands have 90 factories, corresponding to 270 brands. Currently, there are 1,967 domestic brands in the market, meaning 86% of domestic miscellaneous brands will be eliminated. In the future, the share of domestic miscellaneous brands will shrink to 2.6%, ceding 16.4% of market share. That is, affected by the registration system, domestic and foreign miscellaneous brands in third-tier and below cities will cede at least 22% of market share. It is expected that in the future, domestic and foreign major brands (top ten brands) will seize the market ceded by miscellaneous brands, with their combined market share reaching over 90%.
The ceded market is mainly concentrated in maternal/child stores. From the above analysis, the maternal/child channel currently accounts for 48% of the industry, and according to Dairy Information Network data, 55% of maternal/child searches come from third-tier and below cities. It can be calculated that maternal/child store revenue in third-tier and below cities accounts for 26.4% of the infant formula industry revenue. Additionally, Analysys data shows that most infant formula consumers are still distributed in first- and second-tier cities, with 29.5% in third-tier and below. Combined with our channel and terminal research, we estimate that in third-tier and below cities, about 90% of infant formula revenue comes from maternal/child stores. E-commerce and supermarkets mainly feature imported brands and domestic major brands. Additionally, since miscellaneous brands have higher terminal profit margins, their proportion in maternal/child stores is higher than in the overall market, meaning that of the 22% share ceded by miscellaneous brands, over 90% comes from maternal/child stores.
- Cross-border e-commerce policy slows foreign brand impact.
New cross-border e-commerce policy restricts import business. With the liberalization of import e-commerce retail policy in the second half of 2014, a large number of domestic e-commerce and enterprises flooded into the import e-commerce retail market. In 2015, the market size of import e-commerce retail reached 118.43 billion yuan, with a growth rate of 111.9%, and penetration in import e-commerce reached 13.2%. To regulate industry development, on April 8, 2016, the cross-border e-commerce retail import policy formulated by the Ministry of Finance, the National Development and Reform Commission, and 11 other departments was officially implemented.
The core content and changes of the policy mainly include five aspects: First, cross-border e-commerce retail imported goods are subject to tariffs and import value-added tax and consumption tax according to goods. For imports within the limit, the tariff rate is temporarily set at 0%, and the import value-added tax and consumption tax exemption is canceled, temporarily levied at 70% of the statutory taxable amount. Second, the single transaction limit is raised from 1,000 yuan (800 yuan for Hong Kong, Macao, and Taiwan) under the previous postal tax policy to 2,000 yuan, with an annual personal transaction limit of 20,000 yuan. Third, if documents cannot be provided, the postal tax model can still be used, but the postal tax rate is adjusted from the original four tiers (10%, 20%, 30%, 50%) to three tiers, with rates of 15%, 30%, and 60%. Fourth, a "List of Cross-border E-commerce Retail Imported Goods" is established. Goods on the list are taxed according to cross-border e-commerce rates, while goods not on the list are taxed according to general trade. Cosmetics, milk powder, and other products require filing for first import. Fifth, bonded imports are supervised according to general trade, requiring corresponding documents. The impact of this new policy on import business is obvious, with import volumes in multiple comprehensive pilot zones falling by more than 50% compared to before the policy.
The B2C model is significantly affected by the new policy. According to iResearch statistics, from 2012 to 2014, C2C held an absolute advantage in cross-border e-commerce, with most imported milk powder purchased through overseas shopping. From 2015, as consumers demanded higher product quality, more secure and professional B2C platforms gradually became the mainstream, with B2C accounting for 52.8% in 2015. This new policy separates the previous combined tax method, which merged four tax rates into one postal tax, into three types: tariff, value-added tax, and consumption tax. According to the second article of the new policy, the scope of application is cross-border e-commerce retail, i.e., the B2C model, while the personal overseas shopping C2C model is not affected. It is expected that under the new policy, B2C model development will slow, with 2017 expected to reach 62.9%.
The new cross-border e-commerce policy has a relatively obvious impact on imported milk powder. For milk powder (exempt from consumption tax), for orders under 2,000 yuan (taking imported milk powder priced at 400-500 yuan as an example, about 4-5 cans), tariff and consumption tax are 0 yuan. Value-added tax = (dutiable price + tariff) / (1 - consumption tax rate) * VAT rate * 0.7 = 238, so the after-tax price is 2,238 yuan. For goods requiring consumption tax, taking cosmetics as an example, the consumption tax rate is 30%. For orders under 2,000 yuan, tariff is 0 yuan, VAT is 340 yuan, consumption tax = dutiable price * (1 + tariff rate) / (1 - consumption tax rate) * consumption tax rate * 0.7 = 600, so the after-tax price is 2,940 yuan. The dutiable price refers to the price determined by customs through examination or estimation according to relevant regulations, and is the basis for customs tariff collection. Customs valuation generally refers to the selling price from the merchant to the buyer, including freight and insurance. For amounts exceeding 2,000 yuan, tariff must be paid.
This new policy has a greater impact on goods under 500 yuan. From the price of imported milk powder, most products are concentrated in the 200-400 yuan price range, so this cross-border e-commerce policy is expected to reduce the cost-effectiveness advantage of foreign brands and slow the impact of foreign brands.
IV. Domestic major brands are expected to benefit from the registration system; recommend Biostime, Beingmate, and Yili
Domestic major brands are expected to seize the ceded market. From the above industry analysis, first-tier cities are mainly occupied by foreign brands, while domestic milk powder brands rely on channel advantages to build third-tier and below cities as their advantageous markets. Consumers in small and medium cities generally pay more attention to product promotions, have lower brand concern and loyalty, and buy less online. Therefore, we believe the main beneficiaries of the milk powder registration system are domestic major brands that can pass registration approval and rely on channel sinking to third-tier and below cities. Among domestic milk powder brands, Biostime, Ausnutria, Feihe, and Synutra mainly focus on maternal/child channels and e-commerce, with channel structures matching the ceded market blank channels, and are expected to benefit directly. Beingmate and Yili mainly rely on distributors and supermarkets, and are expected to seize market share through channel sinking. Junlebao focuses on online, and is expected to benefit from increased e-commerce penetration, but the short-term effect is not significant.
The new registration system has high standards. It is expected that Chinese dairy enterprises can register 200-300 brands, with varying impacts on mainstream domestic milk powder enterprises. Beingmate has the most production enterprises. Together with its holding subsidiaries, the group can register 14 product brands. Due to the high standards, it is expected to register 7-8, which is relatively small compared to the company's current 11 brands. The same applies to Feihe and Yili, which have four and three production enterprises, respectively. Most milk powder enterprises in the market only have one production enterprise. Relatively speaking, Biostime, Sanyuan, and Mengniu are less affected, as the number of registrable brands basically meets their needs. For example, Biostime adopts precision marketing and a big single product strategy, so it is less restricted by the new policy. Enterprises more impacted include Yashili, Junlebao, and Synutra, especially Synutra, which has over 50 brands and 184 formulas, exceeding the limit significantly, and the company urgently needs to adjust its brand sales strategy.
In summary, we focus on recommending Biostime, Beingmate, and Yili:
(1) Biostime: The company's milk powder adopts a membership system and membership store model, with the strongest channel control and execution among all milk powder enterprises. The company also has obvious advantages in maternal/child channels (second in market share), which helps the company seize the third- and fourth-tier miscellaneous brand market dominated by maternal/child stores. It is expected that the company's infant formula revenue will achieve a compound growth rate of 9% over the next three years. In November 2016, it launched organic milk powder, which is expected to become a new growth point for high-end milk powder and increase the company's overall gross margin. The milk powder industry still faces pressure in the first half of the year, but will improve in the second half. It is expected that the company's milk powder revenue for 2016-2018 will be 2.99/3.13/3.41 billion yuan, with year-on-year growth of -10.9%/4.7%/9%. Swisse is expected to achieve over 20% growth with full offline rollout, with revenue of 2.686/3.223/4.029 billion yuan for 2016-2018, growth of 13%/20%/25%. It is expected that EPS for 2016-2018 will be 1.04/1.31/1.59 yuan, with a Buy rating.
(2) Beingmate: The company's fundamentals have bottomed out. After significant asset impairment provisions and reversal of deferred income tax, the company can move forward lightly. The company has adjusted its channel policies. In the fourth quarter of 2016, after clearing channel inventory and relaunching big single products like "Fen Ai+" with packaging compliant with the registration system, the company adopted a code-scanning inventory control policy, with obvious channel inventory control effects and significant quarterly performance improvement. It is expected that fourth-quarter single-quarter revenue will be around 1 billion yuan, with a quarter-on-quarter growth of 200%. Excluding deferred income tax asset reversals, the company's main business profit is expected to turn profitable in a single quarter. It is expected that Beingmate's revenue for 2016-2018 will be 2.9/4.0/5.1 billion yuan, with growth of -37%/40%/27.5%. The company's net profit for 2016-2018 is expected to be -780/120/250 million yuan (excluding the 300 million yuan deferred income tax reversal), with a Buy rating.
(3) Yili: The company's infant formula products have a 4.9% share of all-channel retail sales, ranking first among domestic brands. The company has been developing second- and third-tier cities since 2005, gradually expanding to third- and fourth-tier cities and rural areas, with a penetration rate of 88.5%. Compared to cities, the company has higher penetration in rural areas. We believe the company will leverage its all-channel advantages, especially in third-tier and below cities, to seize more market share during the registration system's cleanup of miscellaneous brands. It is expected that EPS for 2016-2018 will be 0.9/1.04/1.19 yuan, with a Buy rating.
Risk warnings
Economic growth decline exceeding expectations; food safety issues; policy implementation below expectations.
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