Mengniu focuses on higher margin opportunities

Mengniu focuses on higher margin opportunities

China's largest dairy manufacturer China Mengniu Dairy has shrugged off investor concerns over margin pressure, insisting its strategy to raise investment behind "star" and growth brands will improve the group's long-term profitability profile. Katy Askew reports.

Mengniu today (28 August) booked a jump in first-half sales and profits, although the Chinese dairy group's shares did not reflect that performance.

In a regulatory filing, Mengniu said first-half profit attributable to owners of the company totalled CNY1.04bn (US$871.4m), up 39.9% on the year. Operating profit rose 36.5% while sales were up by one-quarter to CNY25.84bn.

Gains were largely driven by increased contributions from joint ventures and, notably, the majority stake in local infant formula group Yashili International Holdings which was acquired in the back half of last year.

As BNP Paribas analyst Charlie Chen told just-food, the Yashili business was a significant factor in Mengniu's margin expansion during the period. "Yashili is a higher-margin business. If you strip out Yashili's contribution on both revenue and EBIT, you can find Mengniu's own business margin is contracting," he suggested.

Meanwhile, a question mark has been left hanging over Yashili's performance, Chen continued. "Yashili's revenue and net profit both declined 30% yoy for the first-half," he observed.

These concerns prompted a sharp drop in Mengniu's stock price in Hong Kong today. Shares were down 6.7% to close at HK$34.45. 

Mengniu management moved quickly to cool market anxiety over the group's outlook.

In a presentation to analysts and investors CEO Sun Yipping stressed Yashili's prospects remained positive and revealed that, as part of the integration process, Yashili has sold off its nutrition business to increase its focus on infant formula.

"Within Yashili... what is very important is the maternal and baby formula products. Integration with them is how to take some of the unnecessary burden from Yashili. That is one of the reasons why we have disposed of the nutrition business," she explained.

The chief executive added Mengniu is "providing more resources" to enable Yashili to develop "more products for dedicated channels".

Mengniu is also raising its investment levels behind "star" and "opportunity" brands, Yipping continued. "We will be focusing on our major brands, our star brands, our high margin brands... so that they will bring us more profitability - higher margins - in the future."

A focus for investment over the next two years will be the fresh yoghurt brands that the business operates in partnership with French dairy firm Danone.

"In the future, how do we continue to increase the profitability of our chilled product?" she asked. "We want more market share... We have three major [high margin] brands - Bio, Champion Yoghurt and Yoyi C... We want to reduce our SKUs and we want to upgrade the taste and packaging of all our products."

As Mengniu implements its investment strategy across its yoghurt offering, Danone has brought to the partnership a disciplined approach to capital expenditure, Yipping continued. "In terms of capex and op-ex, this has been a very good advantage working with Danone... we have adopted a very prudent expansion strategy."

Mengniu also recently established a joint venture with the US's WhiteWave Foods. Updating her audience on the progress of this business, Yipping revealed: "In October we should be able to expect products coming onto the market in the area of health products."

An important area where Mengniu is increasing investment is marketing, Yipping said. The group has increased its focus on digital platforms - which received 20% of the total marketing budget in the half. Management said by the end of the year Mengniu expects digital platforms to account for 30% of the total spend.

By leveraging high-growth opportunities in categories that offer stronger margins, Mengniu plans to strengthen the product mix profile of its revenue streams.

The group is also working to defend the market share of its core product offering, Yipping added. "At the same time, we are increasing our focus on the backbone brands. From packaging to formula - that is the recipe - we are reviewing the entire procedure to see how we can provide more value to consumers."

The company is also reducing the number of SKUs it offers in order to reduce complexity. "We are looking at the SKUs - each and every SKU's profitability," Yipping stressed.