Stock pick: Cooper Investors

China Mengniu is a leading Chinese dairy company that produces milk, yogurt, infant formula and ice-cream. We are excited about this Company for three reasons:

• Long term trends in the dairy industry remain positive in China. Consumers continue to embrace innovative premium products with enthusiasm. We believe Mengniu has the best product portfolio. Its flagship brands such as Milk Deluxe and Just Yogurt grew over 20% in 2019 through continuous product upgrades. Its new high-end fresh milk brand, Shiny Meadows, is also growing robustly

• Mengniu has the best digital capabilities in the dairy industry. It has digitized its supply chain and sales channel and enjoys real-time visibility on inventory levels. In times of uncertainty (such as now), Mengniu could quickly digest inventory without causing long lasting damage to pricing

• Mengniu is led by a highly capable and professional CEO, with reputable shareholders such as China Oil and Foodstuffs Corporation and Danone. Mengniu’s culture is agile and innovative. Its management team is also skillful at allocation capital – over the past few years, Mengniu invested in upstream farms and factories in both China and overseas when raw milk prices were low. These investments helped Mengniu procure long term high end milk supply for its premium products.

A good example of how Mengniu’s various capabilities came together is how they navigated through COVID-19. As shops were closed, Mengniu’s sales teams quickly pivoted to e-commerce. They set up over 90,000 WeChat groups, and sales from these community marketing efforts reached 10% of revenues in the March quarter. Mengniu’s environmental, social and corporate governance (ESG) team also kicked in full gear, transporting large quantities of milk and yogurt to hospitals in need. Mengniu is emerging out of the crisis with a solid inventory position, a more nimble and capable sales team, and higher brand recognition.

Risks to the position include a second wave of COVID-19 in China and longer than expected integration with its newly acquired entities including Bellamy’s and Lion’s Dairy.

Mengniu is currently trading at 25 times normalized free cash flows, and we are confident that it could grow free cash flow over 15% in the next 3-5 years.

This information has been prepared and provided by Cooper Investors. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.