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Consumer stocks are generally more popular with investors as these businesses are easy to understand, have recognisable brands and are used by people on a daily basis. Investors who are searching for great, reliable companies can start by looking in this sector.
The milk industry in China, in particular, seemed interesting to me. After all, China is the world’s most populous country and babies grow up consuming milk and even many adults continue to drink milk as a healthy source of protein and calcium. Milk has, therefore, been an essential and irreplaceable part of humans’ diets for as long as human beings have existed.
With that in mind, here are two milk companies that investors should be looking at (to generate healthy long-term returns) that tap into China’s thirst for dairy products.
1. Ausnutria Dairy
Ausnutria Dairy Corp Ltd (SEHK: 1717) is an international high-end dairy and nutrition products group that produces cow and goat milk, milk powder, butter and dairy-related products.
The group’s sales network extends from China (its home market) to other diverse markets such as North America, Russia, and the Middle East. Ausnutria owns ten factories around the world – two in China, five in the Netherlands, two in Australia and one in New Zealand.
The group has a long history and track record, being incorporated in Changsha, China in 2003. It listed on the Hong Kong Stock Exchange back in 2009 and was actually the first Chinese infant formula company to list in the city. Ausnutria’s own brands include Kabrita, Hyproca and Puredo, among others, and also it produces private label formula milk for other companies.
Source: Ausnutria FY 2018 Annual Report
The above table shows the five-year growth for Ausnutria. Revenue almost tripled in the last five years from RMB 1.97 billion to RMB 5.4 billion, while profit attributable to shareholders grew seven-fold from RMB 90 million to RMB 635.1 million. Aside from one financial year (2015), the group has been generating positive operating cash flow – which is a big positive.
Investors should also note that the group’s gross profit margin has jumped from 28.9% in 2014 to a high of 49.4% in 2018. This shows that the group has pricing power and that its brands and products command a premium in the marketplace.
2. China Mengniu Dairy
China Mengniu Dairy Company Limited (SEHK: 2319) manufactures and distributes dairy products in China. Mengniu is a leading dairy manufacturer in China with a diversified product portfolio that includes liquid milk (such as UHT milk, milk beverages, and yogurt), formula milk and other products (such as cheese). As of the end-2018, the group’s production capacity reached 9.75 million tonnes.
Source: China Mengniu Annual Report 2018
China Mengniu’s revenue growth has been steady, from RMB 50 billion in 2014 to RMB 69 billion in 2018. Net profit attributable to shareholders has climbed from RMB 2.35 billion to RMB 3 billion over five years.
For FY 2016, the group incurred a loss due to its milk powder unit Yashili suffering from the intense competition with rivals but China Mengniu has since got over that episode and is now back to posting steady, growing profits.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang does not own shares in any of the companies mentioned.