When dairy stocks rose rapidly from more than 50% in a single week to an overall 20%-30% shock pullback stage, various market sentiments began to ferment: some shareholders complained that the dairy stocks they held "underperformed the market and wanted to adjust their positions", and some research reports sent a bullish signal - the price of raw milk continued to decline, the effect of continuous cost control appeared, and the profitability of downstream dairy enterprises may be repaired.
"If the stock price moves significantly off from expectations, it usually indicates that the company is more controversial and that it is the divergence of views that has caused huge volatility." Sun Chen, a fund manager of Guocheng Asset Management who has been tracking the dairy sector for a long time, has also encountered a market where the trend of individual stocks deviates significantly from his own research conclusions in the past 15 years of securities investment. In his view, the short-term trend of individual stocks is mainly disturbed by emotional factors, the medium-term trend is determined by the expected difference, and the long-term must return to the fundamentals.
The fundamentals of the dairy industry, which have many categories and different levels of maturity, are difficult to define with a simple bullish and bearish logic. For example, some of the highly anticipated fast-growing influencer categories have high exposure, but they are extremely draining on cash flow and have little profit contribution. Some traditional categories surrounded by market pessimism, as performance ballast, are in the stage of recovery and restart after experiencing price wars and pressure on goods.
Whether it is the cycle of upstream raw milk price fluctuations, or the digestion of downstream cold drinks and white milk inventories, industry investors need to judge from a longer-term perspective.
The following is the transcript of Sun Chen's exchange:
Q: In the past, many research reports believed that the PE multiples of dairy companies were low, and some dairy stocks that have risen sharply recently have made up for the previous gap. Is the continuous up and down amplitude of the dairy sector a manifestation of the trend of value return?
Sun Chen: From my personal point of view, the domestic stock market is often more prone to sharp rises and falls than other markets. Sometimes you strip out the trading days of the year that have risen the most, and there is basically no profit for the year.
However, for those of us who do in-depth value research, especially those who believe that as long as the valuation of stocks is not expensive, it is more reasonable, and they basically choose to stay in the market all year round. As long as you stay in it, you won't miss the upside on a few days, but you will also need to take the risk of volatility at other times.
In the past, many market research reports always wrote that PE is underestimated below how many times it is. But I don't think it's accurate to call it valuation, we prefer to call it pricing. People who really do investment research look at companies from a long-term perspective. The longer the value cycle is extended, the more the overall market pricing will be consistent with the intrinsic value of the enterprise. Because the long-term trend will eventually be dominated by fundamental development, and the certainty is the strongest.
But in the short and medium term, intrinsic value doesn't necessarily play that big of a role. For example, the short-term is basically caused by emotional factors, and everyone can't predict it.
The medium-term is mainly affected by the difference in the expectations of various investment entities in the market. Especially before the introduction of many policies, everyone is generally pessimistic about some industries and companies. After referring to the actual terminal sales data, various institutions have made downward adjustments to the performance of related enterprises. When the third quarterly report is released at the end of the month, it will be compared to whether the actual performance meets the previously lowered expectations, which may be one of the key factors affecting the medium-term trend. However, the research and evaluation perspectives and depths of various institutions are different, and it is difficult to absolutely unify the medium-term expectations of the market.
Now that market sentiment has been released in the short term, I don't think it can be called a value regression, and it is more appropriate to describe it as valuation repair, which repairs the previous overly pessimistic emotional pricing logic.
Q: In the past, when you invested in dairy stocks, did you encounter a significant deviation between the stock price trend and the value of the company?
Sun Chen: Anyone who does value investing will go through this process. It's really uncomfortable and self-doubting at first, which is also in line with human nature. We see the value of some dairy companies more accurately, but due to the interference of industry factors, the market is too pessimistic about it.
Taking the infant formula industry as a reference, due to the background of the new population, infant formula companies want to cultivate four-stage milk powder for 3-6 years old. However, the overall market effect is not very good, which is related to the consumption cycle for the population. The general logic of the industry is too pessimistic, and it will price individual stocks extremely irrationally - we think that the price has fallen almost, but the actual market will fall by another 40-50%. This is a process of confrontation between individual stock logic and industry logic, and in this process, it often takes a long time for individual stock logic to be recognized by the market.
As the investment period is extended, I also understand that the intensity of this short-term volatility is indeed beyond expectations, and there is no way to do it. Because the stock price trend deviates significantly from expectations, it usually indicates that the company is more controversial, and it is the difference of opinion that causes huge volatility.
If you want to overcome this stage, one is to re-examine whether your research conclusions are reasonable or overly optimistic. The second is to sort out the negative opinions of the market. If there is no solid and objective evidence of these negative views and pessimistic expectations, it is just an emotional catharsis, and you will firmly hold or even increase your position.
Q: In the field of infant formula, in the past two years, many foreign brands have performed positively, while some domestic brands have been in a downturn. Is it because the price war was too fierce before, and after the channel profit was squeezed, the terminal did not have enough motivation to recommend local brands?
Sun Chen: Foreign-funded infant formula is also in a state of polarization. The overall growth of Danone and FrieslandCampina is still good, better than the industry average. However, some second- and third-tier foreign-funded infant formula brands are also withdrawing from the market, and the overall market share of foreign-funded infant formula in China is about more than 30%.
In addition, we can feel that in terms of channel control, domestic milk powder is much stronger. In particular, the sinking market is mainly the world of domestic milk powder, and the sinking intensity of foreign milk powder has not yet reached such a deep level.
The logic of the price war for domestic investors lies in the shrinking of the market scale. Because of the background of the new population, the industry has a bearish logic. In addition, in the past few years, large dairy enterprises have expanded their production, and after the production capacity has come up, with a large number of marketing expenses, it is in the stage of pressing goods. The pressure on domestic milk powder is more aggressive, which is usually related to the pressure of the growth rate of the report.
Foreign milk powder has been active recently, on the one hand, it is related to the price war of domestic brands, and there is more pressure on goods before, and many leading brands have been assisting dealers to destock in the past two years. The foreign milk powder has always been controlling the price of goods, and now the profit level they give to the channel is relatively better than that of the domestic big brands - of course, some local small and medium-sized brands will have a higher profit level for the channel because of the low production cost.
In addition, after the new national standard for milk powder, domestic leading dairy companies responded quickly, and the overall registration process of foreign brands was relatively slow. As a result, in the transition stage between the old and new formulas, the market share of foreign capital has been lost to a certain extent. Nowadays, the registration of new formulas of foreign brands has gradually landed, which is equivalent to a round of recovering lost ground. Therefore, this is a reflection of the different rhythms of their respective operations.
Q: Last year, many cold drink distributors complained about the pressure of ice cream inventory, but at that time, the cold drink business of dairy enterprises may still show positive growth due to the impact of low base. This year, the report of many cold drinks has a double-digit decline. Is this pressure time difference from the terminal in line with expectations?
Sun Chen: All consumer enterprises are mainly distributed on the channel side. When the goods circulate in different distribution links, from the perspective of the manufacturer, the subjective consciousness still hopes to press as many goods as possible, so as to achieve their own growth.
There are only a handful of leading ice cream companies, and the distribution right of famous liquor is a high-quality asset. When it is counter-cyclical, you can accept the distribution and the profit is less. When it is pro-cyclical, make profits. No matter which industry, there is a game between the two sides. As long as the channel itself can bear it, and it does not reach the point of comprehensive loss, they are still willing to cooperate with the leading enterprises.
In this context, the channel has become a reservoir of products, and manufacturers have mastered the performance switch. When it comes to the stage where the pressure on dealers is increasing and the goods cannot be suppressed, the manufacturers also understand that the brands that review the development history of the dairy industry for many years and finally cannot stand in the same trench as the channel will miss their industry status at some stages.
Domestic leading dairy companies have been exploring the industry for decades, and many things have been seen thoroughly - when the channel can be pressed, it is still necessary to press. When dealers have inventory pressure, they must stand up to assist the channel to clear inventory. After all, the brand will be worried that if it doesn't press the goods, and the friends are still pressing, isn't it that the channel freezers are all the goods of the friends, and will their market share decline? This is similar to the prisoner's dilemma - if I stop pressing goods, but my friends don't stop, then I don't dare to stop, and no one wants to lose their market position.
Q: In this semi-annual report, some dairy companies said that the white milk business is only an apparent digital callback under active adjustment, and the actual terminal dynamic sales are not so bad. Is this claim valid?
Sun Chen: The model of the consumer industry is dominated by distribution channels, so there is indeed room for adjustment. But there are also differences in each sub-sector. For example, liquor does not involve the issue of shelf life, and its adjustment cycle and strength will be very long. Condiments with rigid demand attributes usually have a shelf life of one year, which is shorter than the adjustment cycle of liquor.
Dairy products generally have a shelf life of half a year, and the short one is less than 10 days, so compared with liquor and condiments, the adjustment is not so strong. Because the subject of adjustment is in the hands of mobile channels, sales terminals and consumers, and consumers basically do not hoard dairy products in large quantities.
This year, a large number of low-cost small brands have been active, including the situation that the prices of products on online platforms are much lower than those offline. At this time, the manufacturer took action to maintain the profit level of the dealer and the stability of the terminal price, which is also the embodiment of the industry responsibility of the leading enterprise.
Of course, consumers want the cheaper the better. In particular, the homogenization of the white milk industry is too high, and it is difficult for even leading dairy companies to stabilize prices - if the dealer's inventory is too high, and the manufacturer does not help to destock or give subsidies, resulting in the risk of dealers' cash flow exposure, then dumping will become the norm.
One of the common means of our research is to go to a low-cost e-commerce platform and find that if a product has a very low price and a large number of supplies, it can be judged that it will have overall poor sales, inventory backlog, and goods channeling problems in the short term. Especially after some platforms played the gimmick of tens of billions of subsidies, I found that the original price of a milk I usually drink was more than 4 yuan, but this year I can buy it for more than 2 yuan. The date is still relatively fresh, and the shelf life of 6 months is only a little more than a month before production. This shows that during this period, its terminal dynamic sales purchasing power has weakened, and the channel inventory is at a high water level.
However, there will always be a day when the inventory will be digested. When all manufacturers are no longer profitable, the production momentum will also decrease. As long as the production end stops producing at full capacity and continuing to press goods in order to ensure capacity utilization, the inventory can still be digested quickly.
Q: You also mentioned that under the changes in environmental protection and other factors, dairy companies once expanded production, and eventually several forces led to an oversupply of raw milk. At present, the price of fresh milk is still declining, at about 3.13 yuan/kg. When will milk prices recover?
Sun Chen: At present, there are three main types of low-cost white milk. One is that small and medium-sized dairy enterprises release milk after getting low-cost milk sources, because their model is to produce more when the milk price is low, and buy less when the milk price is high. Different from the habit of leading enterprises to sign perennial purchase agreements, they have greater flexibility in adjustment.
The second category is the private label of upstream pastures. Because the productivity of the pasture cannot be stopped, unless the cattle are slaughtered to reduce the capacity. Therefore, they will launch their own brands to supply the market with a large number of low- and medium-priced white milk. The third category is the price of goods channeled by brand dairy dealers.
As for the upstream milk price fluctuation range. From two dimensions, one is the cash cost of large-scale farms, which ensures that there is no cash flow risk at the ranch end, which is basically the same as the current raw milk price, between 3-3.1 yuan/kg. The other is to ensure the full cost of the profit level of the enterprise statement end, which is between 3.4-3.5 yuan/kg.
Usually, the cash cost is the life-and-death line of the enterprise, and the complete cost will affect the profit of the enterprise's statement, thereby indirectly affecting the credit of the enterprise and ensuring that the balance sheet is not reduced. At present, the price of milk hovers around the cash cost of large-scale farms, and if it continues to decline below 3 yuan/kg, the vast majority of large-scale farms will incur actual cash flow losses. Therefore, I think the reasonable price is 3.5-4 yuan/kg, so that the company has a reasonable profit to ensure the steady development of the industry, but also to avoid the industry to generate too many profits, causing enterprises to blindly expand production and overcapacity.
When the milk price will return to a reasonable cycle, the first is to look at the upstream. Nowadays, they are all large-scale ranches, and no one wants to be the first to quit. The second is to look at the changes on the demand side. Local consumption subsidy policies are also tilted towards dairy products. In the short term, it will definitely drive consumption, and in the long run, it will also help cultivate milk drinking habits and increase the per capita milk consumption.
Therefore, under the premise that there are great variables in both upstream supply and downstream demand, it is difficult to predict when milk prices will return to a reasonable range. In addition, the efficiency of breeding is always improving, just like the pig breeding industry, even if the overall reasonable number of pigs is reduced, it does not mean that the production capacity is decreasing. Cattle raising is also a large-scale pasture, even if it is removed, but due to the increase in breeding efficiency, the impact of overall production capacity can not be seen from the dimension of inventory data alone.
Q: After the milk price is sluggish, some dairy companies say that developing more cheese business can improve the profit margin of the whole raw milk and reduce the fluctuation of demand. But in fact, the cheese business of these large enterprises is still losing money, and the small cheese brands are clearing up. Is it because of the previous rush to overdraft the category?
Sun Chen: The identity of imported cheese products is not a traditional category of daily consumption in China, and the level of innovation and differentiation of the products themselves is relatively limited. At present, the differentiation is mainly focused on the way it is eaten and accompanied, rather than how much differentiation the product itself can make. And the gross profit margin of the B-end is much lower than that of the C-end. The C-end was disturbed by many factors such as the new population, and the overall profit level declined. It is only because of the contraction of raw material costs in the first half of the year and the superposition of leading control fees that profits have recovered to a certain extent.
C-end cheese is distributed in two major scenes in China: family tables and snacks. The family table needs to be Westernized in order to make cheese consumption sticky. Snacks are optional, and there are many alternatives. Therefore, in the current market competition, it is necessary for products to have certain functionality and quality endorsement, and leading dairy enterprises have first-mover advantages and brand stickiness, and their share is relatively concentrated.
Many research reports refer to the Japan market when analyzing cheese, but they cannot generalize. I have the impression that more than a quarter of the statistics on eating out in Japan are Western. Including daily breakfast, lunch in the bread and pastry preference is also very high.
Looking back at domestic catering, the proportion of Western food is relatively low, and Chinese cuisine is still absolutely dominant, which leads to the natural lack of cheese pairing scenes. The lack of differentiation of cheese in the snack track makes it difficult to cultivate the habit of continuous consumption and brand loyalty. Therefore, at present, the consumer group is still dominated by teenagers and children, and the penetration rate is low.
However, if it is a long-term cooperation with bakeries and the taste difference of bakery products is used to form consumer stickiness, it can benefit as an upstream raw material for a long time.
Q: Some dairy companies mentioned that due to the market education stage, the profit contribution of low-temperature fresh milk at the C-end was not high. Nowadays, working closely with tea and coffee companies to supply and customize development, can we also improve the profitability of this category?
Sun Chen: Low-temperature fresh milk really needs to be cultivated in the market. Due to the high depth of mainland cities, except for some first-tier and strong second-tier cities, the milk consumption is similar to that of some comparable overseas markets, and the further you go to the sinking cities, the greater the difference in milk consumption.
In addition, the low-temperature short-term properties of low-temperature milk cause users to need high-frequency purchases. According to the Chinese people's habit of buying room temperature milk before, whether it is self-drinking or gifting, it is basically based on the whole box. However, low-temperature milk needs to be purchased frequently and in small quantities, which is different from the purchase habits of room temperature milk, so low-temperature milk needs to be slowly penetrated.
Low-temperature fresh milk is difficult to differentiate at the C-end, and can be similar to cheese - when combined with tea and coffee at the B-end, there is room for innovation. In particular, it is bound to the next level of finished products, which has the opportunity to cultivate long-term taste and consumption stickiness. But from another point of view, the high-end expansion of ready-made tea drinks has slowed down, and many milk teas worth dozens of yuan a cup have returned to more than a dozen or even ten yuan. This will also be transmitted to the upstream, and there will be control actions for the cost of raw materials such as low-temperature fresh milk, which will be a negative factor for the latter in the short term.
In addition, the competition of low-temperature fresh milk is still a concentrated discussion logic. When it was first launched, everyone felt that they had an advantage, and slowly did it, and found that it consumed extremely cash flow, the profit level was not high, and some small enterprises could not survive. In the end, it is the leading enterprises with strong capital strength and good profitability, with a long-term layout and willing to cultivate the market.
As for the category of low-temperature yogurt, it has been cultivated for so many years and has a consumption base and will not disappear. However, everyone's consumption habits have changed in recent years, especially the frequency of buying dairy products in supermarkets has decreased. This change has led to an unsatisfactory recovery of low-temperature yogurt in the past two years.
Compared with some products that are just needed, such as oil, salt, sauce and vinegar, there is no need to remind users to buy, only need to tell users to buy "my" products, and advertising is also biased towards brand promotion. Yogurt, especially low-temperature yogurt, is an optional consumption, and advertisements not only need to tell others to buy "me", but also always remind others to "come and buy".
Q: There are more and more channels in supermarkets for OEM white milk, yogurt, and fresh milk, and the suppliers range from listed companies to unknown dairy companies. Is this just a short-term choice for upstream companies to digest excess milk sources, or is there really a prospect for channel-customized dairy products?
Sun Chen: The channel side definitely wants to expand its own new performance curve, and can make its own brand products, which is good for profit improvement, so they have the motivation to do it. But across the globe, the bargaining power of dairy farmers, dairy producers and channels varies from country to country.
For example, from the perspective of the industrial chain in the mainland, the strongest bargaining power is the brand dairy enterprises. But in Australia and New Zealand, the cooperatives established by dairy farmers basically control more than 90% of the milk source. In the United States, Britain and other countries, it is the channel side that occupies the right to speak.
In the domestic environment, whether the debate channel can change the competitive landscape of an industry, it is necessary to consider whether the emerging consumption channel has changed the first demand of consumers. For example, some users may not necessarily care about the quality when buying milk, but rely more on the taste. Whether the taste will be related to the brand, the answer may be varied.
But personally, I still tend to buy milk from big brands, because leading brands generally bring quality endorsement to products. Even if the self-owned products in the supermarket channel are sold cheaper, I may not consider it very much. However, there are also channels in the market, such as MINISO, which sells many categories, and the brand awareness is relatively weak.
In the overall dairy industry, the brand still endorses the guarantee and differentiation of product quality. I personally think it is still relatively difficult to leverage the pattern change simply through the launch of the supermarket's own products, so the current supermarket's own milk products should still be the result of digesting the excess milk source upstream in the short term.
Q: In addition to channels entering the dairy industry, dairy companies themselves have also entered the field of beef and bottled beverages. Considering that the market was very optimistic about the market value of bottled beverage companies, do you think this kind of crossover of dairy companies can really bring imagination space for business and valuation?
Sun Chen: When many well-known brands expand across sub-industries, there are more failures than successes. Any company entering a new field is tantamount to a new venture.
For example, some soy sauce wines have unshakable brand power in the field of liquor. However, when it launches its own red wine and beer, it will find that it is obviously at a disadvantage compared to those incumbent companies with obvious competitive advantages. The competitive advantage of each track brand is not simply channel laying, whether the brand power can be eaten across industries and whether it will be diluted is something that needs to be considered. There are leading brands in the field of edible oil, and they don't use their own main brand name to make soy sauce condiments. Some roasted food brands have not achieved satisfactory results in the field of candy, but they have entered the nut industry, because they have a closer fit with the roasted food brand and have certain technical reserves, which can make certain achievements.
Therefore, when stepping into a new track, it is necessary to see whether there is sufficient investment, including R&D technology, channel resources, and whether the brand can form a mental transfer. Third, see if there is a talent pool that is familiar with the new market. If the three conditions are not met, we will treat it as a margin of safety when we do business pricing and valuation.
Lin Chen/text