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本商业分析报告主要回顾了港股上市公司澳优乳业5年公司财报，从经济基本面，公司营业状况，产品状况，财务状况等角度进行了分析，总结分析了该公司的利弊，最后给出了投资者是否该持有该公司股票等投资建议。

Business and Finance  

Company Analysis Report of Ausuntria Diary Corporation Ltd.（HKG:01717） 

Table of Contents 

Summary…………………………………. 1

Economic Analysis………………………2 

Industry Analysis………………………...4

Company Overview……………………...6

Business Analysis……………………….8

SWOT Analysis…………………………..11

Financial Analysis……………………….13

Conclusion………………………………..20

Summary

Global Acquisition & Establishment of the Whole Supply Chain

During the past five years, Ausnutria Dairy Operation Ltd.(the Group) continued to adjust its business structure and strategies, increase its effort on the building the global supply chain on infant formula and establish the overseas nutritional business to cater for the industry change. TheGroup acquired 100% equity interest in Ausnutria Hyproca, the Australian Nutrition Care and other business and manufacturing bases.

In terms of the products, the Group using the multiple brands strategy and focusing both the domestic and oversea market. The diversity of the products and innovative marketing strategy bring growth to the Group’s sustainable development.

Sustainable Growth & High Leverage Level

The Group reported a 30%growth in the revenue in 2016 and the gross profit rose to 42% to the revenue. TheGroup’s profit after tax also shows an upward trend, contributed by the sustainable growth of the Group.

On the other hand, the Group has a change from a low-leveraged company to a high-leveraged one, with the rapidly increasing rate of liabilities, reaching 59.5% in 2016. And the leverage ratio also shows the Group’s ability to cover the interest and liabilities is weakening, as the debt-to-equity ratio and net debts ratio double the figure to 1.19 and 1.47 respectively in 2016 compared to 2012. This is mainly attributed to the Group’s active acquisitions and expansion activities, which would bring a sustainable growth.

InvestmentSuggestion & Forecasts

After coming back to exchange market from the suspend in 2012, the Group’s share price shows a steady increasing trend over the last few years. But as the Group is in the fast expansion period and the Group tends to retain cash to finance their rapid growth, the dividend yield is not so attractive to the shareholders.

The large expenses of the acquisitions and investment activities of the Group have been proved to be worthy by the significant revenue increase in 2016. If the following annual report still presents the positive results, investors could benefit from the healthy growth of the company.

We recommend the investors to invest in the Group in a long-term and take a buy-and-hold strategy.

1.Economic Analysis

World

After a lackluster outturn in2016, the world growth is expected to rise from 3.1 percent in 2016 to 3.5percent in 2017 and 3.6 percent in 2018, according to the World Economy Outlook announced by the International Monetary Fund (IMF) in January 2017. Growth prospects have marginally worsened for emerging market and developing economies, where financial conditions have generally tightened. Near-term growth prospects were revised up for China, due to expected policy stimulus.

China

In China, Ausnutria’s largest market, the GDP growth rate of 2015 is 6.7%, breaking below 7.0 and marking the biggest decline over the last 20 years, according to the National Bureau of Statistics of the People’s Republic of China. The quarterly GDP indices in 2017are 6.9% in 1stquarter, 6.9% in 2ndquarter, 6.9% in 3rdquarter.

With the economy is slowing down its pace, other indices also show the negative signals for China economy.

The Consumer Purchasing Index shows a decreasing trend, dropping from 2.0% in 2014 to 1.44% in 2015. Domestic per capita figures, like average disposable income, also shows the same pattern, declining slightly from the upward trend. The unemployment rate remains steady over the last decade at 4.1% and is expected to stay at this level unless special occurrences emerge in the future.

The 19thChina’s party congress, held in October in 2017, set the objective for China economy. Xi has made the economy a priority by setting a GDP growth target of 6.5% this year, lower than before, and emphasize the industrial structure upgrading. The results of the 19thpartycongress will influence Chinese economic development and need to be seen in the future.

The IMF reported that the Chinese economy appears to be making a comeback, with the IMF increasing its own predictions for the growth of China's GDP. China's exports increased, which is partly attributable to an improved global economy. Global GDP grew by approximately 3.6%, meaning that foreign countries had more money to purchase Chinese goods.

Europe

The European economy has entered its fifth year of recovery, which is now reaching all EU Member States. The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2% in 2017, according to the European Communities.

Brexit is one of the biggest factor influence the European economy. It is scheduled to depart in March 2019and the real effect need to be seen in the future. But the current economy of EU and British have shown that it will bring risks to each other.

And the middle-east Asia refugee immigration issue and terrorism bring the social problem to all European countries, affecting the social stability and economy development, which needs long-term solutions.

The Netherlands, the Group’smajor oversea manufacturing base, is the 16thbiggest economy entity in the world in 2016 and its GDP is at $769.93 billion, according to the world GDP ranking published by the IMF. The economy is experiencing a period of steady growth and the country has the most mature dairy industry in the world, providing a good business environment

The Group acquired the Netherlands dairy company Hyproca in 2011, getting the whole industry chain, from milk farm to the infant formula productions. And the Group is going to complete the Green Factory plan in the Netherlands in 2017, investing overEUR100.0 million, with the highest quality standard and state of the art.

Australia

Australia, the Group’s biggest raw material producer country, is the 14thbiggest economy entity in the world in 2016 and its GDP is at $1.206 trillion, according to the world GDP ranking published by the IMF.

The dairy industry continues to be one of Australia's most important agricultural industries, generating $13.7 billion across the whole supply chain.

The Group has invested in the Australian dairy farms and manufacturing plants and is going to expand its nutrition business and NCP properties in Australia in the future.

2.Industry Analysis

General

According to the Food andAgriculture Organization of the United Nations, the Dairy Price Index shows an increasing trend and keeps on a high level in recent years.

The global infant nutrition market is estimated to reach USD 50.2 billion by the end of 2016. Considering the status, growth indicator and expected future trends, the market is further estimated to reach USD 70 billion by 2021, growing at a CAGR of 6.9% during the forecast period of 2016 to 2021.

Increase in the number of working mothers, growing urbanization, and spending power per baby are higher in the developed nations and an upsurge in the disposable income are some of the factors driving the market for infant formula.

However, the risk of allergies or autoimmune diseases and psychological restraints about the adoption of packaged baby food, are a few major restraining factors hindering the growth of the market.

Geographically, the market is segmented into North America (10%), Europe (12%), Asia-Pacific (65%), the Middle East and Africa (5%) and Latin America (8%). Asia-Pacific is expected to experience highest growth rate during the forecast period, while in terms of value the European region is expected to hold the largest share.

Major markets

PRC is the major market for the Group. The infant formula market sales in China has broken 1 trillion in recent years. The two-child policy and the mainland consumers enthusiasm for the quality and brand products make the domestic infant formula market keep expanding.

Based on the two-child policy, the infant population who age from 0 to 4, has a sharp increase since 2011, exceeding 75 million. The proportion of breastfeeding is kept decreasing, breaking 30% in 2008. And with the increase of the resident deposit income and people are increasingly likely to spend more on baby products.

Since 2008 infant formula quality crisis in China, consumers pay more attention to the products quality and prefer to choose the foreign brand, considering the safety of infant milk formula. Comparing to the domestic brands, the price of the foreign brands is more expensive, even double to the domestic brands, and it increases at a faster pace.

On 1 October 2016, theAdministrative Measure for Registration of Infant and Young Children Milk Powder Formula Recipes outlines CFDA’s new registration requirements for domestic and foreign infant formula manufactures, has been taken into force. The measure will help regulate the infant formula market and eliminate small and medium enterprises milk, setting new requirement of research and development for the company.

Other factors

According to the National Bureau of Statistics of the PRC, the number of the newborn in the PRC increased by 7.9% from 16.6 million for the Year 2015 to 17.9 million for the Year 2016. The two-child policy is creating the huge demand for the infant formula market. And the increasing working mom needs infant formula to bridge their desires for healthy, nutritious food with their need for convenience.

Online purchasing trend is another factor. E-commerce retailers can compete on price and convenience due to reduced capital investment in physical infrastructure. The elimination of links in the supply chain is another advantage. E-commerce retail sales show impressive year-over-year growth in China and will benefit the Group sales.

China announced tariff cuts on, consumer goods including infant formula in a new effort to spur economic growth driven by domestic consumption and reduce reliance on trade and investment on Nov 10, 2017.

3.Company Overview

Ausnutria Dairy Corporation Ltd. (the Group) was established on September 2003 in Changsha, China, with production facilities principally based in the Netherlands.

Founded in 2003, the company commenced business by importing high-quality premium pediatric milk formula from Australia for sale and distribution in the PRC. The Group’s activities range from the research and development, milk collection, processing, production, packaging, marketing and sales of dairy products to PRC, Europe, North America, the Middle East, Russia& Commonwealth of the Independent States and other countries.

On October 2009, the company was listed on the Main Board of the Stock Exchange of Hong Kong Limited under the stock code 01717, becoming the first Hong Kong-listed stock which focused on the infant formula industry. Ausnutriacontrols 70 %of the Group, while public shareholders won the rest 30% amounted to 300 billion shares.

On August 2011, Ausnutria invested in its upstream business by acquiring the controlling interests in Ausnutria Hyproca B.V., based in the Netherlands. Apart from sourcing milk from its own factories in the Netherlands, the Group has diversified its infant formula supply to manufacturers located in New Zealand, Australia, and France in recent years.

The Group sells its products under its own brands, including the A-choice Series, Allnutria Series, the Puredo Series and the Hyproca 1897 Series for cow milk-based infant formula, and the KabritaSeries for goat milk-based infant formula. Except for Kabrita which isdistributed globally, most of the own brand cow milk infant formulas are principally designated for consumers located in the PRC. The Group also sells its products under contract manufacturing and private label arrangements for its worldwide customers.

The Group has commenced new businesses since the fourth quarter of 2016. This includes the manufacture and distribution of nutrition products through the acquisition of the nutrition business in Australia.

4.Business Analysis

Branding and products

The Group’s branding policy vary from the products and the sub-brands. The brand vision of the Group is to be a leading corporation of milk formula and nutrition food, reliable consultant of nutrition and health in the world.

Domestically, the Group’smain products are infant formula and nutrition products. The Group has 6 brands in own-branded cow milk formula market, Hyproca1897, Allnutria, Eurlate, Puredo, Mygood, and Neolac. Based on the oversea manufacturing system of the company, the brand strategy of the infant formula products is using the quality assurance of the dairy industry of the Netherlands and Australia and the goodwill of the Group to attract customers.

In the goat milk formula market, the Group has Kabrita, mainly focusing on promoting the unique formula of its goat milk-based formula. The brand strategy is using the good quality and uniqueness of the products to attract the global customers.

The Group’s revenue in 2016 mainly comes from 3 factors, own-branded cow milk, own-branded goat milk and private label business.

Own-branded cow milk：For the Year 2016, sales of own-branded cow milk-based infant formula increased by 53.0% to RMB1,018.9 million. Under the cow milk-based infant formula category, the Group built different brands for different markets, including Allnutria, Puredo, Hyproca 1897, Neolac, Mygood and Eurlate. And the Group has cow milk supply manufactures in the Netherlands, New Zealand, Australia and France, promising the stable and sufficient infant formula for the mitigate the concentration risk of milk source.

Own-branded goat milk：The Group introduced Kabrita in the PRC in 2011 and thereafter in Russia, Europe, the Middle East, the United States, Canada, Brazil and South Africa. In the Group’s major market PRC, for the Year 2016, sales of Kabrita amounted to RMB663.5 million, representing an increase of RMB202.5 million, or 43.9%, when compared with the Year 2015, becoming the major contributor to the Group’s revenue.

Private Label business：Other than the development of its own-branded business, the Group also produces infant formula for the Private Label. Sales of the PrivateLabel business increased by 71.9% to RMB472.1 million in 2016, representing17.2% of the total revenue of the Group.

Market share & target markets 

PRC is the Group’s main market for cow milk-based formula.

The chart shows the major players in China’s infant formula market by the share in 2016, according to the Euromonitor. The Top10 companies are 6 foreign companies and 3 mainland-based companies, Hangzhou Beingmate Group, Inner Mongolia Yili Industrial Group and ChinaMengniu Dairy, taking up about 66.5% of the whole market share. The Group’s domestically market share in cow milk-based formula market is in a medium level.

In the goat milk-based market, the market share of Kabrita has been ranked as the number one imported goat milk-based infant formula in the PRC for 3 consecutive years since 2014, becoming the leader in the domestic industry.

he private label business ismainly focus the oversea market. The pie chart clearly shows that the total revenue of the private label business has double from RMB274.6 million in 2015to RMB 472.1 million in 2016 and the European market shows a significant increase. The Group should keep the developing trend and pay more attention to other overseas markets.

Market segmentation, production differentiation

The own-branded productionsof the Group is divided into 3 main parts: cow milk formula, goat milk formula, and nutrition products.

In the cow milk formula category, the Group targets on different markets，form first-tire cities to fourth and fifth-tier cities in China, and communicate consumers with different brand images and different formula ingredients. Under all brands, the Group has different stage products for different age babies, using diversified choice strategy and price difference strategy to attract consumers.

In the goat milk formula category, the Group has Kabrita as the main brand. Kabrita has been the NO.1imported goat milk-based infant formula in the PRC for 3 years since 2014. TheGroup uses the unique formula of this product to acquire the market preference, differing from the cow milk-based market.

In the nutrition products category, the Group has acquired the Australia brand, Nutrition Care, and released the functional milk brand, Globalist, focusing on the nutritional and healthcare market.

Manufacturing and distribution channels:

The Group is principally engaged in the production, marketing and distribution of infant nutrition products in the PRC. The headquarter in Hunan Province, China, is the main manufacturing base of the Group in China. The Group distributes the infant formula products through the franchises, offline market, and online shop. And the nutrition products are distributed through vendors.

In the Netherlands, the Group has the dairy industry with production facilities which conduct activities ranging from research and development, milk collection, processing, production, packaging, marketing and sales of dairy products to customers in the Netherlands and other overseas countries.

5.SWOT Analysis

Strength

The Group has become one of the veryfew Chinese corporations to own and operate a comprehensive production chain inthe industry from milk collection, production and packaging to marketing andsales. This enables the Group to have total control over the entire productionand distribution process of its dairy products.

The Group has a strong technology research and development power. The Group has its own research center in the PRC and in the Netherlands to support the continuous improvement of existing products and innovation of new products. The Group jointly established the “Peking University · Ausnutria Maternal & Infant Nutrition ResearchCenter with the health science center of Peking University in the PRC.

The Group’s good brandreputation and reliable product quality. The outbreak of the melamine incident, products of Ausnutria are declared free of melamine contamination by the PRCgovernment.

The Group’s own-branded goatmilk formulaKabritais the leading brand in goat milk market. The unique formula and the unique market position,emphasizing on the overseas market, is the reason for the success.

Weakness

Comparing to other brands, which have the high market share in China infant formula market, all the brands under the Group has lower market recognition. And the Group also have less marketing and advertising activities.

The Group’s own branded cowmilk formula has over 6 sub-brands and has the similar market segments and target consumers.

The overseas factories and basement will set higher corporate governance standard for the Group.

Opportunity

China has passed the two-child policy in 2016. According to the Communist Party’s National Health and Family Planning Commission, there were 17.86 million births in China last year, an increase of 7.9 % from the previous year, resulting in an increase in formula demand.

The China retail market is recovering and Chinese consumer tends to pay more for lifestyle and quality products.

The e-commerce trend offers the future development opportunity for the Group. The Group has launched a number of mobile applications and has cooperated with a number of leading e-commerce platform providers in the PRC. 

Threat

Government policy will affect the Group’s operation in the long-form. And the CFDA’s new registration requirement put new challenges to the Group’s brand strategy.

The Chinese formula brands are becoming more mature and widely-acceptable to the public. China also lowers down the import tariffs, benefiting the foreign brand, will make the market competition fiercer than before.

The quality of infant formula products has been the most important factor influence Chinese consumers’ choice since the milk powder crisis in 2008. The quality problem will be the decisive factor for the Group’s future development.

6.Financial Analysis

During the Year 2015, it was reported that some of the inventories produced in the Netherlands had failed to meet the Group's internal standards due to temporary commissioning problems in the production process total losses arising from the written-down of inventories in the Netherlands amounted to RMB97.8 million for the Year 2015. The longer than expected time to upgrade the factory as well as the temporary instability in production has also contributed to a serious shortage in the supply of the Group's own brand products, which caused an adverse impact on theprofitability of the Group. So, this is the reason for some financial data in the Year 2015 show unusual change.

Revenue model & capitalization

The revenue model of the Group is the products revenue model: by selling own-branded infant formula, private label business, milk powder, butter and nutrition products.

In terms of capitalization, the Group has a change from a low-leveraged company to a high-leveraged one, with the rapidly increasing rate of liabilities.

Cost structure & expense analysis

The growth rate of the Group’s the COGs shows a decreasing trend. The COGs is about RMB1.6 billion in 2016, a7% growth.

The selling and distribution expenses, including marketing and advertising fees, is increasing at a range from 35% to 45% year on year, reaching over RMB 646 million in 2016. The Group keeps spending on selling and distribution to expand the global and domestic market to handle the fierce market competition. And the Group incurred additionalair freight charges for the delivery of its products to meet the schedule ofits customers and additional laboratory testing costs to fulfill therequirements of the New Policies in PRC.

And the administration fee shows the same pattern, increasing at about 40% year on year. It’s attributed to the increase in headcounts on both the managerial and administrative staff to cope with the continuous increase in the scale of operations of the Group and the general increase in research and development costs.

Sales analysis

According to graph, own-brandedcow infant formula and own branded goat infant formula contribute more than halfof the annual revenue while private label business, milk powder, butter make up another half.

The own-branded cow infant formula and the own-branded goat infant formula are the best-selling products of the company, increasing at a steady pace, mainly due to the company expansion strategy and investment on the whole supply chain. Revenue received from private label business also shows the same pattern, contributing more to the sales year by year.

The smaller business sector of the company, including milk powder, butter, and others has decreased in the past years, due to the Group become more emphasizing on the main formula business.

Nutrition business is the new revenue contributor came in 2016, only earned RMB12.3 thousand, which will grow in the future based on the Group’s long-term plan.

Interpretation of balance sheet

Based on the fast expansion and active acquisitions of the Group, the Group’s assets increased annually at about 25% year on year, peaking at 3.9 billion in 2016. The proportion of property and the inventories increased clearly over the past five years, reaching 21% and 20% respectively in 2016. The global acquisitions of the Australian nutrition company and the investment in the factory in the Netherlands made the Group’s property peaked at 2015, about 4 times than the figure in 2012.

The total liabilities of the Group have surged 1.78 times from 33% of the all assets in 2012 to 59% in 2016, while the equity shows a decreasing trend, dropping at 41% in 2016.

Interpretation of income statements

The Group’s gross profit percent against revenue keeps at a stable level at 72% from 2012 to 2015, but decreasing sharply to 59% in 2016. The dramatically increasing in revenue in2016 is the main reason, rising 30% to 2.7 billion. And because the Group’sproduction problem in 2015, it affected all the financial data performance in2015, especially the operating profit, EAT of the Group, making the biggest decline in the 5 years.

The selling and distribution expenses and administrative expenses are both increasing annually, mainly due to the company’s expansion strategy.

Interpretation of cash flow statements

The Group’s cash flow has undergone the significant fluctuation over the past five years. The cash generated from operation peaked at RMB 353 million in 2016, recovering sharply from the loss in 2015. While the Group’s deposits only increase in 2014 at RMB7 million.

The net cash flow from operating activities amounted to RMB 294.4 million, the highest among the 5years, mainly contributed by the increase in profit before tax generated for the Year 2016 of RMB297.8 million.

The Group’s long-term expansion plan made the Group kept spending a lot on investing activities. The net cash flow decreases from investing activities peaked RMB 435.6 million in2015. The Group mainly invested in the Nutrition Business and the Hunan Morning Foodstuff Co., Ltd. Acquisition of a total of RMB143.1 million, the purchase of property, plant, and equipment of RMB248.1million mainly for the construction of the Green Factory in the Netherlands.

The net cash flow generated from financing activities increased dramatically in 2015 to RMB 515.8 million but dropped back to average level at RMB 256.3 million in 2016, was primarily contributed by the net drawdown of the additional bank loans and other borrowings. The Group financing activities in 2015 were mainly spent for the acquisition of the residual 49.0% equity interest in Ausnutria Hyproca of approximatelyRMB82.3 million.

The figure of the Group’s net cash and cash equivalents shows an increasing trend, has increased to 187.9million in 2016.

Interpretation of stocks

On March 28, 2012, the Shares were suspended from trading due to failure to timely report the financial performance of the Group in accordance with the Listing Rules. The Group comeback to the exchange market on August 4, 2014.

According to the average share price, the Group’s share increasing through the 5 years, rising from 1.84HKD in 2012 to 2.64 in 2016. The company’s basic EPS kept in a low level during the 5 years, at about 0.1 RMB with the fluctuation.

he historical tendency of theGroup’s share shows that since 2009, the year the Group listed, to 2016, theGroup drop sharply after the IPO from HKD7 to the bottom. After came back tothe market in 2014, the Group’s share price performs good and presented anoverall upward trend. And it’s expected to reach the new highest market valuein 2017 at about HKD 4.5 billion.

Interpretation of ratios