4Q sales growth slowing down due to late Chinese New Year

Management expects sales growth in 4Q17 to slow down from 18% in 3Q17,due to shorter peak season falling in 4Q17 with a later 2018 Chinese New Yearseason. For the full year 2017, it expects sales growth to achieve double digit,core margins (exclude government subsidy) to expand, and net profit to achievepositive growth. The sales growth has been mainly driven by increasing demandand increasing market share in the lower tier region. The management indicatesthat the industry sales grew by 7% in 2017, with 8-10% growth in lower tier regionand 5-6% in high tier regions.

Industry competition could ease down in 2018

Management expects the good demand growth to continue in the near-term. Thekey sales driver will be UHT yoghurt and high end UHT milk. The competitioncould ease down thanks to a more balanced raw milk supply. Yet there will beincreasing cost pressure due to rising raw material cost. Unless there is a sharpincrease in raw milk price, the management does not expect a like-for-like pricehike, but it will reduce price promotion to partly offset the cost increase.

Soy milk contribution is still limited in early stage

launched soy milk with the brand "plant selected" in January. It currently hastwo SKUs for soy milk , the original taste priced at Rmb4.0/pack and the black soybean priced at Rmb4.6/pack. The company is positive on the sector and estimatethe industry market size to be Rmb100bn. In 2018, it expects soy milk sales shouldbe a few hundreds million, and think it is still too early to achieve break even dueto initial marketing spendings.

Our view: growth story intact

Yili's guidance is in line with our expectations. We expect its market share couldcontinue to increase in 2018 with industry competition slowing. Meanwhile, thesoy milk and new SKUs continues to be key sales drivers. As industry leader, webelieve Yili could pass through the cost inflation by reducing price promotion andultimately price hikes. We reiterate Buy on Yili. Downside risks: food safety, andoversupply.

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