Hidden Champions Fund Newsletters: June 2019

26th June 2019

Dear Valued Clients and Partners,


During times of uncertainty and trade wars, the perception is that the stock market will be in a decline, and maybe quite drastically on some days. Despite that, there are days where some markets overcome expectations and display periods of recovery. The same can be applied to individual companies. While most companies tend to decline in times of uncertainty, there are a small number of stocks that may move inversely with the downward markets.

These companies tend to exhibit certain characteristics, including their tendency to be predictable, stable and also exhibit strong growth. Certainty and stability tends to command premiums during such times, and strong growth on the part of the individual companies can often overcome the market downturns. However, it is not always so clear looking forward.

This, in my opinion, is however often reflected in the premium of the share prices of these companies. While many are aware of many of these “strong” companies, their valuation of the companies may often prevent investors from buying into them and often rightly so. Thus, many investors are caught between hunting for value and hunting for growth.

However, as Warren Buffett famously quoted, “Value and Growth are joined at the hips”. What is investing if it is not value investing? Growth is a component contributing to value of a stock. In mathematical parlance, what it meant is that Growth is a subset of Value, based on this perspective. With this in mind, a company’s growth trajectory plays a big role determining the value of a company. But many a times, the industry and macro dynamics does play a role in influencing the growth path of the business.

The “biggest macro news” currently hoarding the headlines is the Hong Kong-China extradition plans. At first glance, one may wonder (at least I did!) what the big concern and reaction about a law was, which is likely to only impact a small group of people, since the stated intent of the law from the Government’s perspective is to prevent Hong Kong from becoming a “haven for fugitives”. Frankly, based on my perspective, the many concessions given in response to some of these opposition would have individually placed some limits on the reach of this law. However, the deeper underlying issue stems from the deep distrust of China’s poor human rights record and its opaque legal system. Many fear that China’s authorities will abuse this extradition law and considering that China has, in her own way, conducted “kidnapping campaign” worldwide, these concerns are not unfounded.

While this situation may cause some apprehension in investing in Hong Kong listed companies, I am of the opinion currently that a listing is, at its most basic, a way to allow investors to have a tradable stake in a business. The most fundamental consideration is and always will be the underlying business. Having that in mind, we at Hidden Champion Capital Management is and always will look actively and diligently at sound growing businesses that can be invested in at a reasonable or even undervalued price.

Note:We are transiting our frequency of publication for our newsletter from monthly to bi-monthly. This will allow us more time to focus on our research and be able to publish a newsletter that present more interesting insights. This change will take effect after this newsletter and the newsletter will be published in the even months of the year (that is, February, April, June, August, October and December). I thank you for your support and look forward to continue to add value to you.

Prologue to next segment of Newsletter:

In this issue, Joyce will share her perspective on one of our stock picks listed in Hong Kong, Ausnutria Dairy Corporation (SEHK:1717). This company exhibit characteristics that suggest that it may remain stable and even growing in times of such uncertainty. We have a vested interest in this company so whatever we share is biased. Please exercise your own due diligence and independent assessment should you want to consider this as one of your investments. Joyce’s Chinese write up will be first, followed by a translated version below.

I hope you enjoy this issue of our Newsletter.

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management
www.hiddenchampionsfund.com


每一位孩子都是上天派下凡间的天使,带给父母家庭很多欢乐。在中国独有一个现象,大人全都围着孩子转,父母非常舍得花钱给孩子。在这一期的Newsletter里我和大家分享的一家公司赚的就是孩子的奶粉钱,五年内市值大涨超过10倍。

这家公司就是澳优乳业, 2003年成立于湖南, 2009年在香港证券交易所上市。从地理位置来讲,湖南属于风吹草低见不着牛羊,缺乏奶源,甚至还曾经因“财务风波”从2012年3月开始停牌至2014年8月。在中国乳粉市场上,外有惠氏、雅培、美赞臣、美素佳儿等国际大牌的“常年占据”,内有伊利、蒙牛等国产老牌“坚守驻扎”,在群雄割据下,澳优乳业是如何抢得一杯羹,成为奶粉界的一匹黑马?



商业模式

孙子兵法里,“凡战者,以正合,以奇胜。”

把握源头:深度整合全球奶粉产业链,坐拥多国优质奶源,以正合。

在消费升级的浪潮下,品质是中国婴幼儿奶粉品牌崛起的核心动力源。高端化发展的背后是 消费者对品质的看重,尤其对 进口优质奶源 的认可。 2008年三聚氰胺事件后,国内消费者对国产奶源奶粉的信任度急剧下降,转而增加对外资品牌奶粉的消费,迫使国产奶粉企业也转而使用进口奶源作为主力原料 ,其中奶源地以荷兰、新西兰等为主。对消费者来说,进口奶源意味着品质的保证。

缺乏奶源的澳优乳业,早在成立之初,就将企业定位为一个依托国际奶源取得发展的公司。公司从2011年收购荷兰百年乳企海普诺凯集团开启国际化布局,到2016年8月收购澳洲专业高端营养品品牌Nutrition Care,再到2017年5月份收购澳大利亚ADP奶粉工厂及OZFarm品牌,并在新西兰投资西部乳业成立工厂,澳优正逐步完善自己的全球化布局。目前,澳优乳业已在全球拥有10间工厂,其中荷兰5间、澳洲2间、新西兰1间,以及中国长沙2间,以国际资源服务全球市场。


Source: 3rd party research report

建立完善营销体:前瞻性布局母婴店,以奇胜。

母婴奶粉在国内传统的销售渠道分为三个:商场超市、母婴店以及电商。根据尼尔森零售市场研究数据,目前婴儿奶粉渠道,母婴店占据了52%的市场,且增速也是最快的。参见下图。 澳优乳业早在2006年就率先进入母婴专卖店渠道。目前渠道分布以实体母婴店为主, 全国售点数量约为2.6万,澳优主要市场为二线三线城市,其营收额占比可达80%以上。近年来,随着消费者对综合母婴服务需求的提升,行业渠道从传统的商超逐渐转向母婴店及电商,澳优前瞻性布局母婴渠道优势逐渐显现。营销策略上,澳优公司直接参与地区营销推广活动,和经销商门店联合举办孕妇讲座、月子中心等活动,能够为门店带来客流,门店和品牌之间绑定较为紧密,稳健的下游分销体系是澳优业绩提升的保证。

蓝海策略:早早布局羊奶婴幼儿领域,避开红海厮杀,以奇胜。

澳优从2011年开始布局羊奶粉,通过收购荷兰海普凯诺(源自1897年,从收奶到包装成品完整的产业链及强大的研发实力和严格的质量安全控制系统),掌握荷兰超过一半的羊奶资源。上游原料的垄断,加上公司旗下羊奶品牌佳贝艾特采用100%纯羊乳清蛋白配方,使得公司羊奶粉具有得天独厚的优势,在市场中保持领先地位。随着中国注册制(会在下文中介绍奶粉中国注册制)的实施,以及消费升级的大趋势,未来羊奶粉市场必然是品质为先,而100%纯羊乳清蛋白的羊奶粉将更容易得到消费者的认可。澳优乳业旗下羊奶粉佳贝艾特目前是国内进口羊奶婴幼儿配方奶粉市场第一品牌,占进口羊奶粉总销售额的63%,连续三年稳居市场份额第一。

公司2015年底宣布迈进“黄金十年”战略,于2016年开始持续推进业务结构,不断加大自有品牌婴幼儿配方羊奶粉及牛奶粉销售比重,2014、2015年公司毛利率仅为28%的水平,到了2016年以后,因调整业务结构大幅提升公司的毛利率,上升到40%以上,证明公司的盈利能力大幅提升。


Source: Historical Annual Report

竞争优势

一手掌控国外优质奶源,一手拥有中国完善的营销体系,再引入国资背景资金的注入,可谓三足鼎立,造就澳优非凡成长。

风来了

奶粉注册制于2018年1月1日起在中国全面执行,原则上每个企业不得超过3个配方系列9个产品配方,提高了行业的准入门槛,促使奶粉行业优胜劣汰。预计超过80%的婴幼儿奶粉品牌由于未经注册,将被淘汰。

于2018年报告期内,澳优拥有合共5座工厂已向CNCA(中国国家认证认可监督管理委员会)正式注册的厂房,以及总共12个取得市场监管总局注册的系列奶粉。

另外2019年6月3日,中国国家发改委等七部门联合制定并印发了《国产婴幼儿配方乳粉提升行动方案》, 指出“支持国内企业在境外收购和建设奶源基地,降低原料成本。鼓励有实力、信誉好的企业在国外设立加工厂,并将生产的产品以自有品牌原装进口。” 这对于澳优在国外建厂,拥有优质奶源,并原装原罐进口自有品牌奶粉,是国内政策所支持的。

行业利好加上澳优自身产能扩张及产品组合不断充实,未来保持高速增长值得期许。

管理层

公司于 2015 年 底 进行管理层重组,因2015年完成海普凯诺(荷兰最大羊奶生产商)收购,荷兰方入驻管理层使得公司管理团队发生较大变化。现如今颜卫彬(现澳优董事长)、Bartle van der Meer(现澳优CEO)共同带领的澳优管理团队,重组前后,澳优的股权结构由之前较为集中的单一大股东结构逐渐发展成目前的三权鼎立状态(管理层持股22.91%、中信持股23.95%、台湾方晟德持股23.76%),企业文化更为自由开放,激励制度也逐渐发展完善。

值得一提的是2018年,澳优乳业引入国资背景投资者-中信农业基金管理有限公司。从此公司加入“国家队”,带上国资委的帽子,未来可以获得更多资源和发展机会。

风险提示

  1. 食品安全:但凡食品制造商,都会面临食品安全的风险。
  2. 需求下滑:虽然中国政府2015年10月全面开放二胎,但是实际婴儿出生率仍然有下降趋势,婴幼儿奶粉行业存在需求下滑风险,从而影响公司发展速度。


总结

希望正在阅读的你们能通过上述简短的介绍了解这家企业,一家先天缺乏奶源的企业是如何攻克难题,在内忧外患的不利情形下开辟出一条属于自己的天地。
正如孙子兵法中所说的,“凡战者,以正和,以奇胜。” 澳优乳业以布局羊奶婴幼儿奶粉为其“奇策”,绕开牛奶粉界群雄割据的局面,使自己在婴幼儿奶粉市场中拥有立足之地。
三足鼎立的竞争优势(优质海外奶源+完善国内营销体系+政府基金注入),伴随最近刮起的政策风,我们认为利好澳优乳业。简短声明:我们的基金目前有投资在澳优乳业。


“Every child is an angel who is sent from heaven, a blessing which brings joy to the whole family”

There is a phenomenon in China, where children are treated like the treasure in the family, and thus the parents are willing to give nothing but the best to their children. In this issue, I would like to share with you a company that provides the vital nutrition to the future of China in the form of milk powder. By participating in the formative years of the children, they were able to reward their shareholders with their market value rising more than 10 times in the past five years.

You may have heard of Ausnutria Dairy, which was founded in 2003 in Hunan China, and listed on the Hong Kong Stock Exchange in October 2009. They are a leading paediatric milk formula company with production facilities principally based in the Netherlands. They sell its products under its own brands including A-choice Series, Allnutria Series (including Allnutria Organic Series), the Puredo Series and the Hyproca 1897 Series for the cow milk based infant formula, and the Kabrita Series for goat milk based infant formula (63% market share in terms of China imported volume in 2018).

Despite all these, they are not without their challenges. For those unfamiliar with Hunan, it is a mountainous location where it is hard to raise any sort of cattle due to the lack of grasslands. Additionally, they are faced with strong competitors, the “perennial” international brands like Wyeth, Abbott, Mead Johnson and Mei Sujia, and the “ever-present” local brands like Yi Li and Meng Niu.

With so many strong factors against them, how did Ausnutria Dairy, a dark horse in the milk powder industry, manage to grab a piece of the cake and become a leading player in the industry?


Business Model

In Sun Tze’s The Art of War”, he mentioned: “凡战者,以正合,以奇胜。” In other words, “In all fighting, the direct method may be used for joining battle, but indirect methods will be needed in order to secure victory.”

With reference to this strategy, let’s dig deeper to see how Ausnutria was able to grab a slice of that pie.

Starting from the foundations: Within the whole global value chain for milk powder, Ausnutria was able to acquire their own high-quality source of milk

As China underwent an upgrade in their standards of living due to the rise in middle class and improving economic environments, quality emerged as the key factor which guided consumers’ purchase decisions, especially towards essential products such as milk or milk-powder. In addition, after the melamine scandal in 2008, the consumers’ confidence in domestic milk powder dropped significantly, leading to an increased consumption of foreign brands of milk powder. This forced the domestic milk powder enterprises to change their strategy and turn to importing foreign milk sources from other countries such as the Netherlands, New Zealand for the main raw material for their products. Being foreignly sourced milk products, they are perceived in China as a form of quality assurance.

This played out nicely for Ausnutria Dairy, as they have always used international milk sources for their products since inception due to their lack of domestic milk resources around their company. They have since started to build on securing their international sources of milk, by acquiring the century-old Dutch dairy company called Hyproca Dairy Group in 2011, Australia’s high-end nutrition brand Nutrition Care in August 2016, Australia’s ADP milk-powder factory and OZFarm brand in May 2017. In addition to these, Ausnutria is improving its globalization strategy by partnering New Zealand’s Westland Co-operative Dairy Company Limited. Presently, Ausnutria Dairy has a total of ten factories in the world, including five in the Netherlands, two in Australia, one in New Zealand and two in Changsha, China serving their international consumers.

Marketing Strategy: Establishing good sales channel in the Maternity Shops early on.

There are three traditional sales channel for maternal and infant milk powder in China: Physical maternity stores, supermarkets, or integrated online shopping platforms. According to Nielsen retail market, maternity stores accounted for 52% of the products sold currently, and has the fastest growth rate among the three (see chart below).

As early as 2006, Ausnutria took the lead in establishing the maternity stores as their primary sales channel, with the number of maternity stores in the country at about 26,000 in total. Ausnutria Dairy’s main markets are in the second-tier and third-tier cities, where more than 80% of their revenue are generated. Recently, the increase in demand for integrated maternal and child services saw the demand in the industry shifting from the traditional supermarkets towards the maternity stores and e-commerce, that was where Ausnutria was able to reap the benefits of having the foresight to select the correct sales channel. By having close ties early on with the maternity stores, Ausnutria is able to directly participate in regional marketing and promotional activities, jointly organise lectures for pregnant women and monthly activities for mothers, hence driving traffic to the stores. This ensures synergies between the company and the stores and a stable downstream distribution system, establishing a strong foundation for Ausnutria’s performance.

Blue Ocean Strategy: Early ventures into Goat milk powder for infants, avoiding direct competition.

Ausnutria Dairy entered into goat milk powder in 2011 through the acquisition of the Dutch company Hyproca Group (which was established as early as 1897, handling the complete industrial chain, from the collection of milk to the packaging of products, even strong R&D and strict quality and safety control system). Hyproca also controls almost half of the entire goat milk resources in the Netherlands. The monopoly of upstream raw materials, together with the company’s goat milk brand – Kabrita, a 100% pure goat whey protein formula, which makes the company’s goat milk powder uniquely advantageous and maintains a leading position in the market.

Currently, Ausnutria’s Kabrita is the leading brand for three consecutive years in the domestic imported goat milk infant formula market, accounting for 63% of the total sales of imported goat milk powder. Together with the implementation of a new strict Chinese registration system in January 2018 (further explained below), the general increase in consumer spending for quality infant formula, and Kabrita being the trusted brand, they are poised to continue their market leadership.

In addition, the company announced their new “Golden Decade” strategy, which mean significant changes to their product mix; increasing the sales of their own brand of infant formula goat and cow milk powder. Their Gross Profit Margins improving from around 28% in 2014 & 2015 to around 40% from 2016 onwards.


Source: Historical Annual Report

Summary – Three Pillars of Growth.
With control over high-quality foreign sources of their raw materials in one hand, and a strong foothold in the strongest sales and marketing channel for their products in the other, they established strong pillars of growth. The business model attracted attention from the state-owned funds, and with their support, it created extraordinary growth in this company.

Growth Drivers

Implementation of New Regulations

China Food and Drug Administration came up with an Administrative Measures for Product Formula Registration of infants and Young Children Formula Milk Powder, and announced that as of 1st January 2018, if any companies, foreign or domestic, plan to sell their formula milk powder in the Chinese market, it is mandatory to get a registration certificate. Each IMF producer is eligible to register up to 9 formulas under no more than 3 IMF brands. With this new regulation, over 80% of IMF brands are expected to be eliminated as a result of new registration regulation.

As of their 2018 annual report, Ausnutria Dairy has a total of five factories duly registered with the Certification and Accreditation Administration of the People’s Republic of China (CNCA) and a total of twelve series registered with the State Administration for Market Regulation (SAMR).

Government Policies Favouring Their Business Model
On June 3, 2019, the National Development and Reform Commission and other seven departments jointly formulated and issued the “Domestic Infant Formula Milk Powder Enhancement Action Plan”, stating that they “support domestic enterprises to acquire and build milk source bases overseas and reduce raw material costs. They encourage “companies with the strength and good reputation to set up processing factories abroad and import the manufactured products back to China.” This new policy is in favour of Ausnutria’s existing business strategy and model.

Therefore, the new strategy of increasing their own brand in their product mix, new regulations eliminating competition, together with new policies favouring Ausnutria’s business model should place them in a good space to enjoy rapid growth in the future.

Management

After acquiring Hyproca (the largest goat milk producer in the Netherlands) in 2015, the Dutch company’s presence in the management team has caused major changes in the management team. Mr. Yan Weibin (currently Chairman) and Mr. Bartle van der Meer (currently CEO) is currently leading the team. There are three major shareholders, with the management team owning 22.91%, CITIC with 23.95%, and Taiwan Center Laboratories owning 23.76%.
It is worthwhile to mention that in 2018, Ausnutria Dairy welcomed the state-owned investment fund – CITIC Agricultural Fund Management into the company. Since then, the company has joined the “national team” and, under the umbrella of the SASAC, is likely to be able to obtain more resources and development opportunities in the future.

Risks

  1. Food safety concerns

As with all food manufacturers, they will face the risk of lapses in standards during manufacturing, resulting in drop of confidence among consumers or reputation.

  1. Declining demand: declining birth rate despite the 2 child policy

Although the Chinese government has introduced a second-child policy in October 2015, the actual number of newborn babies are on a downward trend. This has negative implications on the infant milk powder industry due to falling demand, which can affect the company’s development speed.

Conclusion

I hope that this simple article provides you with a brief overview of this company, and how it has overcame difficulties, starting from literally nothing (no milk resources at all) to being a  leading force in their selected specialized industry.

By taking a page out of Sun Tze’s Art of War, the “indirect” approach to securing victory, Ausnutria did not compete directly with the dominant players head on in their infant formula market through cow’s milk, and instead slowly but surely establishing a strong foothold in the industry through goat’s milk.

With their “three pillars of growth” and the recent tailwinds, we are cautiously optimistic about this company.  We currently have a vested interest in this company.

Warm regards,
Joyce Pang Qin | Investment Analyst
Hidden Champions Capital Management
www.hiddenchampionsfund.com