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Core views:　　In 3Q22, Yili’s revenue rose by 7% YoY but ex-one-off attributable net profit (ANP) declined by 27% YoY. Liquid milk was under pressure, while milk powder was still growing well, though at a lower rate. Ice cream continued robust growth. The product structure pushed up the gross profit margin (GPM). However, the selling expense ratio increased significantly and the profitability decreased. With the earlier arrival of the Chinese New Year (CNY) and the low base in 4Q21, we expect Yili"s performance to improve in 4Q22 and embrace higher revenue growth and profitability in 2023.　　Abstract:　　In 3Q22, the revenue/ex-one-off ANP growth was +7%/-27% YoY, and the performance was lower than expected. The Company’s revenue rose by 6.7% YoY to Rmb30.4bn in 3Q22; the quarterly ANP/ex-one-off ANP declined by 26.5%/33.3% YoY to Rmb1.93bn/1.69bn, respectively, showing the decrease of profitability. Excluding the consolidation of Ausnutria, we calculate that the revenue growth of Yili in 3Q22 was basically flat compared to a year ago, and the consolidation basically made no positive contribution to Yili"s overall net profit.　　Liquid milk remained under pressure in 3Q22, milk powder slowed down growth, and the ice cream business continued to grow at a high rate; Product structure change pushed up the GPM, but the selling expense ratio increased significantly, and the overall profitability declined. On the revenue side, ①Liquid milk: In 3Q22, the Company"s liquid milk revenue was Rmb21.22bn (-4.9% YoY), showing no improvement in demand compared to 2Q22 (-4.5% YoY), mainly due to the impact of the pandemic. In a breakdown, the revenue from shelf stable liquid milk posted low single-digit increase and that from fresh liquid milk recorded double-digit decrease in 1-3Q22, of which plain UHT milk increased well YoY, Satine increased by middle single digits YoY, and Ambrosial decreased by single digits YoY. ②Milk powder & dairy products: In 3Q22, the segment’s revenue amounted to Rmb6.66bn (+64.7% YoY); Excluding the consolidation of Ausnutria, we believe the revenue of milk powder & dairy products increased by 15%-20% YoY in 3Q22. In the first three quarters, the revenue growth of Yili’s infant milk formula powder ranked first in the domestic market, that of adult milk powder also ranked first in the segment market, and that of cheese was more than 30% YoY. ③Ice cream: In 3Q22, the segment’s revenue totaled Rmb1.91bn (+35.3% YoY). Yili’s ice cream maintained the first place in sales in 3Q22 with obvious advantage. As the first brand of ice cream, Chocliz continued to take the first place in market share. On the profit side, in 3Q22, selling expenses climbed, which dragged down the Company"s overall profitability. ANP/ex-one-off ANP declined by 26.5%/33.3% YoY to Rmb1.93bn/1.69bn, respectively. After excluding the impact of the recalibrating the financial data, the GPM rose by 0.7ppts in 3Q22 YoY, mainly benefiting from the increase in the proportion of milk powder and cold drink products with high GPM. The administrative/selling expense ratio increased by 1.2ppts/3.3ppts YoY. The increase in selling expense ratio was mainly due to: 1) increased expenses of online product publicity such as variety shows; 2) higher selling expenses due to the consolidation of Ausnutria. The rise of administrative expense ratio was mainly due to related expenses arising from the consolidation of Ausnutria. To sum up, the NPM in 3Q22 fell by 2.9ppts to 6.3% YoY. Excluding the consolidation of Ausnutria, the NPM of Yili’s organic business fell by 2.5ppts YoY.　　With the earlier arrival of the CNY and the low base in 4Q21, we expect Yili’s performance to improve in 4Q22. Considering that the next CNY will arrive early (in Jan 2023), the demand for stock in 4Q22 will be better, and we expect Yili’s organic revenue in 4Q22 will likely resume double-digit growth given the upbeat sentiment of distributors in stocking. In 4Q21, the profit base was relatively low (considering Olympic-related expense input and asset impairment); in 4Q22, with expected recovery of revenue growth and stable expense input, we expect better profit growth in the quarter. Looking ahead to 2023, we estimate that the Company"s organic revenue will grow by double digits, its profitability will improve, and Ausnutria will start to contribute incremental profits.　　Potential risks: Food safety hazards; policy changes; decline in industry prosperity; sporadic resurgences of Covid-19; intensified industry competition; sharp rise in raw material prices.　　Investment recommendation: Considering the lower-than-expected performance in 3Q22, we trim our 2022E-24E EPS forecasts for Yili to Rmb1.46/1.69/1.97 (from Rmb1.60/1.94/2.29), corresponding to 18x/15x/13x 2022E-24E PE at the current price. Considering the valuation of its comparable peer Mengniu Dairy (02319.HK) and New Hope Dairy (002946.SZ), which are currently trading at 20x/22x 2022E PE based on Wind consensus estimates, as well as the leading position of Yili and its long-term prospects of steady growth, we assign 25x 2022E PE to derive a target price of Rmb36 and reiterate the "BUY" rating.【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

关键词： profitability