Provision for Bellamy's 4 billion yuan large impairment, has Mengniu shed its "historical burden"?

On the evening of February 18, Mengniu (2319.HK) issued a profit warning announcement, expecting the net profit for the entire year of 2024 to be approximately between 50 million and 250 million yuan.

This represents a nearly 95% year-on-year decline compared to the total profit of 4.809 billion yuan for the entire year of 2023.

The sharp decline in profit is mainly related to two large impairment provisions.

In the profit warning announcement, Mengniu stated that considering Bellamy's current operational and financial performance, it anticipates an impairment provision for goodwill and intangible assets of 3.8 to 4 billion yuan.

This is the highest goodwill impairment event for Mengniu to date.

In 2019, Mengniu spent 7.3 billion yuan to acquire the Australian milk powder brand Bellamy. However, due to failing to pass the formula registration system approval, the brand faced sales obstacles in the domestic market.

From 2021 to 2022, Mengniu made goodwill impairment provisions of 620 million yuan and 742 million yuan for Bellamy, respectively. Since 2022, Mengniu has stopped disclosing Bellamy's brand revenue separately.

The other impairment provision comes from the upstream farms controlled by Mengniu.

Due to the decline in market prices for culling cows and raw milk prices, the joint venture company Modern Dairy made related biological asset impairment losses and goodwill impairments, impacting Mengniu's reported profit by 790 million to 900 million yuan.

If these two impairment impacts are excluded, Mengniu's estimated profit range for 2024 would be 4.64 billion to 5.15 billion yuan, which is similar to the same period in 2023.

However, in the first half of 2024, Mengniu's net profit is expected to drop by 19% year-on-year to 2.445 billion yuan.

In response, Mengniu stated in the announcement that thanks to the decline in raw milk prices and various quality improvement and efficiency enhancement measures, the annual gross profit margin and operating profit margin have significantly improved year-on-year.

Currently, the dairy product industry has not yet emerged from its winter.

According to Nielsen data, the total channel sales of dairy products in 2024 are expected to decline by 1.4% year-on-year, with offline channels dropping by 10.9% year-on-year.

Mengniu also indicated that the supply-demand contradiction of raw milk is prominent, and consumer demand is below expectations, leading to a year-on-year decline in revenue for 2024.

Cost-cutting and efficiency enhancement remain the main themes of the industry.

Mengniu's new president, Gao Fei, stated at the 2024 semi-annual report performance meeting that capital expenditures for 2024 will not exceed 3 billion yuan and will gradually decrease in the future.

This will be Gao Fei's first annual report since taking office.

Some analysts believe that Mengniu's large impairment this time represents the new management's "offloading of historical burdens," and the market interprets it as the end of negative news.

In 2016, former president Lu Minfang also made a goodwill provision of 2.254 billion yuan for Yashili after taking office.

Additionally, Mengniu stated that it expects the impairment will not have a significant adverse impact on operations and cash flow. The dividends for shareholders in the 2024 fiscal year will not be based on the net profit after impairment in the financial statements.

As of the time of writing, Mengniu's Hong Kong stock has risen by over 10%