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Morningstar, Inc.

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Equity Bottom-Up

Inner Mongolia Yili Industrial Group (A) / Equity Bottom-Up

Inner Mongolia Yili Industrial Group (A) (600887 CH)

We initiate coverage of Inner Mongolia Yili Industrial Group, or Yili, with a fair value estimate of CNY 17.50, along with narrow moat and stable moat trend ratings. Our fair value estimate implies forward price/earnings of 18.6 times, enterprise value/EBITDA of 11.4 times, and free cash flow yield of 4% to estimated fiscal 2017 earnings and cash flow. The shares are trading at 1.04 times our fair value estimate, and we view the shares as fairly valued.We believe Yili has a narrow economic moat, derived from cost advantage and its entrenched distribution network. Yili’s enviable market share gives the firm a certain degree of cost advantage over regional competitors, which is demonstrated by its industry-leading profitability. Additionally, the firm has achieved high penetration of distribution channels, with over 2 million points of sale in both urban and rural markets, leading an outperformance in growth to its peers. Quantitatively, the company has consistently delivered solid returns on invested capital, averaging 24% during 2010-15 and we forecast its ROIC to maintain an average of 35.9% through 2020.Analyst: Allen Cheng

We initiate coverage of Inner Mongolia Yili Industrial Group, or Yili, with a fair value estimate of CNY 17.50, along with narrow moat and stable moat trend ratings. Our fair value estimate implies forward price/earnings of 18.6 times, enterprise value/EBITDA of 11.4 times, and free cash flow yield of 4% to estimated fiscal 2017 earnings and cash flow. The shares are trading at 1.04 times our fair value estimate, and we view the shares as fairly valued.We believe Yili has a narrow economic moat, derived from cost advantage and its entrenched distribution network. Yili’s enviable market share gives the firm a certain degree of cost advantage over regional competitors, which is demonstrated by its industry-leading profitability. Additionally, the firm has achieved high penetration of distribution channels, with over 2 million points of sale in both urban and rural markets, leading an outperformance in growth to its peers. Quantitatively, the company has consistently delivered solid returns on invested capital, averaging 24% during 2010-15 and we forecast its ROIC to maintain an average of 35.9% through 2020.Analyst: Allen Cheng

Launching Coverage of Yili at CNY 17.50 FVE With Narrow Moat and Stable Trend; Shares Fairly Valued