Europe Equity Research07 August 2019 Global Baby NutritionChina Infant Milk, the premiumisation merry-go-roundEuropean Consumer Goods and BeveragesCeline Pannuti, CFA AC(44-20) 7134-7123celine.pannuti@jpmorgan.comBloomberg JPMA PANNUTI J.P. Morgan Securities plcAnkur Gupta(91-22) 6157-5999ankur.x.gupta@jpmorgan.comJ.P. Morgan India Private LimitedSamuel Vialla(44-20) 7134-8804samuel.vialla@jpmorgan.comJ.P. Morgan Securities plcLara Simpson(44-20) 7134-3637lara.simpson@jpmorgan.comJ.P. Morgan Securities plcEdward G Hockin(44-20) 7742-6937edward.hockin@jpmorgan.comJ.P. Morgan Securities plcAustralian Consumer & RetailShaun Cousins AC(61-2) 9003-8623shaun.r.cousins@jpmorgan.comBloomberg JPMA COUSINS J.P. Morgan Securities Australia LimitedShalin J Doshi(91-22) 6157-3036shalin.doshi@jpmorgan.comJ.P. Morgan Securities Australia Limited/ J.P. Morgan India Private LimitedFor Specialist Sales advice, please contactSophie L Warrick, CFA(44-20) 7134-1423sophie.l.warrick@jpmorgan.comTemi Ladega(44-20) 7134-2654temi.ladega@jpmorgan.comSee page 36 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.www.jpmorganmarkets.comWith US$25bn retail sales, Chinese Infant Milk Formula (IMF) represents 46% of the global market but drove 2/3 of its growth in 2018. It is also a key driver of the equity story for companies in our coverage. Amid weakening demographics, the market premiumisation is expected to be a key growth engine. With a high pace of launches in H219, this offers good growth runway for our companies to deliver on their 2019 objectives. We still caution on mid-term risk to a growth slowdown: declining birth rates, and risk of down trading (from macro downturn or regulation changes). We believe A2M and Danone offer a positive play on current industry trends, though in the medium term we think Nestlé offers the most balanced portfolio. Premiumisation driven. The market is increasingly polarized between stagnant Mainstream and fast growing Premium as consumers upgrade to ever increasing prices (as much as RMB600-US$85/kg). Industry forecasts point to sustained premiumisation driving mid-single digit market growth. High rate of innovation (A2, Goat, Grass-fed) and tackling fast growing distribution channels (Mum and Baby Store, Internet) are key to play on these trends. Volatile market. Changes in China IMF have been abundant over the past decade. While we caution the deterioration in demographics post the recent birth surge, Premiumisation may not be immune to 1) price normalisation, 2) macro downturn, 3) down trading, 4) regulation. Market share gain opportunities. International players have been the major beneficiaries of recent market consolidation (aggregate shares of 49% in 2018, up from 37% in 2014), with A2 and Danone gaining most. We expect the market to remain highly competitive, with players vying for increased Premium shares via innovation (organic formulas, A2 milk, and goat milk) and widened distribution. China IMF is a high contributor to growth and profits for European players. Danone (N) is most exposed with one third of H219 group LFL dependent on China IMF. A full pipeline and a good Q2 should drive H219, though low visibility prevails amid heightened competition. Reckitt Benckiser (OW) H219 guidance also dwells on a rebound in IFCN, which we see achievable on easy comps and channel expansion. Nestle (OW) benefits from strong innovation, while offering the most diversified portfolio (price, production, brands) to win in the mid-term.2Europe Equity Research07 August 2019Celine Pannuti, CFA(44-20) 7134-7123celine.pannuti@jpmorgan.com Table of ContentsKey Conclusions ......................................................................3Premium driven growth...........................................................................................3China IMF: A meaningful contributor to growth for our coverage............................7The China IMF markets in 5 points .......................................10China IMF market driver #1: Volume growth to be constrained by demographics...10China IMF market driver #2: Premiumisation opportunities and risks.....................11China IMF market driver #3: Multiple and fast-changing routes to market with online to grow share ........................................................................................................14China IMF market driver #4: Regulation is evolving to improve compliance and encourage domestic production..............................................................................17China IMF market driver #5: Intense competition as players vie for share gains ......
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