By Kimberley Kao

China Mengniu Dairy shares jumped after the company said that it doesn't expect impairment losses to affect its declaration of dividends, despite guiding for a sharp drop in annual profit.

Shares of Mengniu, one of China's largest dairy companies, were 11% higher at 17.38 Hong Kong dollars (US$2.24) in early trade Wednesday, bringing year-to-date losses to 1.7%. The jump puts the stock on track for its biggest one-day percentage gain since October 2024.

Mengniu late Tuesday guided for a drop in net profit for 2024 to 50.0 million yuan to 250.0 million yuan (US$6.9 million-US$34.3 million), compared to 2023 net profit of CNY4.81 billion. This is in part due to goodwill impairments and fair value changes in assets from subsidiary Bellamy's Australia and associate China Modern Dairy. Mengniu expects to record impairment losses of about CNY4.59 billion to CNY4.90 billion.

The company said the impairments won't adversely affect its cash flow, nor factor in to its decision to declare a dividend.

"The company continues to strive to maximize returns to the shareholders," it said.

Mengniu also guided for a drop in revenue for 2024, citing lower-than-expected consumer demand. Still, it expects to record a substantial increase in both gross and operating profit margins, thanks to a decline in raw milk prices as well as operational efficiency improvements.

Citi research analysts kept a buy rating on the stock, highlighting that its underlying net profit guidance for 2024 is 4%-15% above Citi's estimates thanks to a better-than-expected operating profit margin.

That said, the dairy company is still facing several headwinds, Citi's Xiaopo Wei and Vincent Young said in a note. China's dairy market remains highly fragmented and competition fierce, while food-safety incidents--which have hit the industry in recent years--present an investment risk, they said. Mengniu's profits are also sensitive to average selling price and raw-milk prices, posing an additional risk, they added. Citi has a HK$20.90 target price on the stock.

Write to Kimberley Kao at kimberley.kao@wsj.com

(END) Dow Jones Newswires

February 18, 2025 22:30 ET (03:30 GMT)

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