Sector Overview
The Chinese dairy industry is witnessing a period of cautious optimism driven by healthier channel inventories and a gradual recovery in retail prices. Even though retail demand for liquid milk remains weak, proactive adjustments by dairy companies have contributed to a stabilization of inventory levels and a slow normalization of shipment volumes. The market expects raw milk supply and demand dynamics to balance out in the second half of 2025, with raw milk prices remaining relatively stable. Operating margins are forecasted to expand as companies benefit from cost efficiencies, reductions in bulk powder impairments, and lower selling expenses.
Deep Dive: Company Analyses
Feihe (6186 HK)
Recommendation: BUY
Target Price: HK\$6.20
Earnings & Revenue Outlook: For Feihe, revenue forecasts for 2024 and 2025 were trimmed by 1% and 4% respectively in response to the sluggish retail demand recovery. Despite the modest revenue cuts, there is a slight upward adjustment in gross margin estimates by 0.4 percentage points for both years, reflecting the benefit from lower raw milk prices. However, raw milk impairment has been factored into the forecasts, leading to an overall earnings forecast reduction of 10% for 2024 and 9% for 2025.
Valuation: The long-term earnings outlook has been lowered and the DCF-based target price has been rolled over to 2025. With a target price cut of 6% to HK\$6.20, the valuation translates to an implied 12.1x 2025F PE, while Feihe is currently trading at 10.9x 2025F PE.
Mengniu (2319 HK)
Recommendation: BUY
Target Price: HK\$22.40
Earnings & Revenue Outlook: Mengniu issued a profit warning on 18 February 2025. In 2024, net profit is forecasted to fall into a significantly lower range of RMB50 million to RMB250 million compared to RMB4,809 million in 2023. This sharp decline is mainly attributed to two factors:
- An impairment provision of RMB3.8 billion to RMB4.0 billion tied to the goodwill and intangible assets of its subsidiary Bellamy’s.
- A share of loss amounting to RMB790 million to RMB900 million from the associated company China Modern Dairy, stemming from changes in the fair value of dairy cows and an impairment loss on goodwill.
In line with the sluggish demand recovery, the revenue forecast for 2025 has been cut by 6%. On a positive note, the gross margin estimate for 2025 has been revised upward by 0.5 percentage points, although the overall earnings forecast for the year is lowered by 4%. Core earnings forecasts have been refreshed with adjustments for the one-off items.
Valuation: The long-term earnings forecast has been lowered while the DCF-based target price has been adjusted for 2025, leading to a target price cut of 5% to HK\$22.40. This revised target implies a 16.5x 2025F PE, compared with its current trading multiple of 12.7x 2025F PE.
Yili (600887 CH)
Recommendation: BUY
Target Price: RMB32.70
Earnings & Revenue Outlook: Yili has seen its revenue forecasts for 2024 and 2025 reduced by 11% and 12% respectively, reflecting the continuing sluggish demand recovery. For 2024, the gross margin estimate has been raised by 0.4 percentage points. However, in 2025, a slight reduction of 0.2 percentage points in the gross margin estimate has been factored in as the company also deals with bulk powder impairments for both years. Consequently, the overall earnings forecasts have been lowered by 6% for 2024 and by 4% for 2025.
Valuation: The long-term earnings forecasts have been revised downwards and the DCF-based target price has been rolled over to 2025 with a cut of 7%, bringing the target price to RMB32.70. This is equivalent to an implied 17.9x 2025F PE, while Yili is currently trading at 15.4x 2025F PE.
Market Drivers & Future Outlook
The broader dairy sector is set for an operational margin expansion mainly driven by several key factors:
- The reduction in the selling expense ratio fueled by healthier channel inventories.
- Ongoing cost control measures and efficiency enhancements across dairy companies.
- Impairment reductions on bulk powder thanks to a stabilizing raw milk price environment.
Even though retail liquid milk demand remains subdued compared to historical levels, proactive management by leading dairy players has created a foundation for shipment normalization over time. The expectation is that by the second half of 2025, the balance between raw milk supply and demand will support further business expansion for market leaders in the segment.
Conclusion
The report by UOB Kay Hian underscores a cautious yet optimistic outlook for China’s dairy sector. While challenges such as weak retail demand continue to press on revenue forecasts, the strategic adjustments by companies, operational improvements, and a balanced raw milk market are expected to drive margin expansion and long-term sector growth. Feihe, Mengniu, and Yili all retain a BUY recommendation with target prices adjusted for 2025, reflecting a more balanced market outlook despite short-term setbacks.
