JP Morgan: Attention and trading activity in the Chinese dairy industry have increased, and the recovery path for China's Yili is clear.

Recently, the trading department of J.P. Morgan noticed an increase in attention and trading activity in the Chinese dairy industry. J.P. Morgan stated that due to government policies regarding infant formula, and the industry's strong domestic focus, the sector has been receiving more attention since the beginning of the year. J.P. Morgan pointed out that while the poor performance in 2024 was expected, the 2025 performance guidance from Inner Mongolia Yili industrial Group Co., Ltd. (600887.SH) is reassuring. The bank's analysts raised their expectations for Yili's 2025 sales/reported earnings/adjusted earnings, expecting year-on-year growth of 3.4%/34%/80%. Based on a discounted cash flow model (DCF), the new target price is 35 Chinese Yuan (previously 30 Chinese Yuan), with an estimated P/E ratio of 18 times for 2026, reaffirming it as the top pick in the Chinese dairy industry. J.P. Morgan stated that the reason the 2025 performance guidance is reassuring is as follows: first, the revenue target was raised by 2.8% year-on-year to 119 billion Chinese Yuan (similar to Mengniu's low single-digit growth target); second, pre-tax profit increased by 24.4% year-on-year to 12.6 billion Chinese Yuan, with an implied pre-tax profit margin increase of 1.8 percentage points to 10.6% (higher than Mengniu's target of 1-1.5% increase in operating profit margin from 2025 to 2027). Third, industry channel inventory has reached a healthy level, while overall consumer sentiment remains cautious (resulting in a lower revenue target). Yili expects the oversupply situation in the second half of 2025 due to capacity reduction in dairy farms, rising beef prices accelerating farm closures, and the ongoing trade wars leading to higher feed costs. J.P. Morgan believes this is positive news for the entire industry and has also given a buy rating to Mengniu Dairy (02319) and Feihe International Inc. (06186).