CMSC International: China's dairy raw milk cycle reaches inflection point, upgrades MENGNIU DAIRY (02319) rating to "hold", upstream preferred YOURAN DAIRY (09858).

CMSC International released a research report stating that the bottoming out of raw milk prices in the Chinese dairy industry signals a key turning point for the upstream sector and even the entire dairy industry, which is expected to kick off a cycle of revaluation of valuations across the board. The bank's top pick for the upstream sector is YOURAN DAIRY (09858), with a high proportion of specialty fresh milk supporting higher average prices. By optimizing the dairy herd and increasing productivity, there is still room for a decrease in the cost of milk production by 0.1-0.2 yuan per kilogram in the future. A rise in milk prices will increase the fair value of biological assets and reduce culling losses. Under neutral expectations (a 2% increase in milk prices and stable costs), net profit before biological asset adjustment is expected to increase by 17% year-on-year. The bank has upgraded its rating for downstream leading company MENGNIU DAIRY (02319) to "hold." The bank believes that after two years of capacity and inventory clearance, the supply-demand gap in the industry for the second half of 2025 has narrowed to single digits, with raw milk prices expected to stabilize at 3.0-3.05 yuan/kg in the fourth quarter of 2025. The prolonged downturn cycle has accelerated the exit of small and medium-sized farms, reshaping the supply side structure and further consolidating towards leading enterprises. MENGNIU DAIRY's performance in the first quarter was strong, with high single-digit growth in liquid milk sales and double-digit growth in other categories such as formula milk powder, cheese, and fresh milk. The bank expects joint venture revenue to recover to profit of 1.10 billion yuan by 2026, with the company planning to steadily increase dividends per share from 2025 to 2027 while maintaining a share buyback pace similar to that of 2024/2025. This plan will also be supported by a relatively conservative (possibly even lower) capital expenditure target.