China Infant Milk Formula_ Scenario analysis of birth outlook upon fertility subsidy

Summary of the China Infant Milk Formula Conference Call Industry Overview - The report focuses on the China Infant Milk Formula (IMF) industry and its outlook in light of changing birth rates and government policies regarding fertility subsidies [1][4][11]. Key Insights 1. Birth Rate Projections: - A moderate decline in birth rates is expected in 2025 after the Year of the Dragon in 2024. The anticipated year-on-year changes in birth rates for 2026-2028 are projected as follows: - Bull case: 1% increase - Base case: -3% decrease - Bear case: -5% decrease [1][2]. 2. Infant Population Trends: - The decline in the infant population (ages 0-3) is expected to narrow in 2025 and 2026 compared to a -4% decline in 2024. Projections for 2027 and 2028 indicate stabilization in the bull case, a -3% decline in the base case, and a -5% decline in the bear case [3]. 3. IMF Market Dynamics: - The IMF market is experiencing a trend of premiumization, with ultra-premium product sales growing despite a weak macroeconomic environment. The sales value decline narrowed from -10% in 2023 to -7% in 2024. The average selling price (ASP) has remained stable, indicating a better product mix that offsets price competition [4][5]. 4. Sales Forecasts: - Sales decline in the IMF market is expected to further narrow in the following scenarios: - Base case: -1% to -4% - Bear case: -2% to -6% - Bull case: stabilization [4]. 5. Stock Implications: - Companies like Feihe and A2 Milk are expected to gain market share due to their strong positioning in lower-tier markets and effective execution strategies. Feihe is particularly well-positioned to benefit from the birth subsidy in lower-tier cities [5][14][18]. Additional Considerations - Demographic Challenges: - The female population of childbearing age (20-39 years) is projected to decline by 2-3% annually from 2025-2028, which poses a long-term challenge for birth rates and, consequently, the IMF market [2][8]. - Risks: - Key risks affecting the IMF industry include potential food safety issues, lower-than-expected gross profit margins, and a decline in the infant population size. These factors could impede stock performance and market recovery [15][21]. - Valuation Metrics: - Target prices for Feihe and Health and Happiness (H&H) are set based on P/E ratios and sum-of-the-parts (SOTP) approaches, reflecting the expected recovery in the market [14][16]. This summary encapsulates the critical insights and projections regarding the China Infant Milk Formula industry, highlighting both opportunities and risks for investors.