YILI(SH:600887)2025-09-29 03:06Summary of Key Points from the Conference Call Company and Industry Overview - Company: Inner Mongolia Yili (600887 CH) - Industry: Dairy sector in China Core Insights and Arguments - Market Conditions: The dairy sector is facing challenges such as lukewarm demand and intense competition, with small brands gaining market share through price cuts due to raw milk oversupply [2][9] - Sales Forecast: Yili's sales are expected to grow by 2.3% year-over-year in Q3 2025, with liquid milk sales decline narrowing and strong milk powder sales continuing [2][6] - Earnings Outlook: Recurrent earnings are forecasted to decline by 4.7% year-over-year, primarily due to flat raw milk costs impacting gross profit margins [2][9] - Full-Year Guidance: Yili aims for a 2.8% year-over-year sales increase in 2025, with a reported net margin of 9% [2][9] - Valuation: Trading at 15x 2025 consensus earnings, the valuation reflects known sector headwinds, with a price target of Rmb35 [2][9] Financial Performance and Projections - Liquid Milk Sales: Expected decline to narrow from -3.1% in Q1 2025 to -0.5% in Q3 2025, with Yili opting not to engage in nationwide discounting [6][9] - Milk Powder Sales: Forecasted to grow by 9% in Q3 2025, driven by a Rmb1.6 billion subsidy program and a growing B-to-B business [6][9] - Raw Milk Costs: Current costs at Rmb3.02/kg, the lowest since 2011, with expectations of stability in Q3 2025 and slight decline in Q4 2025 [2][18] Investment Thesis - Management Alignment: The top four senior management members hold 8% equity, aligning their interests with public shareholders [9][26] - Profitability: Yili is recognized for superior profitability and equity return profile, with expectations of sales and earnings growth in the coming years [9][26] - Market Recovery: Anticipated demand recovery and potential raw milk cost increases in mid-2026 could favor Yili's sales growth and margins [9][26] Risks and Catalysts - Downside Risks: Include intensifying competition, input cost volatility, management changes, and potential food safety issues [30] - Upside Catalysts: Stronger-than-expected liquid milk sales, earlier inflection points in raw milk prices, and successful product innovations could positively impact performance [31] Valuation Metrics - Price Target: DCF-based price target of Rmb35 implies an 18x/17x P/E for 2026/27 and a 2.0x PEG for 2026 [10][27] - WACC: Estimated at 9.0%, with a risk-free rate of 3.0% and a risk premium of 7.0% [10][27] Additional Important Information - Market Performance: Yili's share price has underperformed relative to the SHSZ300 Index, with a year-to-date decline of 10.6% [8][20] - Financial Estimates: Revenue is projected to grow from Rmb115.4 billion in 2024 to Rmb128.1 billion in 2027, with adjusted net income expected to rise from Rmb6.0 billion to Rmb13.3 billion over the same period [8][15]