Pricing Power Key to Weather Mounting Commodity Prices for Packaged Food Firms; Our Top Pick Is Yili

The recent acceleration in commodity prices as a result of the Russia-Ukraine conflict has exacerbated the margin pressure on packaged food companies brought about by supply disruptions throughout 2021. Various food and beverage companies in China have engaged in price hikes since the third quarter last year to mitigate margin compression. We continue to highlight Yili as our top pick, with our fair value estimate at CNY 46 per share, as we think the premiumization trend and continued penetration of dairy products in China are unchanged. The raw milk cost curve continued to moderate in early March, which should mitigate margin pressure observed since the second half of 2021. Robust sales reported for January and February at 15% growth year on year also confirm our constructive view. We expect categories with more room to maneuver on premiumization and higher concentration of share to command stronger pricing power and face lower margin pressure in the near term.