Full-Year Profit Guidance for Yili and Mengniu Could Be Tough To Reach; Lowering FVEs for Both

With weaker-than-expected dairy and infant milk formula demand, we lower our 2023 revenue and profit projections for wide-moat Yili and narrow-moat Mengniu ahead of first-half earnings. We think sluggish consumer sentiment will persist for longer, hurting demand for premium liquid milk products. Infant milk formula, or IMF, sales are also set to slow for both companies, due to headwinds from a low birthrate in 2023. Yili has larger exposure to IMF than Mengniu. We think it would be difficult for both companies to reach their full-year profit guidance, given soft consumer confidence and elevated channel spending. Our fair value estimate for Yili slides to CNY 40 from CNY 42, and for Mengniu to HKD 36 from HKD 39.