Yili Earnings: Profit Tailwind Thanks to Rebound in Liquid Milk Sales

Wide-moat Yili’s third-quarter earnings exceeded our profit estimates, despite a slight miss in revenue. A rebound in liquid milk sales and control in selling expenses drove the margin beat. We moderately lower our 2023 revenue estimate, which was slightly below management guidance. Yili’s share price has lagged due to investors’ concern over premium dairy demand amidst tight consumer wallets. But we think the company’s competitive advantage in distribution remains intact. Improved third-quarter results could lift near-term sentiment, but we think liquid milk revenue growth may soften in the fourth quarter. Our fair value estimate remains CNY 40 per share, which implies 24 times 2023 price/earnings, and we continue to see shares as undervalued.