Yili Earnings: Modest Top-Line Trend Remains a Near-Term Headwind; Retain Fair Value Estimate

Its modest top-line trend remained as the primary drag to wide-moat Yili’s fourth-quarter 2023 and first-quarter 2024 results. The company decided to reduce channel inventories during the first quarter, which led to a sluggish top-line trend for liquid milk. We think this implies weaker-than-expected sell-out during Lunar New Year, which is supposed to see firm festive demand. We lowered our 2024 revenue projection by 4% to factor in the near-term headwind and think liquid milk sales could remain soft before a turnaround in the fourth quarter. Management also acknowledged the need to increase channel expenses for channel inventory reduction. Despite lower sales and higher expenses, the one-off investment income of CNY 2.58 billion due to the sale of a subsidiary’s shares in the first quarter boosted our 2024 net income projection by over 20%. However, our 2025-27 earnings forecasts are largely unchanged, and we retain our fair value estimate at CNY 36 per share, which implies 17 times 2024 price/earnings, 15 times EV/EBITDA, and a 4.0% dividend yield.