Yili Earnings: Liquid Milk Volume Remained a Drag but Margins Improved; Retain Fair Value Estimate

Wide-moat Yili delivered decent margins in the third quarter despite still-sluggish liquid milk sales volume, mainly attributable to low raw milk prices and recovering selling prices following the channel inventory correction in the first half. While consumer sentiment remained soft, management is optimistic on the recent measures suggested by the Ministry of Agriculture and Rural Affairs to stabilize the upstream dairy sector and downstream dairy demand, as well as China’s long-term dairy consumption trend. We lift our 2024 net income forecast by 4% despite a 1% cut to revenue due to slightly better margin assumption while leaving our long-term estimates largely unchanged. As a result, we retain our fair value estimate at CNY 33 per share, which implies 20 times 2025 price/earnings, 13 times EV/EBITDA, and 3.7% dividend yield. While near-term demand headwinds could persist, we think shares remain undervalued for investors willing to look through the current industry downcycle.