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

Wide-moat Yili’s 600887 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.

Third-quarter revenue grew 2.7% year on year, thanks to 8.5% growth in liquid milk. The growth momentum for liquid milk accelerated due to a revival in gifting demand. Premium liquid milk revenue growth outpaced that of mass market milk and yogurt. A positive mix drove higher gross margin and more efficient spending in sales and marketing expenses. Declining raw milk prices were another tailwind. But management was cautious regarding the fourth-quarter trend, due to a high base from last year. The milk powder business remained suppressed, but Yili recorded positive sales growth in October thanks to new product launches.

We moderately lower our 2023 revenue growth projection to 3.9% year on year, below management guidance for mid-single-digit growth. Lower operating expenses in the third quarter also lift our margin outlook for the year. The result is a slightly higher 2023 net income projection of CNY 10.7 billion from CNY 10.1 billion. While the quarterly results were positive, we think the fourth-quarter trend could soften as recovery in consumer sentiment remains modest. For the full year, we expect liquid milk sales to grow 2.5% year on year, following a flattish trend in 2022.