China broader consumption research trip: recovery remains mild, dairy resilience stands out, and YUMC is likely to improve in 2Q

Overview

This report summarizes the key takeaways from Morgan Stanley's China broader consumption research trip. The report covers dairy, restaurants, food and beverages, beauty, gold and jewelry, freshly made beverages, and IP/toy segments. The core conclusion is that consumption trends remain weak and monthly momentum is uneven, but leading companies are shifting from pure price competition toward product and service differentiation; dairy is the most resilient, and YUMC is expected to see sequential improvement in 2Q.

Core views

The report maintains constructive views on Mengniu, Yili, and YUMC. In dairy, liquid milk momentum remained healthy through April, Mengniu targets mid-single-digit sales growth in 2026, and Yili maintains a sales growth target of about 5%. In restaurants, YUMC's same-store sales year to date are in line with expectations, and 2Q is expected to improve versus 1Q. In food and beverages, Tingyi targets low-single-digit sales growth in 2026, but its beverage business may face PET cost pressure from 2Q to 3Q. In gold and jewelry, demand improved sequentially in May, and although Laopu's demand momentum was slightly below expectations, margin expansion was stronger. Freshly made beverages remain under pressure in 2Q-3Q, with competition focusing more on product innovation than price.

Analysis framework

The report compares demand momentum, pricing environment, cost pressure, margin trends, market share changes, and competitive landscape across consumer sub-sectors based on field visits and company feedback, and provides relative views using Morgan Stanley's equity rating framework.

Methodology notes

• Industry researchCompany visits and management feedback

  Use discussions with companies in the consumer sector to assess changes in demand, costs, margins, and competition.

  The report says the research covered companies such as Yili, Mengniu, YUMC, Tingyi, and Laopu, and it summarizes 2026 growth targets, channel momentum, and cost pressure by category.

• Relative ratingMorgan Stanley Overweight/Equal-weight/Not-Rated framework

  OW means expected risk-adjusted total return over the next 12-18 months is above the average of covered names in the sector; EW means roughly in line; NR means there is not enough conviction.

  The report discloses that Morgan Stanley does not use Buy/Hold/Sell as its formal ratings, but instead uses Overweight, Equal-weight, Not-Rated, and Underweight.

• Operating quality analysisRevenue growth, gross margin, operating margin, and capex tracking

  Assess earnings elasticity by combining revenue growth, product mix, raw material prices, expense ratios, and capital expenditure.

  For example, Mengniu focuses on mid-single-digit sales growth, upside in GPM, flat OPM, and capex below Rmb2bn; Yili focuses on GPM improvement driven by product mix and flat NPM.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Mengniu (2319.HK)

  Core dairy covered name, rated OW.

  Strengths

  Targets mid-single-digit sales growth in 2026, Milk Deluxe is growing in the double digits, basic milk is growing in the mid-to-high single digits, raw milk prices have stabilized, and DPS is expected to be stable or higher.

  Weaknesses

  The company believes 2026 GPM upside is limited, and OPM mainly depends on operating efficiency to stay flat year over year.

  Comparison

  Compared with smaller dairy companies, Mengniu could continue to gain market share if raw milk prices normalize.

  Risks

  Consumption recovery weaker than expected, changes in raw milk prices or costs, and insufficient product mix improvement.

• Yili (600887.SS)

  Core dairy covered name, rated OW.

  Strengths

  Maintains a sales growth target of about 5%, UHT milk is growing positively, infant formula and adult milk powder are growing well, liquid milk sell-through was healthy in April-May, and inventories are low.

  Weaknesses

  The selling expense ratio may rise slightly, and the net profit margin target is flat year over year.

  Comparison

  Similar to Mengniu, Yili benefits from the return to growth in liquid milk and share losses at smaller brands.

  Risks

  Rising expense ratio, slower-than-expected product mix improvement, and weak consumer demand.

• YUMC (YUMC.N)

  Core QSR covered name, rated OW.

  Strengths

  Quarter-to-date SSSG is in line with expectations, 2Q is expected to improve versus 1Q, demand remains resilient after price increases on some delivery products, and 2026 restaurant margin is expected to improve year over year.

  Weaknesses

  Delivery will still grow, but the pace may be slower than in previous quarters.

  Comparison

  Against a backdrop of weak overall consumption, YUMC's sequential improvement and margin recovery stand out.

  Risks

  Traffic recovery weaker than expected, pricing actions affecting demand, and continued slowdown in delivery growth.

• Tingyi (0322.HK)

  Food and beverages covered name, rated EW.

  Strengths

  The 2026 low-single-digit sales growth target is broadly on track, noodle sales and profit momentum are relatively stable, and the dividend payout ratio target is 100%.

  Weaknesses

  Competition in beverages is intense, the water category is under pressure, and PET cost pressure will be present in 2Q-3Q.

  Comparison

  Tea beverages are expected to outperform the water category, but overall beverage cost pressure is more pronounced than in dairy.

  Risks

  PET prices staying high, intensifying competition, and beverage demand weaker than expected.

• Laopu (6181.HK)

  Gold and jewelry covered name, rated OW.

  Strengths

  Demand momentum improved sequentially in May as gold prices stabilized, and margin expansion was stronger than expected.

  Weaknesses

  Demand momentum in 2Q26 is still slightly below Morgan Stanley's expectations.

  Comparison

  The premium gold and jewelry segment is attracting traditional brands, and competition is intensifying.

  Risks

  Gold price volatility, intensifying competition in the premium market, and unstable demand recovery.

• Shanghai Yuyuan Tourist Mart (600655.SS)

  Gold and jewelry and property-related company, non-covered.

  Strengths

  As a property owner, it is bringing in more traditional-gold brands and promoting Laomiao's premiumization and store upgrades.

  Weaknesses

  It needs to close low-end stores and reshape brand positioning, and the execution of the transformation remains uncertain.

  Comparison

  Its strategy reflects the industry trend of traditional brands expanding into the premium gold and jewelry market.

  Risks

  Premiumization falling short of expectations, intensifying competition, and changes in retail property traffic.

• Freshly brewed beverages segment

  Industry observation on freshly made beverages.

  Strengths

  Competition in the industry is more focused on product innovation, and prices are generally stable.

  Weaknesses

  There is still pressure in 2Q-3Q26 due to last year's high base and weaker platform subsidies.

  Comparison

  Compared with pure price wars, product innovation has become the more important competitive dimension.

  Risks

  High-base pressure, weaker platform subsidies, and demand volatility.

Key data

• Report date2026-05-17 07:50 PM GMTFrom the report cover timestamp.
• Overall consumption viewMild recovery, volatile monthly momentumThe report says overall consumption trends remain muted.
• Mengniu 2026 sales targetMid-single-digit growthIn 1Q26, Milk Deluxe posted double-digit growth, basic milk grew in the mid-to-high single digits, and April momentum largely continued.
• Yili 2026 sales targetAbout 5% growthUHT milk is growing positively, infant formula is growing in the mid-to-high single digits, and adult milk powder is growing in the double digits.
• Tingyi 2026 sales targetLow-single-digit YoY growthPerformance year to date is broadly in line with the target, but the beverage business is under pressure in the water category.
• Mengniu capexBelow Rmb2bnThe company expects 2026 DPS to be stable or higher.
• YUMC 2Q trendExpected to improve sequentially versus 1QQuarter-to-date same-store sales growth is in line with company expectations.
• Beverage cost pressure windowMore visible from late 2Q to 3QTingyi began buying PET at market prices starting in June, and high PET prices are expected to continue into 3Q.
• Laopu May demandSequential improvementDemand momentum in 2Q26 is still slightly below expectations, but margin expansion is stronger.

Impact & implications

For investors, the report suggests that the China consumer sector should not be viewed as a simple broad-based recovery trade. Instead, investors should focus on leaders with category resilience, share gains, product mix upgrades, and improving operating efficiency. Dairy and YUMC have relatively higher near-term visibility; beverages and freshly made beverages need to be watched for cost pressure and high-base comparisons; for gold and jewelry, the key variables are gold price stability and the premium competitive landscape.

Risks

• Overall consumption recovery is slower than expected, making it difficult to meet revenue targets.
• Broad-based price recovery has not yet appeared, so profit improvement depends more on cost control and product mix.
• Beverages may face more visible PET and other cost pressure from late 2Q to 3Q.
• If gold prices become highly volatile again, gold and jewelry demand could be affected.
• Intensifying competition in premium gold and jewelry could compress the growth room for leading brands.
• Freshly made beverages may remain under pressure in 2Q-3Q because of last year's high base and weaker platform subsidies.
• The report discloses that Morgan Stanley has or may have investment banking, market-making, or other commercial relationships with several covered companies, and investors should pay attention to potential conflicts of interest.

What to watch

• Whether Mengniu and Yili's liquid milk returns to growth in 2026 as expected and whether they can continue to gain share from smaller brands.
• Whether YUMC's 2Q same-store sales growth and restaurant margins confirm sequential improvement.
• The trend in PET prices from June to 3Q and the impact on Tingyi's beverage margins.
• Gold price stability and its effect on Laopu and gold and jewelry demand.
• Whether competition in the freshly made beverages industry continues to focus on product innovation rather than returning to price wars.
• Whether companies can offset cost pressure through product mix upgrades, service differentiation, and operating efficiency.