Goldman Sachs: China Dairy Industry Faces Supply-Demand Inflection in 2H26; Mengniu and Yili Preferred

Overview

Goldman Sachs believes China’s dairy industry is approaching a supply-demand cycle inflection point, with rebalancing expected in H2 2026. The report notes that excess supply will gradually be absorbed as upstream dairy farms continue capacity reduction and downstream demand recovers moderately. Across subcategories, early signs of recovery are already visible in liquid milk, while the infant milk formula (IMF) segment has experienced pronounced differentiation due to recent international brand recalls—benefiting domestic leaders such as Mengniu and Yili. Accordingly, Goldman Sachs reiterates its Buy ratings on Mengniu and Yili, raises Mengniu’s target price, and lowers Feihe’s earnings forecasts and target price amid intensifying competition.

Core views

Industry-level supply-demand: The report forecasts total industry supply to decline ~2% YoY in 2026, driven primarily by an estimated 4.0% reduction in dairy cow herd size (partially offset by higher per-cow yields) and continued declines in net imports (dry dairy product imports projected to fall 10%). Demand is expected to grow modestly by 2%, with liquid milk contributing most of the incremental growth (+6%). Supply-demand balance is expected to stabilize through 2027–2028. Liquid milk business: 2026 marks the early stage of liquid milk recovery. Data show high-single-digit and low-single-digit growth in liquid milk sales for Mengniu and Yili respectively in Q1 2026—outperforming the broader market. Full-year 2026 liquid milk sales are forecast to rebound modestly (mid-single-digit growth), with chilled fresh milk growing faster (high-single-digit), supported by product innovation and new B2B channels. Premium white milk (e.g., Mengniu’s Telunsu, Yili’s Jindian) shows improvement in both pricing and volume, while the drag from ambient yogurt and dairy beverages has largely ended. Infant milk formula (IMF) business: In early 2026, multiple multinational dairy firms initiated precautionary recalls globally over concerns related to ARA (arachidonic acid) and cereulide (a toxin produced by Bacillus cereus), triggering consumer confidence volatility. Data indicate sharp sales declines for foreign brands such as Nestlé Wyeth and Danone Aptamil in China, while domestic brands—including Mengniu’s Bellamy’s and Biostime—grew rapidly against this backdrop, gaining significant market share. Goldman Sachs expects Mengniu and Yili to be the primary beneficiaries of this share shift; Mengniu’s IMF business is projected to accelerate growth in 2026, alongside improving margins. Deep-processed dairy products: Cheese, butter, and other deep-processed dairy items represent long-term strategic growth pillars. With maturing domestic production technology and structurally favorable raw milk costs, import substitution potential remains large. Mengniu’s cheese business and Yili’s B2B operations both demonstrate strong growth momentum. Valuation and ratings: Goldman Sachs raises Mengniu’s 2026–2028 sales forecasts by 2–3% and core net profit forecasts by 1–2%, lifting its target price from HK$21.4 to HK$24.0 (15.1x 2027E P/E). Yili’s earnings forecasts and target price of Rmb35.0 are unchanged. Feihe’s 2026–2028 sales forecasts are lowered by 4–7%, and core net profit forecasts cut by 7–13%, with its target price reduced from HK$4.00 to HK$3.43 (11x 2026E P/E).

Analysis framework

Goldman Sachs employs a combined top-down and bottom-up analytical framework. First, it constructs a dairy supply-demand model (S/D Model), integrating Ministry of Agriculture herd data, customs import-export statistics, and macro consumption trends to assess the industry’s cyclical position and timing of inflection points. Second, at the category level, it conducts volume-price decomposition to isolate distinct drivers across liquid milk, IMF, and deep-processed dairy (e.g., liquid milk driven by channel innovation and premiumization; IMF driven by birth rates and brand trust). Finally, at the company level, it leverages high-frequency sales tracking data (e.g., online GMV, Baidu Index) to evaluate how discrete events (e.g., recalls) reshape competitive dynamics—and adjusts earnings forecasts and valuation multiples accordingly.

Methodology notes

• Industry/sector analysis frameworkSupply-demand framework

  Supply-demand balance analysis

  Assessing whether the industry is in surplus or shortage—and forecasting price trends and corporate earnings inflections—by tracking upstream raw milk supply (herd size, per-cow yield, imports) and downstream demand (liquid milk and IMF volumes).

• Event-driven game theory and behavioral finance

  Reshaping of competitive landscape by discrete events

  Using food safety recalls and similar negative events as natural experiments to observe short-term shifts and long-term entrenchment in consumer brand preferences—and thereby identify which companies gain market share.

• Valuation methodologyP/E and PEG valuation

  Relative P/E valuation

  Assigning a reasonable forward P/E multiple to next-year’s expected EPS, calibrated against historical valuation ranges and growth rate (PEG) considerations, to derive a target price.

Asset mapping & comparison

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

• Mengniu Dairy (2319.HK)

  Beneficiary: Liquid milk recovery + IMF market share gains + scaling deep-processed business

  Strengths

  Strong Bellamy’s brand growth; cheese business returning to double-digit growth; valuation below historical average

  Comparison

  Largest target price upside among covered names

  Risks

  Premium demand recovery slower than expected; losses in new businesses widen

• Yili Co. (600887.SH)

  Beneficiary: Stable leadership in liquid milk + #1 IMF market share

  Strengths

  Successful launch of Jindian new products; Pro-kido brand expected to rank #1 in 2026; ambitious B2B business targets

  Comparison

  High earnings certainty; high dividend yield

  Risks

  Slower-than-expected recovery in premium liquid milk demand; intensified competition

• China Feihe (6186.HK)

  Adversely affected: Intensifying IMF competition; deteriorating sales momentum

  Weaknesses

  Sales decline; margin pressure; product portfolio upgrade not yet achieving scale benefits

  Comparison

  Valuation multiple downgraded; underperformance versus Mengniu and Yili

  Risks

  Birth rate volatility; competition intensity exceeding expectations

Key data

• 2026E Liquid Milk Sales Growth ForecastMid-Single-Digit % (MSD%)Chilled fresh milk growth stronger, at High-Single-Digit % (HSD%)
• 2026E Dairy Cow Herd Size Change Forecast-4.0%Expected ongoing capacity reduction, partially offset by yield gains
• Mengniu 2026E Core Net Profit ForecastRmb5.2 billionUp 8% YoY
• Mengniu New Target PriceHK$24.0Raised from prior HK$21.4; implies 43% upside
• Feihe New Target PriceHK$3.43Lowered from prior HK$4.00, reflecting intensifying competition
• Bellamy’s Q1 2026 Online Sales Growth60–70%Benefited from competitor recalls, driving market share gains

Impact & implications

For Mengniu and Yili, the arrival of the industry supply-demand inflection point signals easing raw milk cost pressure and restored pricing power—amplified by IMF market share gains—significantly enhancing earnings visibility. Notably, Mengniu’s positioning in high-growth segments such as IMF and cheese is now translating into tangible earnings, supporting substantial valuation rerating potential. For Feihe, although the pace of birth rate decline may moderate, intense competition and aggressive promotions by foreign brands create near-term headwinds, slowing earnings growth. For investors, the current juncture presents an attractive entry point for dairy sector leaders—particularly those with multi-category synergies and durable brand moats.

Risks

• Slower-than-expected recovery in premium dairy demand
• Sluggish overall dairy demand recovery
• Intensified industry competition triggering price wars
• Widening losses in new businesses (e.g., cheese, IMF)
• Greater-than-expected volatility in newborn birth rates
• Systemic food safety incidents across the industry

What to watch

• Whether liquid milk sales growth reaches mid-single-digit levels in H2 2026
• Progress of dairy cow herd reduction and raw milk price trajectory
• Market share evolution for Mengniu’s Bellamy’s and Yili’s Pro-kido in the IMF segment
• Magnitude of decline in dry dairy product imports