Yili Industrial Group (600887): The foundations for Yili's recovery continue to improve; near-term earnings will remain under pressure in 2026, but growth is expected to accelerate in 2027

Overview

The report assesses Yili's first-half 2026 results, earnings forecast revisions, operating guidance, and shareholder return policy. Although Ausnutria's goodwill impairment and additional taxes materially depressed current-period profit, BofA believes that core operating trends are improving: the raw milk supply-demand cycle is approaching an inflection point, channel inventories continue to decline, and cost control and product mix are supporting margin expansion. Growth is expected to accelerate in 2027, so the Buy rating and CNY35 target price are maintained.

Core views

In the first half of 2026, Yili's revenue increased 4.1% year over year to CNY64.490 billion, while net profit attributable to shareholders declined 20.0% year over year. Second-quarter revenue grew 2.6% year over year to CNY29.665 billion, while net profit attributable to shareholders fell 84.4% to CNY364 million. Second-quarter revenue from liquid milk, milk powder, and ice cream increased 0.1%, decreased 3.5%, and increased 13.4% year over year, respectively, compared with 2.3%, 6.1%, and 7.1% in the first quarter. Ice cream accelerated significantly, while milk powder weakened. The decline in milk powder was mainly attributable to Ausnutria, while Yili's own Pro-Kido milk powder business still achieved mid-to-high-single-digit growth. The company overview indicates that liquid milk accounts for approximately 80% of sales, milk powder 11%, and ice cream 7%. Yili holds more than 30% of the liquid milk market, making both stability in liquid milk and growth in non-liquid milk important to the pace of the overall recovery. The profit decline was not primarily caused by deterioration in gross margin. Second-quarter adjusted gross margin declined only 5 basis points year over year to 34.3%, but asset impairment losses increased 804% year over year to CNY2.4 billion, mainly due to Ausnutria's CNY2.6 billion loss before minority interests, equivalent to approximately CNY1.55 billion after minority interests. As a result, second-quarter operating profit declined 61.9% year over year, operating margin fell 619 basis points to 3.7%, and adjusted net margin fell 682 basis points to 1.2%. Meanwhile, cost control has improved: first-half core operating margin rose 66 basis points; selling, general, and administrative expenses as a percentage of revenue declined 59 basis points to 23.7%, including a 95-basis-point decline in the selling and distribution expense ratio to 18.9% and a 36-basis-point increase in the general and administrative expense ratio to 4.8%. Based on the tax and Ausnutria impairment impacts, BofA cut 2026E EPS by 13.4%, from CNY1.93 to CNY1.67; 2026E adjusted net profit was reduced from the previous forecast of CNY12.186 billion to CNY10.552 billion. Forecast revisions include an increase in asset impairment losses from CNY650 million to CNY2.7 billion, an increase in the effective tax rate from 12% to 18%, and a reduction in operating margin from 11.8% to 10.8%. The report estimates approximately CNY600 million of additional taxes in FY2026, including retrospective impacts relating to prior years; the related tax amount in FY2027 is expected to be only above CNY200 million. Following Ausnutria's impairment, remaining goodwill is only CNY597 million, leading the report to believe that further impairment pressure will be limited. The outlook for 2027 is more positive. BofA raised 2027E EPS by 3.0%, from CNY2.05 to CNY2.11, and raised adjusted net profit from CNY12.960 billion to CNY13.349 billion; operating margin was raised from 11.9% to 12.4%, and net margin from 10.2% to 10.5%. 2028E EPS was also raised from CNY2.23 to CNY2.28. The report forecasts sales of CNY121.589 billion, CNY127.668 billion, and CNY133.307 billion for 2026—2028, respectively, and adjusted net profit of CNY10.552 billion, CNY13.349 billion, and CNY14.427 billion, respectively, corresponding to year-over-year EPS growth of -8.8%, 26.5%, and 8.1%. Operationally, the company maintained its FY2026 revenue growth guidance of 5%. Given first-half growth of 4%, this implies acceleration in the second half, while performance in July and August has already improved relative to the first half. Yili also raised its core margin guidance from broadly flat to an improving trend. BofA believes that operating leverage from sales growth, cost control, and a better product mix can support further margin expansion. Non-liquid milk continues to grow faster than liquid milk. The only major drag in the first half was Ausnutria's milk powder business; the company expects Ausnutria to improve in the second half, while Yili's own milk powder business has maintained mid-to-high-single-digit growth. The report attributes Yili's slower growth relative to Mengniu in 2026 to a higher comparison base and Yili's proactively selected strategic pace, rather than simply a deterioration in competitiveness. Yili views 2026 as the final year of its three-year transition period, with a focus on reducing channel inventory further from reasonable levels to historical lows. First-half retail sales were stronger than shipments to channels, indicating that the company was proactively controlling shipments and digesting inventory. BofA believes this process will suppress recognized revenue growth in the near term but improve channel health and establish a foundation for faster growth in 2027. At the industry level, BofA believes that China's raw milk cycle has reached an inflection point and expects a recovery path lasting at least two years, driven by the beginning of a reversal in the four previous shocks of weak demand, deflation, destocking, and deconsolidation. As supply capacity is reduced, demand improves, and some imports are substituted, the company expects raw milk prices to trend upward subsequently. Yili may benefit from a recovery in industry demand and the competitive environment and is also viewed by the report as a representative exposure to the inflection point in China's raw milk price cycle. Shareholder returns provide another source of support. Yili maintained a dividend payout ratio of above 75% and a dividend floor of CNY1.22 per share. Although one-off items depress 2026 earnings, BofA expects dividends per share to remain broadly unchanged from 2025. Its model assumes dividends per share of CNY1.38 in both 2025E and 2026E, corresponding to a 2026E dividend yield of 5.23%. The company also launched a new CNY1 billion to CNY2 billion repurchase plan, equivalent to 0.4% to 0.8% of outstanding shares based on the current share price used in the report. Cash flow and deleveraging forecasts support its dividend-paying capacity. BofA forecasts free cash flow of CNY15.867 billion, CNY14.867 billion, and CNY15.920 billion for 2026—2028, respectively, while net debt is expected to decline from CNY26.608 billion in 2025 to CNY18.526 billion in 2026, CNY12.716 billion in 2027, and CNY6.622 billion in 2028. Over the same period, the net debt-to-equity ratio is expected to decline from 45.4% to 30.8%, 20.1%, and 9.9%, while operating margin is expected to recover from 10.8% in 2026 to 12.4% in 2027 and 12.8% in 2028. The CNY35 target price remains unchanged and uses a blended valuation comprising 50% P/E and 50% DCF. The P/E component is valued at CNY31.7, based on an unchanged 16x 2026E P/E multiple. This multiple represents an approximately 25% discount to the company's mid-cycle valuation to reflect slowing long-term dairy demand. The DCF component is valued at CNY38.3, assuming a weighted average cost of capital of 10.4%, a beta of 0.9, and a terminal growth rate of 3%. BofA incorporates higher free cash flow into the DCF due to margin expansion. On this basis, the report maintains its Buy rating, with a current reference price of CNY26.45.

Analysis framework

The report first dissects first-half and second-quarter 2026 revenue, category performance, expense ratios, impairments, and profit performance, distinguishing changes in core operations from non-core impacts such as Ausnutria's impairment and additional taxes. It then adjusts its 2026—2028 earnings forecasts based on the latest margin guidance and one-off items. Its medium-term assessment combines the raw milk supply-demand cycle, channel inventory, the divergence between retail sales and channel shipments, and category mix to explain why near-term growth may be slow in 2026 but accelerate in 2027. Finally, it determines the target price through a valuation framework comprising 50% P/E and 50% DCF and assesses cash flow, leverage, and shareholder return capacity.

Methodology notes

• Valuation methodologyPE/PEG valuation

  2026E P/E valuation

  The report derives a valuation of CNY31.7 using a 16x 2026E P/E multiple and applies an approximately 25% discount to the company's mid-cycle valuation to reflect slowing long-term dairy demand; this result accounts for 50% of the final target price.

• Valuation methodologyDCF discounted cash flow

  Discounted free cash flow valuation

  The report calculates a DCF value of CNY38.3 using a weighted average cost of capital of 10.4%, a beta of 0.9, and a terminal growth rate of 3%, and raises free cash flow due to expected margin expansion; this result accounts for 50% of the target price.

• Industry/sector analysis frameworkSupply-demand framework

  Analysis of China's raw milk supply-demand cycle

  The report links capacity reductions, improving demand, and partial import substitution to subsequent increases in raw milk prices, concluding that the raw milk cycle has reached an inflection point and that the recovery path may last at least two years.

• Industry/sector analysis frameworkVolume-price decomposition

  Revenue growth breakdown by category and quarter

  The report compares revenue growth for liquid milk, milk powder, and ice cream in the first quarter, second quarter, and first half to identify structural differences such as the drag from Ausnutria's milk powder, accelerating ice cream growth, and growth in core milk powder.

• Corporate fundamentals and financial frameworkEarnings quality analysis

  iQmethod standardized operating performance and earnings quality metrics

  The report uses standardized measures including operating margin, cash realization ratio, asset replacement ratio, tax rate, net debt-to-equity ratio, and interest coverage ratio to distinguish improvements in core operations and cash-generation capacity from one-off impairment and tax impacts.

• Corporate fundamentals and financial frameworkFree cash flow analysis

  Operating cash flow less capital expenditure

  The report defines free cash flow as cash flow from operating activities less capital expenditure and uses it to assess valuation, deleveraging, and the financial support for dividends and repurchases.

Asset mapping & comparison

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

• Yili Industrial Group (600887)

  The report views Yili as a representative exposure to the recovery of China's dairy industry and the inflection point in the raw milk price cycle and maintains its Buy rating.

  Strengths

  More than 30% share of the liquid milk market, potential for market-share gains, a favorable category mix, a strong execution track record, a dividend yield above 5%, cost control, and cash-flow generation capacity.

  Weaknesses

  Growth in 2026 is weighed down by a high comparison base, proactive channel destocking, weakness in Ausnutria's milk powder business, goodwill impairment, and additional taxes; long-term dairy demand growth may slow.

  Comparison

  The report believes Yili's growth will be slower than Mengniu's in 2026 due to factors including a higher comparison base and the strategic choice to proactively reduce channel inventory.

  Risks

  Raw milk price trends, the intensity of peer competition, and the pace of recovery in sales and margins may be above or below the report's expectations.

Key data

• Rating and target priceBUY; 35.00 CNYBuy rating and target price maintained; current reference price is 26.45 CNY
• First-half 2026 revenueCNY64,490 millionUp 4.1% year over year
• First-half 2026 net profit attributable to shareholdersCNY5,759 millionDown 20.0% year over year
• Second-quarter 2026 revenue and attributable net profit growth+2.6% / -84.4%Revenue was CNY29,665 million, and net profit attributable to shareholders was CNY364 million
• Second-quarter category revenue growthLiquid milk +0.1%; milk powder -3.5%; ice cream +13.4%The weakening in milk powder was mainly due to Ausnutria, while Yili's own milk powder still achieved mid-to-high-single-digit growth
• Second-quarter adjusted marginsGross margin 34.3%; operating margin 3.7%; net margin 1.2%Year-over-year changes of -5 basis points, -619 basis points, and -682 basis points, respectively
• Asset impairment lossesCNY2.4 billionUp 804% year over year, mainly due to Ausnutria's losses
• 2026E EPS revisionCut from 1.93 CNY to 1.67 CNYReduced by 13.4%
• 2027E EPS revisionRaised from 2.05 CNY to 2.11 CNYIncreased by 3.0%
• 2028E EPS revisionRaised from 2.23 CNY to 2.28 CNYReflecting subsequent earnings improvement
• FY2026 revenue guidance+5%Previous guidance maintained, implying faster growth in the second half than in the first half
• Estimated additional taxesApproximately CNY600 million in FY2026; above CNY200 million in FY2027The 2026 amount includes retrospective impacts relating to prior years
• Dividend policyPayout ratio above 75%; dividend floor of 1.22 CNY per shareThe report expects the 2026 dividend per share to remain broadly unchanged from 2025
• Share repurchase planCNY1 billion to CNY2 billionEquivalent to 0.4% to 0.8% of outstanding shares at the current share price
• 2026E valuation metricsP/E 15.86x; dividend yield 5.23%; free cash flow yield 9.42%Based on the report's forecasts and current price
• Target-price valuation parametersP/E value 31.7 CNY; DCF value 38.3 CNY50% weighting each; DCF uses a 10.4% WACC, 0.9 beta, and 3% terminal growth rate

Impact & implications

The report believes that profit pressure in 2026 is mainly concentrated in one-off factors such as Ausnutria's impairment and retrospective taxes, while core cost control, product mix, and margin guidance are improving. Proactively reducing channel inventory may sacrifice near-term shipment growth but will help improve channel health and create conditions for faster growth in 2027. Improving raw milk supply and demand, faster growth in non-liquid milk, stable dividends, and the new repurchase plan collectively support the medium-term view. At the same time, slowing long-term dairy demand still leads the report to retain an approximately 25% discount to the mid-cycle valuation in its P/E analysis.

Risks

• If raw milk price trends are more favorable or less favorable than expected, they may alter the earnings and valuation outcomes underlying the target price.
• If peer competition becomes more moderate and rational or, conversely, intensifies further, sales and margin performance may deviate from forecasts.
• The pace of recovery in sales and margins may be faster or slower than expected.

What to watch

• Monitor whether second-half 2026 revenue growth can accelerate from the first half's 4% rate, thereby achieving the full-year growth guidance of 5%.
• Monitor whether core operating margin can continue the first half's 66-basis-point improvement and deliver on guidance raised from flat to improving.
• Monitor whether channel inventory can fall to historical lows and how the situation in which retail sales exceed channel shipments evolves.
• Monitor whether raw milk capacity reductions, improving demand, and import substitution can drive a subsequent recovery in raw milk prices.
• Monitor Ausnutria's operating improvement in the second half of 2026 and changes in the remaining CNY597 million of goodwill.
• Monitor whether approximately CNY600 million of additional taxes in 2026 declines as expected to above CNY200 million in 2027.
• Monitor the implementation of the dividend payout ratio above 75%, the dividend floor of CNY1.22 per share, and the CNY1 billion to CNY2 billion repurchase plan.