Liquid milk recovery and multi-category growth prompt Mengniu to raise FY26 revenue guidance; Goldman Sachs raises target price and maintains Buy

Overview

This report assesses Mengniu Dairy's 1H26 results and information from management's briefing. Goldman Sachs believes that the recovery in liquid milk demand, expansion of non-liquid milk categories, more rational competition, and improved supply-chain efficiency have increased visibility into FY26 revenue growth and 2H26 margin expansion; it therefore raises its target price and maintains its Buy rating.

Core views

First, FY26 growth expectations have improved significantly. Mengniu announced its 1H26 results on August 26 and held a briefing on August 27; management subsequently raised FY26 sales growth guidance from the previous mid-single digits (MSD%) to high-single digits (HSD%), based on a stronger-than-expected volume-led recovery, improving industry supply-demand conditions, and continued positive trends across categories in July and August. Management targets mid- to high-single-digit sales growth in 2H26. Sales volume grew 8% in 1H26, in line with the 8% increase in revenue, indicating that the current recovery is being driven primarily by volume rather than price increases. Growth in 2H26 will remain mainly volume-driven, while reduced promotions and an improved product mix support average selling prices; there are currently no plans to raise prices. On margins, the core operating margin reached 8.2% in 1H26, above management's initial target of 8.0%, but declined 0.3 percentage points year over year. Management broadly maintained its FY26 full-year margin outlook and expects core operating margin expansion in 2H26. Although rising raw milk, packaging material, and palm oil costs could pressure gross margin, a more rational competitive environment should reduce discounting, while premium SKUs such as Deluxe, M-Plus, and Greek yogurt should improve product mix and average selling prices. Supply-chain reform, route-to-market (RTM) optimization, inventory management, operating efficiency, and selling-expense optimization will provide further support. The Shengmu integration is expected to generate several hundred million renminbi in annual synergies from improved production efficiency, supply-chain optimization, and lower administrative expenses. Management's medium-term core operating margin target is 9%-10%. Category mix is another core growth driver. Management expects ice cream, infant milk formula (IMF), and cheese to continue delivering double-digit growth over the medium term, reducing reliance on liquid milk as a single category and improving the mix. Chilled dairy products maintained strong momentum, driven by membership stores and emerging key-account channels. The fresh milk business maintained market leadership in Mainland China, Hong Kong, Macau, and Taiwan, while sales in Singapore achieved triple-digit growth. Infant milk formula continued to outperform the industry, with domestic brands ranking among the top 3 to top 5 offline. Bellamy's revenue has exceeded the RMB1.3bn level recorded in 2019 before its acquisition and continues to expand into Southeast Asia. Adult milk powder also achieved growth both online and offline. Industry supply and demand are evolving from the pressure experienced over the past two years toward a more balanced state. China's dairy product output rose 8.4% year over year in July, while the dairy cow herd declined 3.5% year over year. Raw milk prices have remained stable at approximately RMB3.0/kg since mid-June, and the average raw milk price in 3Q26 through the report date increased by low-single digits year over year. Milk output returned to 1.5% year-over-year growth in 2Q26. The report believes a recovery in raw milk prices will pressure smaller and white-label companies that depend on inexpensive milk supply, while more disciplined competition, product premiumization, and supply-demand rebalancing should improve industry economics. Mengniu's prior capacity expansion in high-protein products and deep-processed ingredients, together with upstream optimization through the Shengmu integration, leaves it better positioned to meet recovering demand. Deep processing and upstream integration provide long-term earnings optionality. Management believes whey protein, cheese ingredients, milk fat, and milk powder must be developed in parallel, and that only companies with scale, integrated dairy resources, and downstream demand channels can generate meaningful economic returns. Industry leaders, especially those with leading cheese capacity, therefore enjoy greater advantages. As the cost gap between domestically produced dairy ingredients and imported products narrows, the import-substitution trend is expected to continue. However, approximately 5 million tonnes of new deep-processing capacity is scheduled to come online over the next two years, making capacity ramp-up and the competitive landscape important variables. The drag from non-operating items is expected to ease in 2H26. Raw-milk-related inventory impairment losses were approximately RMB166mn in 1H26, and management expects these losses to decline in 2H26 as raw milk prices recover and industry supply and demand rebalance. The FY26 tax drag is expected to exceed RMB500mn, of which RMB320mn relates to prior-year tax adjustments already recognized in 1H26. Excluding the historical adjustment, management indicated that the recurring incremental annual tax burden will be approximately RMB200mn going forward. The report also conducts sensitivity tests on associate earnings from China Modern Dairy, including Shengmu, based on raw milk prices, feed costs, and biological asset impairments to assess the impact of changes in upstream profitability on Mengniu's 2027E net profit. Goldman Sachs made only approximately plus-or-minus 1% adjustments to its 2026E-2028E sales and net profit forecasts. It now forecasts 2026E revenue of RMB88.3bn, core net profit of approximately RMB5.3bn, and reported net profit after tax effects of approximately RMB4.7bn, representing year-over-year growth of 7% and 5% in revenue and core net profit, respectively. For 2H26, it expects growth of 7% and 6%, respectively, compared with 8% and 4% in 1H26. Goldman Sachs forecasts a 2026E core operating margin of 8.1%, with expansion of 0.3 percentage points in each of 2027E and 2028E. Its 2027E core net profit forecast remains RMB5.6bn. Revenue in the forecast table for 2026E, 2027E, and 2028E is RMB88.2748bn, RMB93.3626bn, and RMB98.2739bn, respectively, while diluted EPS before exceptional items is RMB1.20, RMB1.49, and RMB1.62, respectively. Shareholder returns and valuation complete the case for maintaining the Buy rating. Management expects dividends per share to continue rising over the next three years and plans to accelerate share repurchases. FY26 capital expenditure is expected to be below the previous RMB2.0bn plan, while 1H26 capital expenditure was approximately RMB500mn, down more than 50% year over year, which should support free cash flow. The report states that the shares trade at 12.2x/11.5x 2026E/2027E recurring P/E based on updated Goldman Sachs forecasts, with a dividend yield of 4%-5%, which does not fully reflect the visibility of the near-term recovery or the long-term compound growth potential. Goldman Sachs raises its 12-month target price from HK$24.00 to HK$25.00 due to its latest earnings forecasts and exchange rates, with all other assumptions unchanged. The target price is based on 15.1x 2027E P/E and discounted to end-2026 using a 9.6% cost of equity. Relative to the report price of HK$18.79, this implies 33.0% upside.

Analysis framework

The report first derives changes in revenue, volume, and margin guidance from the 1H26 results and management briefing, and then analyzes the earnings transmission mechanism through industry supply and demand, product mix, costs and promotions, supply-chain efficiency, deep-processing opportunities, and non-operating items. Goldman Sachs then calibrates earnings expectations through sensitivity tests of raw milk prices and average selling prices, scenario analysis of upstream associate earnings, and 2026E-2028E financial forecasts, before deriving its 12-month target price using a 2027E P/E multiple discounted to end-2026.

Methodology notes

• Valuation methodologyP/E and PEG valuation

  2027E target P/E valuation

  Goldman Sachs calculates Mengniu's forward value using 15.1x 2027E P/E and then discounts it to end-2026 using a 9.6% cost of equity, deriving a 12-month target price of HK$25.00.

• Industry analysis frameworkSupply-demand framework

  Dairy industry supply-demand rebalancing analysis

  The report assesses changes in industry supply and demand using dairy product output, the dairy cow herd, milk output, and raw milk prices, and analyzes their effects on competitive discipline, promotional intensity, inventory impairment, and upstream profitability.

• Industry analysis frameworkVolume-price decomposition

  Decomposition of volume, price, and product mix

  The report decomposes sales growth into volume, price increases, reduced promotions, and product mix upgrades. Both sales and volume grew 8% in 1H26, indicating that the recovery was mainly volume-driven, while mix improvement and reduced promotions are expected to provide price support in 2H26.

• (Method outside vocabulary)

  Sensitivity tests for raw milk prices, average selling prices, and associate earnings

  The report estimates the effects of different assumptions for raw milk prices, average selling prices, feed costs, and biological asset impairments on 2027E gross margin, associate earnings, and net profit. All else being equal, every 3-percentage-point increase in raw milk prices would theoretically require a 0.5% increase in average selling prices to offset the cost pressure.

Asset mapping & comparison

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

• Mengniu Dairy (2319.HK)

  The report views the company as a major potential beneficiary of recovering dairy demand, improving industry supply-demand conditions, and expansion in non-liquid milk categories, and maintains its Buy rating.

  Strengths

  Fresh milk maintains a leading position in Mainland China, Hong Kong, Macau, and Taiwan; ice cream, infant milk formula, and cheese are growing rapidly; the company has advantages in brand, scale, upstream resources, deep-processing capabilities, downstream channels, and supply-chain integration.

  Weaknesses

  The company faces near-term cost pressures from raw milk, packaging materials, and palm oil, while FY26 is also affected by tax adjustments, inventory impairment, and losses from certain new businesses.

  Comparison

  The report believes improving industry supply-demand conditions are more favorable for leaders with scale and integrated capabilities. Mengniu's domestic infant milk formula brands rank among the top 3 to top 5 offline, while its fresh milk business maintains market leadership.

  Risks

  Slower-than-expected recovery in premium or overall dairy demand, intensified competition, and widening losses in new categories.

Key data

• FY26 sales growth guidanceHigh-single digits (HSD%)Raised from the previous mid-single digits (MSD%)
• 2H26 sales growth targetMid- to high-single digits (MSD%-HSD%)Management target
• 1H26 revenue and volume growthBoth increased 8% year over yearGrowth was primarily volume-driven
• 1H26 core operating margin8.2%Above the initial target of 8.0%, but down 0.3 percentage points year over year
• Medium-term core operating margin target9%-10%Driven by product mix, category transformation, organizational efficiency, and selling-expense optimization
• 2026E revenueRMB88.2748bnGoldman Sachs forecast, approximately RMB88.3bn, up 7% year over year
• 2026E core net profitApproximately RMB5.3bnGoldman Sachs forecast, up 5% year over year
• 2026E reported net profitApproximately RMB4.7bnIncluding tax effects
• 2027E core net profitRMB5.6bnGoldman Sachs maintains this forecast
• 2026E-2028E diluted EPS before exceptional itemsRMB1.20/RMB1.49/RMB1.62Latest Goldman Sachs forecasts
• Margin forecasts8.1% in 2026E, expanding by 0.3 percentage points in each of 2027E and 2028ECore operating margin basis
• Raw milk priceApproximately RMB3.0/kgStable since mid-June; the 3Q26 average through the report date increased by low-single digits year over year
• July industry indicatorsDairy product output +8.4% year over year; dairy cow herd -3.5% year over yearUsed to assess industry supply-demand rebalancing
• 1H26 inventory impairment lossApproximately RMB166mnManagement expects a reduction in 2H26
• FY26 tax dragMore than RMB500mnIncluding RMB320mn of prior-year adjustments recognized in 1H26; recurring incremental tax burden of approximately RMB200mn
• Shengmu integration synergiesSeveral hundred million renminbi annuallyFrom improvements in production efficiency, the supply chain, and administrative expenses
• New deep-processing capacityApproximately 5 million tonnesExpected to come online industry-wide over the next two years
• 1H26 capital expenditureApproximately RMB500mnDown more than 50% year over year; FY26 is expected to be below the original RMB2.0bn plan
• Current valuation12.2x/11.5x2026E/2027E recurring P/E stated in the report; dividend yield of 4%-5%
• Target price valuation basis15.1x 2027E P/E and 9.6% cost of equityDiscounted to end-2026, deriving a 12-month target price of HK$25.00

Impact & implications

The report believes Mengniu's growth foundation is expanding from a simple cyclical recovery in liquid milk to structural opportunities in ice cream, infant milk formula, cheese, and deep processing. Even if raw milk and other input costs rise, more rational competition, reduced promotions, product mix upgrades, and improved supply-chain efficiency could still drive operating margin improvement in 2H26 and over the medium term. Lower capital expenditure, dividend growth, and accelerated share repurchases should also support free cash flow and shareholder returns, although new deep-processing capacity, the pace of demand recovery, and losses from new businesses will continue to affect this earnings trajectory.

Risks

• Demand growth for premium dairy products is slower than expected.
• The recovery in overall dairy demand is slower than expected.
• Competition in the dairy industry is more intense than expected.
• Losses in new business categories widen further.

What to watch

• Whether 2H26 sales growth can reach management's mid- to high-single-digit target.
• Whether reduced promotions and product mix upgrades can drive core operating margin expansion as raw milk, packaging material, and palm oil costs rise.
• Whether ice cream, infant milk formula, and cheese can sustain double-digit growth over the medium term.
• Whether changes in raw milk prices, the dairy cow herd, and dairy product output continue to support industry supply-demand rebalancing.
• Whether the Shengmu integration's annual synergies of several hundred million renminbi and supply-chain reforms materialize as planned.
• The actual impact of inventory impairment, the tax burden, and associate earnings from China Modern Dairy on reported net profit.
• Competition and capacity utilization after approximately 5 million tonnes of new deep-processing capacity comes online over the next two years.
• Execution of FY26 capital expenditure, dividend-per-share growth over the next three years, and accelerated share repurchases.