Yili Industrial (600887): Goldman Sachs sees Yili entering a more structured liquid-milk recovery, with limited raw-milk margin pressure

Overview

This management-call note examines Yili's path toward a more orderly recovery in liquid milk and its longer-term growth initiatives. Goldman Sachs argues that healthier channels, improving dairy supply-demand conditions, share gains and controlled raw-milk cost pressure support the company's outlook into 2027.

Core views

Goldman Sachs came away from its 28 September management call with stronger confidence in Yili's long-term strategy and execution. The central argument is that liquid milk is moving toward a structured recovery: year-to-date and 3Q26 operations were steady, while sell-through exceeded sell-in/shipments as Yili prioritized healthier channel inventory rather than near-term shipment growth. Liquid-milk revenue in 3Q26 was tracking broadly flat year on year, but management expects growth to accelerate in 4Q26 on an easier comparison base, with Mid-Autumn Festival performance meeting internal expectations. It expects a further acceleration in 2027 as consumption stabilizes, industry supply-demand improves, channel inventory normalizes and Yili continues gaining share. Premium Satine continued to outperform regular white milk, milk beverages improved, and Ambrosial stabilized during 2026. The report views the raw-milk cycle as improving without becoming a major margin shock. Management expects raw-milk prices to stabilize and potentially recover moderately in 2027 after capacity reductions accelerated in 2024-25, consumption volumes stabilized in 2026, and spot milk prices recovered in 2H26 to date. Scattered raw-milk price gains have meaningfully exceeded contracted-milk price gains year to date from a low base. However, management does not expect a sharp inflation cycle because upstream dairy farming has become more consolidated, capacity planning is more rational, and leading brands such as Yili work more closely with suppliers. Accordingly, it expects limited margin volatility in the next upcycle; Yili's participation in Youran Dairy's secondary offering also increases its upstream exposure. Growth outside liquid milk remains part of the thesis. Pro-Kido infant milk formula delivered mid- to high-single-digit revenue growth in 1H26, in line with management's target, driven by share gains in Stage-1 formula and faster-growing e-commerce channels. Management sees additional room because Pro-Kido's share is only about 15%. Although milk-powder costs are higher, it considers infant formula one of Yili's highest-margin businesses and has used self-produced dry powder, whey protein and casein to replace some imported ingredients. Adult milk powder is growing at a double-digit rate, with Yili targeting double-digit revenue growth and improved profitability through functional products and premium milk-source gift boxes. Management also identifies dairy ingredients and deep processing as a larger longer-term growth leg. It sees near- to medium-term localization potential in butter and cream because domestic raw-milk costs are lower, followed by higher-value ingredients such as WPC and LF over the longer term. Over five years, Yili targets eventual Rmb10bn-plus scale in both domestic and overseas B2B/deep-processing businesses, pacing investment to demand. Low cheese consumption in China is cited as a source of potential. Capital returns remain supportive despite planned investment. Normal annual capital expenditure is about Rmb4-5bn, including roughly Rmb2-3bn of maintenance spending, with remaining expansion capex focused mainly on deep processing and new products. Management reiterated a payout ratio of at least 75% during 2025-27 and said it would consider more regular repurchases; the company announced a Rmb1-2bn buyback plan after its 1H26 results. On earnings, 1H26 was affected mainly by Ausnutria-related one-offs, including about Rmb1.5bn of goodwill impairment and Rmb0.6bn of inventory impairment. Management expects no meaningful near-term impairment and substantially lower milk-powder inventory impairment as dry milk-powder prices recover, though it expects a remaining tax adjustment of more than Rmb100mn in 2H26 and about Rmb300mn of recurring annual incremental tax adjustment. Goldman Sachs values Yili at a 12-month target price of Rmb37.00 using 18.9x 2027E P/E, reflecting a 20% A/H premium to a target level one standard deviation below the prior downcycle P/E of 2015-16, discounted back to mid-2027E at an 8.8% cost of equity. The report lists a Buy rating, compared with a Rmb27.03 price as of 28 September 2026, implying 36.9% upside.

Analysis framework

The report synthesizes management commentary on demand, channel inventory, product trends, raw-milk supply-demand conditions, margins, growth initiatives, capital allocation and one-off earnings effects. It then values Yili using a 2027E P/E multiple benchmarked against the prior downcycle and discounted to mid-2027E.

Methodology notes

• Industry AnalysisSupply-demand framework

  Dairy supply-demand analysis

  The report links upstream capacity reductions, stabilizing consumption, spot milk-price recovery and channel inventory normalization to a more favorable industry setup and a moderate rather than sharp raw-milk price upcycle.

• Valuation methodsP/E and PEG Valuation

  Forward P/E valuation

  Goldman Sachs applies an 18.9x 2027E P/E multiple, benchmarked against the 2015-16 downcycle valuation range, and discounts the result back at an 8.8% cost of equity.

Asset mapping & comparison

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

• Yili Industrial (600887.SS)

  Primary covered company expected to benefit from liquid-milk recovery, healthier channel inventory, share gains and expanding dairy-ingredient operations.

  Strengths

  Premium-product momentum, improving sell-through, Pro-Kido share gains, upstream supplier collaboration, and capital-return commitment.

  Weaknesses

  1H26 earnings were affected by Ausnutria-related goodwill and inventory impairments and tax adjustments remain.

  Comparison

  Management expects leading dairy brands to benefit from improving industry supply-demand conditions and closer supplier collaboration.

  Risks

  Slower premium liquid-milk demand, slower dairy-demand recovery, or more intense competition.

Key data

• 12-month target priceRmb37.00Based on 18.9x 2027E P/E and discounted back to mid-2027E at an 8.8% cost of equity.
• Price and implied upsideRmb27.03; 36.9%Price as of 28 Sep 2026 close.
• 2027E revenueRmb125,249.9mnGoldman Sachs forecast.
• 2027E EBITDARmb18,857.8mnGoldman Sachs forecast, versus Rmb15,522.5mn in 2026E.
• Pro-Kido 1H26 revenue growthMid- to high-single-digit percentageIn line with management's target, alongside continued market-share gains.
• B2B/deep-processing targetRmb10bn+ in both domestic and overseas marketsManagement's eventual five-year scale target.
• Capital return commitment≥75% payout ratio for 2025-27Management also announced a Rmb1-2bn buyback plan after 1H26 results.
• 1H26 one-off impairmentsc.Rmb1.5bn goodwill impairment and Rmb0.6bn inventory impairmentMainly Ausnutria-related.

Impact & implications

The report argues that Yili's channel reset and improving dairy supply-demand conditions can support faster liquid-milk growth in 2027 while a more rational upstream industry limits raw-milk cost volatility. Infant formula, adult nutrition and dairy ingredients provide additional growth avenues, while the payout commitment and potential regular repurchases support shareholder returns.

Risks

• Liquid-milk premium demand could recover more slowly than expected.
• The broader dairy-demand recovery could be slower than expected.
• Competition could become more intense.

What to watch

• Whether liquid-milk growth accelerates in 4Q26 and further in 2027 as management expects.
• Channel inventory health and the gap between sell-through and sell-in.
• Raw-milk price stabilization and the extent of any 2027 recovery.
• Pro-Kido share gains, particularly in Stage-1 formula and e-commerce.
• Execution and demand pacing for B2B dairy ingredients and deep processing.