Nomura initiates coverage on Yili shares at Buy, target price CNY34.90

Overview

This report is Nomura Orient International Securities' company research on Yili Industrial Group, with the core conclusion of an initial Buy rating. The report believes that although overall dairy demand remains under pressure, Yili as a leading domestic dairy company has brand, channel, scale and product mix advantages; as the raw milk cycle approaches an inflection point, the product mix shifts toward higher-value categories, expense control improves, and B-side professional dairy import substitution advances, the company's earnings quality and profit growth are expected to keep improving.

Core views

The report's core views are: first, the raw milk downcycle has lasted for a long time, upstream dairy farms are under increasing pressure, and supply-side capacity optimization may stabilize the industry's pricing system, from which Yili is expected to benefit thanks to its brand and channel pricing power. Second, B-side dairy demand is growing faster than C-side demand, and premium B-side categories such as cream, butter and cheese are still dominated by international brands, leaving ample room for domestic substitution; Yili has a first-mover advantage through professional dairy brands such as SoMi and cooperation with food-service and new-style tea beverage channels. Third, the C-side growth logic is shifting from volume expansion to structural upgrade, and categories such as chilled fresh milk, cheese, infant formula and adult nutrition are expected to optimize the revenue mix. Fourth, the company's sales expense ratio has already shown a downward trend, and improved expense discipline can partially offset gross margin pressure while supporting steady net profit growth in 2026-28.

Analysis framework

The report analyzes the company through industry cycles, category mix, segment forecasts, financial modeling and relative valuation. On the operating side, it mainly breaks out revenue and gross margin assumptions for the three major segments of liquid milk, milk powder and dairy products, and ice cream and chilled beverages; on the valuation side, it uses the P/E multiple method with Yili's own 2016-25 historical trading range as the main reference, while applying a discount to reflect the expectation that future earnings growth will slow versus the previous industry upcycle.

Methodology notes

• Valuation methodsP/E Multiple Method

  Derive the target price from 2026F EPS and the target P/E multiple

  The report uses an 18x 2026F P/E to derive a target price of CNY34.90 based on 2026F EPS of CNY1.94. The 18x target multiple is below Yili's roughly 24x average P/E during the 2016-25 industry upcycle, reflecting an expectation of slower future earnings growth while also signaling more resilient operating quality.

• Industry CycleRaw Milk Cycle Analysis

  Raw milk supply-demand and price cycles affect dairy companies' costs, ASP and earnings elasticity

  The report points out that raw milk prices are 45% below the August 2021 peak and have been below breakeven since July 2024. The exit of inefficient capacity, optimization of dairy farm herds, and the weakening cost advantage of imported whole milk powder may help improve domestic supply-demand conditions.

• Operating BreakdownSegment Revenue and Gross Margin Forecast

  Build revenue and gross margin assumptions separately for liquid milk, milk powder and dairy products, and ice cream and chilled beverages

  The report forecasts 2026-28 revenue and gross margin for the three major segments separately, arguing that liquid milk is supported by scale and channel advantages, milk powder and dairy products represent the second growth curve, and ice cream and chilled beverages are driven by channel penetration, low-sugar functional products and premiumization.

Asset mapping & comparison

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

• Yili Industrial Group / Yili Shares

  Research coverage; leading domestic dairy company

  Strengths

  Strong brand value and channel capabilities, with coverage across liquid milk, milk powder, yogurt, cheese, ice cream, butter and cream; it holds a leading position in ambient milk, milk powder and yogurt, and has been increasing share in new categories such as cheese.

  Weaknesses

  Overall dairy demand is under pressure, and terminal promotions and price competition limit short-term pricing power; raw milk prices are near the cycle bottom, and the pace of gross margin recovery remains uncertain.

  Comparison

  The report focuses more on Yili's own historical trading range than on the industry average; Yili's average TTM P/E during 2016-25 was about 24x, while this time an 18x 2026F P/E is used, reflecting a milder earnings growth outlook than the previous industry upcycle.

  Risks

  Raw material price volatility, intensifying industry competition, weaker-than-expected consumption recovery, policy and industry-standard changes, and execution shortfalls in operations and management.

Key data

• Target priceCNY34.90Based on 18x 2026F P/E and 2026F EPS of CNY1.94.
• Current priceCNY27.78Current price shown on the report cover page.
• Implied upside+25.6%Upside versus the current price.
• 2026/27/28 revenue forecastCNY121.61bn / CNY127.52bn / CNY133.58bnCorresponding to a 4.8% CAGR in revenue for 2026-28.
• 2026/27/28 net profit forecastCNY12.26bn / CNY13.26bn / CNY14.32bnCorresponding to a 7.4% CAGR in net profit for 2026-28.
• 2025 revenue and net profitRevenue CNY115.93bn; net profit CNY11.57bnRevenue grew 0.1% YoY, and net profit grew 36.8% YoY.
• 1Q26 revenue and net profitRevenue CNY34.82bn; net profit CNY5.39bnUp 5.5% and 10.7% YoY, respectively.
• Liquid milk 2026/27/28 revenue forecastCNY70.14bn / CNY70.70bn / CNY71.19bnForecast gross margin is 31.5% / 31.7% / 32.0%.
• Milk powder and dairy products 2026/27/28 revenue forecastCNY37.09bn / CNY41.00bn / CNY44.93bnThe report expects segment gross margin to stay around 42.0%.
• Ice cream and chilled beverages 2026/27/28 revenue forecastCNY11.23bn / CNY12.37bn / CNY13.62bnRevenue is expected to maintain double-digit growth, with gross margin staying above 38%.
• Raw milk price changeDown 45% from the August 2021 peakAlso below breakeven since July 2024.
• B-side and C-side dairy consumption volume growth2021-24 B-side CAGR 14.9%; C-side CAGR -4.4%Source: Euromonitor data cited in the report.

Impact & implications

If the report's assumptions materialize, Yili's investment case would shift from relying solely on a recovery in industry demand to being driven by cyclical cost improvement, mix upgrade and better expense efficiency. The 25.6% upside to the target price indicates that the report believes the current 14.2x 2026F P/E does not fully reflect the improvement in profitability quality and the potential inflection in the raw milk cycle. However, the lower valuation multiple versus the historical upcycle average also reflects the report's caution about slower future earnings growth and industry competition pressure.

Risks

• Volatility in raw material prices may raise production costs and compress profitability.
• Intensifying competition in the dairy industry, if the company fails to maintain its brand and channel advantages, could pressure market share and gross margin.
• A weaker-than-expected consumption recovery or subdued consumer confidence could lead to dairy demand and sales below expectations.
• Changes in industry policies and standards may alter demand structure and the cost curve, such as the impact of the new national standard for pure milk on demand for imported bulk milk powder.
• If multi-category expansion, refined channel management, supply chain optimization, core talent retention and internal management efficiency fall short of expectations, long-term operating performance may be dragged down.

What to watch

• Whether 2Q26 profit recovery is stronger than expected.
• Raw milk prices, upstream capacity cleanup and progress in herd optimization at dairy farms.
• The rollout pace of high-potential categories such as milk powder, cheese, adult nutrition and chilled fresh milk.
• Import substitution progress for professional B-side dairy products in the food-service and new-style tea beverage channels.
• Whether the sales expense ratio continues to decline and how much expense discipline supports net margin.
• Consumer sector valuation re-rating and CSI 300 relative performance.