Yili Earnings Beat Expectations; Liquid Milk Recovery Launches New Growth Cycle

Overview

This report is Goldman Sachs' performance review of Yili Industrial for the fourth quarter of 2025 and the first quarter of 2026. The research note indicates that core profits beat expectations, management confidence in the 2026 liquid milk recovery has strengthened, and businesses such as IMF/milk powder and frozen dairy continue to grow at a high rate. Maintaining the Buy rating and raising the target price to 35 RMB, implying an upside of 27.5%.

Core views

The liquid milk business is expected to recover gradually in 2026, achieving 2% year-over-year growth in Q1 2026. Management drives growth through peak-season strategies during Chinese New Year and emerging channels (such as restaurant retailers, B2B, and membership stores). Fresh milk business growth exceeded 20% in 2025 and is expected to continue. The IMF/milk powder business targets mid-to-high single-digit growth in 2026, with market share increasing by another 1-2 percentage points; the Pro-Kido brand plans to launch Southeast Asia expansion in 2026. Frozen dairy targets high single-digit sales growth and margin improvement. Regarding margins, 2026 net margin guidance remains stable, while gross margin benefits from product mix optimization (IMF grows faster than average; Diamond premium products outperform basic milk). B2B/overseas/non-dairy businesses make increasing contributions. B2B deep-processed dairy targets 10 billion RMB scale domestically and internationally. Non-dairy products (packaged water, premium beef) saw sales double in 2025. Raw milk prices are expected to rebound in the second half of 2026, and the supply-demand cycle will ease as B2B consumption grows.

Analysis framework

Goldman Sachs employs a business-segment breakdown approach, categorizing Yili's growth drivers into four dimensions: liquid milk recovery, high-growth IMF/milk powder, improved frozen dairy, and new contributions from B2B/overseas/non-dairy businesses. Sustainability of liquid milk recovery is verified through indicators such as channel inventory, product freshness, and penetration rates in emerging channels. Potential of the milk powder business is assessed by combining market share targets and overseas expansion plans. Margin stability is analyzed from the perspective of product mix optimization and cost control. The possibility of accelerated B2B business is judged based on capacity technology maturity and raw milk cost trends. Valuation uses a 2026 PE of 18.9x, referencing valuation bottoms during the previous downturn cycle (2015-16) plus a 20% A/H premium.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  Setting target price based on expected 2026 PE

  The report uses a 2026 PE of 18.9x as the valuation anchor, referencing historical cycle bottoms with a certain premium, reflecting confidence in the recovery cycle.

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Raw Milk Supply and Demand Cycle Analysis

  Judging the raw milk price turning point by assessing upstream herd destocking and B2B demand growth, explaining the logic of easing cost-side pressure.

• Industry/Industrial Analysis FrameworkIndustry Concentration Analysis

  Market Share Increase Target

  The IMF business sets a target of increasing market share by 1-2 percentage points, reflecting the leading advantage under an optimizing industry competitive landscape.

• Company Fundamentals and Financial FrameworkProfit Quality Analysis

  Net Margin Stability Analysis

  Against the backdrop of potentially rising sales expense ratios, maintaining stable net margins by offsetting cost pressures through product mix optimization.

Asset mapping & comparison

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

• Yili Shares (600887.SS)

  Direct beneficiary; core carrier for liquid milk recovery and multi-business growth

  Strengths

  Full-category layout, strong channel control, complete brand matrix

  Weaknesses

  Liquid milk recovery progress depends on consumer sentiment recovery

  Comparison

  More advantageous in category diversification compared to Mengniu Dairy

  Risks

  Fluctuations in raw milk prices, intensifying competition

Key data

• 2026 Sales Growth Target5%Driven by liquid milk recovery and multiple businesses
• 2026 Net Margin Guidance10.1%Steady increase from 10% in 2025
• Liquid Milk Q1 2026 Growth Rate2%Starting point of YoY recovery
• IMF Business 2026 Growth TargetMid-to-High Single DigitMarket share increase of another 1-2 percentage points
• Target Price35.00 RMBIncreased from previous 33.9 RMB
• 2026 Expected PE15xCorresponding to 5% dividend yield

Impact & implications

The research note believes that through multi-business synergy and channel innovation, Yili is expected to achieve both market share and margin increases during the liquid milk recovery cycle. B2B and overseas businesses open long-term space, while non-dairy businesses verify diversification capabilities. The expectation of raw milk price rebounds reduces cost volatility risks, weakening the cyclical nature of the industry.

Risks

• Recovery of high-end liquid milk demand slower than expected
• Overall recovery of dairy demand sluggish
• Increasing intensity of industry competition

What to watch

• Monthly liquid milk sales data
• Signals of raw milk price turning points
• Progress of IMF business overseas expansion
• Achievement of B2B business scale targets