Goldman Sachs on China Dairy: Navigating the Supply-Demand Inflection and Raw Milk Price Divergence – Buy Mengniu and Yili
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Goldman Sachs notes that the Chinese dairy industry is currently navigating a critical supply-demand inflection alongside a notable divergence in raw milk pricing. The firm views the current risk-reward profile for industry leaders Mengniu Dairy and Inner Mongolia Yili as highly attractive, initiating coverage with a Buy recommendation on both names.
The core thesis hinges on a structural shift within the supply chain. Raw milk production growth has decelerated significantly, projected to increase by only 1% to 2% in 2026. This dynamic is causing raw milk prices to decline, a trend that directly benefits downstream processors by substantially lowering input costs and expanding gross margins.
As industry leaders, Mengniu and Yili are uniquely positioned to capitalize on these declining raw material expenses while simultaneously capturing incremental market share. Furthermore, current valuations offer a significant margin of safety. Mengniu is trading at approximately 12 times forward earnings, while Yili sits at roughly 15 times, both situated near historical troughs. Goldman anticipates that Mengniu will deliver 15% net profit growth in 2026, with Yili achieving 10% growth. Key downside risks primarily involve slower-than-anticipated consumer demand recovery and unexpected volatility in raw milk pricing. Specific target prices were not explicitly detailed in the summary.
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