Yili's Q3 Results Missed, Near-Term Growth Outlook Softened; Lowering FVE

Wide-moat Yili's third-quarter results were well below our forecasts because of lackluster consumer sentiment. Liquid milk sales declined year on year during the quarter while selling expenses remained elevated, suppressing net profit significantly. Growth in other subsegments were unable to offset liquid milk weakness. Similar to the brewers, we think dairy manufacturers will face headwinds over the next few quarters as squeezed consumer pockets continue to weigh on product mix. We have lowered our topline and net profit estimates for 2022 and 2023, with the assumption that a sluggish economy would reduce demand for high-end liquid milk in the next few quarters. We lowered our fair value estimate to CNY 42 per share, from CNY 46 per share, accordingly and believe short-term sentiment on the stock will be weak. Signs of recovery in consumer trade-up would be a key catalyst in our view.