Yili: Q1 Off to Good Start, On Track To See Earnings Rebound in 2023; Retaining FVE at CNY42

Yili is the market leader in China’s dairy processing market, having overtaken Mengniu in revenue and market share in the early 2010s. It has strategically targeted the ultra-high-temperature milk and yogurt segments, given the still underdeveloped cold-chain logistics in China, when dairy consumption and penetration were on its rise. The company’s nationwide distribution network has created scale and operational efficiencies have led to favorable working capital arrangement, which bolster its competitive advantage in a commoditized category. In our view, Yili is well aware that Chinese consumers expect quality and reliability from domestic dairy products following past industry scandals. As a result, the company has steered its product innovation and marketing efforts toward emphasizing functionality and nutrition value, which would also be conducive to increasing customer spend on its products. Yili has the highest number of patents in the dairy industry in China and has set up overseas research and development centers, which serve to enhance its competitiveness among peers in the long term. We think the company has fortressed a virtuous cycle of solid R&D, competitive offerings, scalable distribution and efficient operations.