Yili Earnings: Sluggish Liquid Milk Demand Dragged Results; Cut Fair Value Estimate by 8% to CNY 33

We cut our 2024-28 net income projections by 7%-9% for wide-moat Yili following the disappointing 2024 interim results. Sluggish demand for liquid milk products has caused a 20% year-on-year decline in liquid milk revenue in the second quarter and over 40% decline in the company’s net profit. Management noted that increased selling expenses were required to lower channel inventory, which more than offset the positive impact from lower raw milk input prices. We lowered our fair value estimate to CNY 33 per share, from CNY 36, implying 18 times 2024 price/earnings, 13 times EV/EBITDA, and 3.9% dividend yield. We think shares are undervalued, but near-term sentiment could be dampened by soft liquid milk demand. Positively, Yili was able to deliver decent top-line growth of 17% year on year for the milk formula segment in the second quarter, thanks to share gain amids the shrinking total market size. We think this segment would be another crucial top-line driver for the company over the long run, underpinned by Yili’s strong channel execution and product development capabilities.