The Zhitong Finance App learned that China Merchants Securities released a research report saying that although the growth rate of the liquid milk industry is slowing down, there is no need to be overly pessimistic about the industry space. In the short term, the population shock is a long-term slow variable and will not be a suppressing factor. In the medium to long term, there is still room for exploration in categories such as fermented milk and solid dairy products. In this context, leaders Yili (600887.SH) and Mengniu (02319) have more balanced claims. Although the cost of raw milk is declining, the price of liquid milk is still strong, and more attention is being paid to improving efficiency in terms of cost investment, and they have entered the stage of increasing profit margins. From a cash flow perspective, leading capital expenses have declined, and cash flow is on the right side of the balance point, and there is a foundation for increasing dividends.

The main views of China Merchants Securities are as follows:

The growth rate of liquid milk is slowing down, but there is no need to be overly pessimistic. The growth rate of the liquid milk industry has slowed to medium to low single digits. There are structural opportunities on the segmentation circuit. Leading core products such as Jindian, Trensu, An Muxi, and Chunzhen have entered a mature period, and the growth rate has declined somewhat. However, there is no need to be overly pessimistic. There are no suppressing factors in the short term. Judging from the forecast of the future population of the core population of milk drinkers, until 2030, the compound growth rate is only -1.8%. The population impact is a long-term slow variable. Moreover, from a medium- to long-term perspective, China's dairy products still have room to explore in categories such as fermented milk and solid dairy products.

Strategic choice: The leaders' demands are more balanced and enter the profit release cycle. The stage of rapid increase in shares of Yili and Mengniu has passed. Since 2022, as revenue growth has slowed, leading demands have shifted from share and revenue to equal emphasis on profit and cash. 1) Price performance: In this downward cycle of raw milk costs, leading liquid milk prices showed positive performance, and the net price contribution was basically flat or even positive; 2) Cost investment: Pay more attention to improving cost efficiency. Mengniu's marketing strategy has taken the lead in changing, and long-term brand building revolves around sports and aerospace. In a horizontal comparison of snacks and drinks, there is room for a decline in the advertising and marketing rate of leading dairy products.

Dividend return: On the right side of the cash flow balance point, there is a basis for increasing dividends. Capital expenditure in Yili and Mengniu has entered a downward channel. In particular, capital expenditure for liquid milk projects has declined markedly. From a cash flow perspective, Yili's net operating cash flow is currently flat after deducting capital expenses and dividend payments. Mengniu has already entered the right side, which means that in the future, as capital expenditure declines, the company will be able to increase dividends by using only its remaining cash flow. Moreover, after deducting short-term loans, the two companies still have 10 billion dollars in their accounts, and there is plenty of cash. Erie's dividend rate is already attractive. It is expected to maintain a high dividend of 70% or more in the future, and Mengniu's dividend ratio is expected to increase steadily.