The Zhitong Finance App learned that GF Securities released a research report saying that there is currently a gap between China's per capita consumption of dairy products and developed countries, there is an imbalance between urban and rural dairy consumption, and there is still room for growth and expansion in the future. Demand for dairy products is expected to recover moderately in 2024; the demands of leading dairy companies on the profit side are clear, and future competition is expected to become rational and jointly promote a gradual increase in profit margins; regional dairy companies will use their own characteristics and develop differentiated products and channels, and are expected to maintain a good level of profit. Currently, the valuation level and fund positions of the dairy sector are at historically low levels. The performance growth and dividends of leading companies are stable, and the allocation cost ratio is gradually becoming prominent.

Key recommendations: Yili Co., Ltd. (600887.SH), Mengniu Dairy (02319); New dairy (002946.SZ) is recommended among regional dairy companies; it is recommended to focus on Yantang Dairy (002732.SZ), Tianrun Dairy (600419.SH), etc.

The views of GF Securities are as follows:

Liquid milk: Demand is expected to recover moderately, and the sinking market is worth looking forward to.

Looking back at 2023: Affected by macroeconomics and consumer confidence, the overall recovery in demand for liquid milk is weak due to the decline in traffic in large stores and supermarkets, which account for relatively high volumes. Referring to Nielsen, milk and dairy revenue in the first three quarters of 2023 was -4.20%; judging from the pace of the whole year, demand for liquid milk in 2023 showed a high and low trend, and the boom declined in the second half of the year. Looking ahead to 2024: Dairy companies' channels are deepening or driving the continuous release of liquid milk consumption potential in the offline market, which is expected to drive a steady recovery in liquid milk consumption; in terms of structure, due to consumption power, the trend of upgrading liquid milk consumption slowed in 2022 to 2023, but dairy companies capture consumer segmentation and continue to drive the iterative upgrading of high-end liquid milk, and the product line continues to be refined. Unique ingredients/milk sources/functions give high-end liquid milk a greater sense of value and are expected to drive the optimization of liquid milk structure.

Milk powder: Demand is expected to stabilize, and the implementation of the new national standard may drive pattern optimization.

In recent years, China's new birth population has continued to decline, demand for infant formula is under pressure, industry consumption and sales have continued to decline, and the overall revenue growth rate of key milk powder companies declined in the first half of 2023. The new national standard for milk powder was officially implemented in February 2023. Judging from the registration situation in 2023, domestic leading brands clearly have an advantage, and small and medium-sized brands are under pressure to clear them. Drawing on the experience of the previous round of registration system and removal of miscellaneous goods, there is more market space for the third- and fourth-tier markets to hand off. It is expected that in the future, as inventory removal in the milk powder industry ends, subsequent market competition is expected to gradually ease, and the concentration of the milk powder industry is expected to increase further in the long run.

Profit side: Milk prices are expected to fluctuate at a low level, and competition among dairy companies is expected to slow down.

Domestic raw milk prices have been declining at an accelerated pace since 2023, mainly due to a mismatch between supply and demand caused by an adequate supply of raw milk but weak recovery in consumption demand for dairy products. Against the backdrop of declining milk prices and high feed costs, upstream animal husbandry operations are under pressure, and clearance from small and medium-sized ranches is accelerating. It is expected that the oversupply situation in the dairy industry will ease in 2024. Demand recovery was weak during the downward period of milk prices in 2023. Dairy companies faced certain shipping pressure, industry buy-in promotions increased, and competition intensified. However, judging from key listed companies, during this round of milk price decline, dairy companies focused more on their own advantages and competitive differentiation. Expenses were relatively restrained, and sales expenses increased less than during the 2014-2016 milk price decline period. Considering the gradual improvement in the supply and demand pattern, it is expected that there is limited room for a sharp decline in milk prices in the future. Future industry competition is expected to become rational, and the profit margins of key companies are expected to maintain a good level.

Risk warning: Channel expansion falls short of expectations; risk of rising costs; risk of food safety.