Shanxi: The pet food industry has broad development prospects, and brand upgrading and transformation are key to breaking through.

Shanxi released a research report stating that with the development of social economy, the penetration rate of pet ownership in China is expected to continue to rise, and pet food is still a relatively growth-oriented niche sector in many consumer industries. Currently, domestic outsourcing is actively transitioning to a brand-oriented model. The two modes are fundamentally different, with outsourcing earning lower processing fees and focusing on costs, while brands have pricing power and the core is user insight. The premium for domestic leading companies' own brands is nearly 15% higher than OEM. In the long term, as many brands build their own production capacity, the proportion of outsourcing models may decline. Key points from Shanxi: Continuous expansion of pets in China, emergence of cat economy Pet quantity: By 2025, the number of urban dogs and cats in China will reach 126 million, up 1.8% year-on-year; from 2020 to 2025, the CAGR of the number of dogs and cats is 4.6%, with the CAGR of cats reaching 8.4%. Market size: By 2025, the consumption market size of urban pets (dogs and cats) will exceed 312.6 billion RMB, up 4.1% year-on-year; from 2020 to 2025, the CAGR of the consumption market size of dogs and cats is 8.6%, with the CAGR of cats reaching 11.4%. Global pet food industry dominated by two giants, high growth for domestic manufacturers Global: The average growth rate of global pet food is around 5%, reaching 146.6 billion USD in 2024, with North America holding the highest share globally (42.5%), and the top two players, Mars and Nestle, commanding over 40% of the market share. China: The market share of domestic enterprises is steadily increasing. In 2024, among the top 5 companies in the domestic market, 3 are domestic companies, up from 2 in 2015. Among them, Guaibao ranked 2nd with a share of 6.2% in 2024, up 3.8% from 2015; Zhongchong ranked 4th, with a share of 2.8%, up 1.7% from 2015. In terms of single brand share, Guaibao's Maifudi became the top player in the pet food industry in 2023, with a share of 5.9%, maintaining the first position in 2024 with a share of 6.2%. Total demand: Pet industry has growth potential In 2024, the penetration rate of pet ownership in urban China is about 21%, lower than Japan and South Korea (40-60% and about 30% respectively), leaving room for growth in the long term. In the short term, the sales growth of pet food (5.9%) is higher than the overall growth of social retail (3.7%), making it a relatively flourishing sector in consumption. Demand structure: Trend towards "precise feeding + consumption upgrade" The population of pet owners is becoming younger (in 2025, 90s and 00s account for 69.0%), pets are being fed in a more personalized manner, from "having" to "good" to "precise", and the nutritional ratio and ingredient composition significantly influence the choice of main food. According to Tmall, high-end new process pet foods represented by wet food, baked food, fresh food, freeze-dried food, and prescription food have seen a rising consumption share on the platform. Business model: Domestic outsourcing actively transitioning to brand-oriented The two models are fundamentally different, with outsourcing earning lower processing fees and focusing on costs, while brands have pricing power and the core is user insight. The premium for domestic leading companies' own brands is nearly 15% higher than OEM. In the long term, as many brands build their own production capacity, the proportion of outsourcing models may decline. According to Euromonitor, from 2015 to 2024, the share of dog and cat food outsourcing in the United States has remained around 10%. Competitive landscape Brands are diversified but companies are becoming more concentrated. This is because precise positioning and differentiated demand result in limited coverage for a single brand, leading large companies to increase concentration through a rich brand matrix (self-built or acquired). For example, in the United States in 2024, the CR5 of dog and cat food brands (about 25.5%) is much lower than the CR5 of companies (about 67.2%); domestically, new brand creation is still predominant, and large-scale brand mergers have not yet occurred. Competitive mode: Shift from heavy marketing to heavy R&D and supply chain As the cost of traffic increases, the marginal contribution of traditional e-commerce marketing may slow down, and relying solely on marketing is not enough to build a lasting brand moat. The competition between brands is shifting from heavy marketing to a focus on R&D and supply chain. Since the 1960s, Mars has deeply studied pet nutrition and health at the group level, establishing a complete commercial closed loop of "diagnosis-treatment-nutrition management". Investment recommendations With the development of social economy, the penetration rate of pet ownership in China is expected to continue to rise, and pet food is still a relatively growth-oriented niche sector in many consumer industries. In the process of growth of the pet food industry in China, with the younger age of pet owners and the popularization of scientific pet care concepts, consumption decisions are becoming increasingly refined, professional, and health-oriented, with cost-effectiveness and brand reputation becoming the main factors for pet owners when choosing a brand. However, the influence of cost-effectiveness is declining, while the overall influence of brands is significantly increasing. With the emergence of a large number of new entrants in the industry and the increase in traffic costs, the marginal contribution of traditional e-commerce marketing may slow down. Relying solely on marketing is no longer sufficient to build a lasting brand moat, and competition between brands will shift from heavy marketing to heavy R&D and supply chain. Recommendations include Gambol Pet Group, which leads in own-brand development, and Yantai China Pet Foods (002891.SZ), which has a leading global industry layout. Risk factors Risks from intensifying market competition; trade friction risks; risks from fluctuations in raw material prices; product quality risks.