HAITONG INT'L: The dairy product cycle clears the bottom, the four lows resonate and welcome a reversal.

HAITONG INT'L released a research report stating that the dairy industry went through a deep consolidation in 25 years, and in 26 years it will see a cyclical turnaround, profit recovery, and valuation normalization. Under the resonance of five major logics, dairy products have become a must-have high-quality consumer track. In terms of priority layout: the preferred choices are the industry-leading Inner Mongolia Yili Industrial Group (600887.SH) and MENGNIU DAIRY (02319), with the most stable logic, least susceptible to downturns, and suitable for large fund allocation, fully benefiting from industry recovery; next is to pay attention to the high-growth target New Hope Dairy (002946.SH) with outstanding profit performance based on track advantages; and finally, to layout the upstream raw milk elastic target YOURAN DAIRY (09858) and CH MODERN D (01117), with the largest performance elasticity driven by rising milk prices and clear logic for cyclical turnaround. Medium-term consumption recovery releasing structural upgrade dividends, long-term industry scale effects and cash flow advantages are significant, and the leading share and profit continue to increase. HAITONG INT'L's main points are as follows: 25-year performance review: Weak growth, strong differentiation, deep adjustment The 25 years was a year of deep consolidation for the industry, with overall revenue growing at a low single-digit rate and growth rates significantly falling. The price of raw milk dropped to near-decade lows, with the average price of fresh milk at about 3.0 yuan/kg, lower than the cost line of 3.3-3.4 yuan/kg for large-scale ranches, leading to comprehensive losses for upstream ranches. Downstream dairy companies' profits came under pressure, with the resilience of leading companies becoming evident, as Yili's non-net profit increased by 19% in the first three quarters, Mengniu's profits recovered, New Hope Dairy's revenue increased by 5% and net profit by 36%, while Bright Dairy suffered losses due to overseas subsidiaries. Cost reduction temporarily improved gross margin, but price wars and high costs consumed profits, accelerating the exit of small and medium-sized enterprises, increasing the market share of leading companies, and the industry turned to profit protection in the fourth quarter. The sector's valuation reached a bottom, with the A-share dairy PE ratio below 10%, and only 4% for Hong Kong stocks, with southbound funds and long-term foreign capital increasing against the trend. Industry transformation: Cyclical bottom, logic reconstruction Demand-side rigid demands supported, but with insufficient elasticity, growth dragged down by competition in room-temperature milk, while low-temperature yogurt, cheese, and cold drinks were highlights of growth. Infant formulae were pressured by demographic factors, and the recovery of the catering channel was moderate. The industry competition logic shifted from the traditional cost-cutting for market share to product upgrades and refined operations, with the clearance of upstream production capacity laying the foundation for the cycl... 26-year outlook: Four lows resonate, low in front and high in back In the first quarter of 26 years, demand lows, cost lows, competition lows, and capital lows resonated, with industry revenue at 33.9 billion yuan in March, down by 0.9% year-on-year, but the decline continued to narrow, with no slowdown in the off-season. The price of fresh milk was at 3.02 yuan/kg, with limited room for decline, manageable feed costs, improving terminal discounts, and competition easing. The three major logics of cyclical turnaround of raw milk, demand recovery, and valuation normalization will resonate throughout the year, with the industry poised for a low in the beginning and high at the end, stabilizing in the first quarter, accelerating in the second and third quarters, and profits releasing gradually. Risk warning: Consumption recovery falls short of expectations, fluctuation in raw milk prices, intensified industry competition, food safety issues.