China Securities Co., Ltd.: Signals of a reversal in the raw milk cycle have emerged, and both upstream and downstream sectors are set to welcome a window for operational recovery.

China Securities Co., Ltd. released a research report stating that the recent spot milk prices have surpassed contract prices, with daily fresh milk production decreasing to its lowest level in two years. Dairy prices in major production areas have seen a slight rebound, indicating a clear reversal signal in the raw milk cycle. As upstream downsizing continues, raw milk output is expected to gradually tighten, while demand for downstream deep processing capacity is increasing. The report is optimistic about the raw milk prices entering a period of mild increase, and recommends YOURAN DAIRY, as leading dairy farming groups will benefit from performance elasticity. During the price rise period, midstream dairy companies will enhance their competitiveness in liquid milk, with reduced related impairments upstream and increased investment returns, which will be favorable for performance improvement. The main viewpoints of China Securities Co., Ltd. are as follows: Clear reversal signal in the raw milk cycle Since May, factors such as foot-and-mouth disease and heat stress have driven up spot milk prices, surpassing contract milk prices, with daily fresh milk production decreasing to 4,000 tons. After bottoming out for a year, dairy prices in major production areas have slightly increased to 3.06 yuan/kg, turning positive year-on-year. As the peak season approaches, the supply and demand for raw milk are trending towards balance, and there is optimism about further increases in milk prices around the Mid-Autumn Festival and National Day. Continuous improvement in supply and demand, optimistic about the start of a mild price increase for milk On the supply side, the aging structure of breeding cattle and the proportion of mature cows are increasing, and contract milk prices remain lower than the full social cost, which will drive continued reductions in mature cow inventories. The high proportion of aging cattle may slow down the increase in per-cow yield, leading to gradually tightening raw milk output in the future. On the demand side, deep processing of dairy products will contribute to industry growth. Since 2025, there have been over 70 planned or under-construction projects. High growth in B-end demand and the domestic replacement of high value-added raw materials will drive the development of the deep processing industry. As capacity utilization improves, it is expected to digest approximately 4 million tons of fresh milk in the future. Under the resonance of supply and demand, there is confidence in the sustainability of this round of milk price increases. Considering the continuous enhancement of industry scale, deep binding between dairy farming groups and large dairy companies will smooth out the volatility in milk price cycles, supporting a mild upward trend in raw milk prices. Tightening beef supply in the second half of the year, with meat prices expected to accelerate In the first half of the year, domestic beef prices saw only a slight increase due to accelerated use of import quotas and inventory accumulation by importers. Starting in 2024, domestic breeding cows will be eliminated, leading to significant reductions, while the willingness to restock remains weak, resulting in a continuous decrease in domestic beef supply. The implementation of the import beef quota system from 2026 to 2028 will exacerbate the situation. By 2026, Australian quotas will be exhausted, while Brazilian quotas are over 90% used, and Argentine quotas exceed 50%. Considering the supply capacity of other countries, import beef quotas will start to tighten in the second half of the year. Looking ahead, domestic supply will be further constrained, and as the remaining import quotas diminish and enter destocking, price increases during the peak season are likely. Investment advice: Leading dairy farming groups, backed by major dairy companies, have an average selling price significantly higher than the industry average, with full industry chain layout and digital farming cost control. During the milk price rise period, their gross profit elasticity is stronger, and YOURAN DAIRY is recommended. Midstream dairy companies: During the milk price rise period, optimistic about the recovery of leading operations During the price upturn, leading dairy companies are expected to benefit from improved operations, reduced impairments upstream, and increased investment returns from affiliated farming companies contribute positively to company performance. With rising spot milk prices, the cost-effectiveness of products from small and medium-sized dairy companies decreases, enhancing the competitiveness of leading liquid milk products. The performances of Yili and Mengniu liquid milk are expected to improve by 2026. In the 2024-2025 period, Yili and Mengniu are likely to see significant increases in impairments related to upstream spray powder and credit, but during the milk price rise period, they are not expected to accumulate significant related impairments. In the 2026 interim report, leading dairy farming groups will achieve a turnaround from losses to profits, which will continue to release profit elasticity in the future. Yili and Mengnius investments in leading dairy farming groups will significantly enhance returns from affiliated companies. Investment advice: 1) Yili and Mengniu are currently valued at historically low levels, and leading companies possess the ability to further increase market share while ensuring shareholder interests through dividends. 2) Regional dairy company New Hope Dairy has good profit elasticity, and its low-temperature products and new retail align with current consumption trends. Risk warnings: Capacity reduction may not meet expectations; demand may fall short of expectations; raw material price fluctuations; risks related to deep processing production not meeting expectations.