Huaxi: The dairy sector offers both offense and defense; bullish on upward cycle opportunities over the next 3 years.

Huaxi released a research report stating that against the backdrop of domestic demand gradually becoming more important, it focuses on the consumer sector and prefers consumer staples; the dairy industry's logic offers both offense and defense, and leading dairy companies are expected to have a strong win rate, so the sector is strongly recommended. For dairy leaders' dividend, Yili + Mengniu; under a pro-cyclical scenario, the advantages of traditional white milk leaders are expected to strengthen; under other scenarios, they still have the advantages of leaders' stable performance + scarce consumer dividend attributes; for growth, prefer track leaders New Hope Dairy + Milkground; both the low-temperature and deep-processing tracks are important directions for the future upgrading of the dairy industry; the core of earnings rebound from the raw milk cycle turning upward is YOURAN DAIRY + CH MODERN D; continue to be bullish on the raw milk cycle reversing and recovering to the historical average price level. Huaxi's main views are as follows: Event overview: Under the current market's style changes, macroeconomic changes, and liquidity impacts, when considering investment ideas for 26Q4 and 2027, the bank believes that focusing on the consumer sector means preferring consumer staples, and within consumer staples preferring the dairy sector. It judges that under the following four scenarios for the broad market, leading dairy companies are expected to have a strong win rate, and therefore strongly recommends this sector. Analysis and judgment: Domestic demand game: pro-cyclical low-valuation rotation, dairy offers both offense and defense Looking ahead to next year, on the export side, the AI hardware dividend is affected by slower capital expenditure, and combined with the base effect, if export growth comes under pressure, then based on macro narrative assumptions, domestic demand expectations are expected to rise, and the dairy industry's logic offers both offense and defense. Offense can look to the expansion of high-gross-margin categories and channel penetration, while defense can look to traditional categories and the upward cycle of basic products. The dairy sector can earn industry valuation elasticity + performance + dividend returns + excess returns. Range-bound with no mainline: operational improvement, stable performance + increased dividends enhance holding returns Assuming external factors (geopolitics, oil prices, global economy, US Treasuries, inflation, etc.) suppressing liquidity do not change, the broad market is expected to remain range-bound without a mainline. Under the defensive attribute of stable demand in dairy, leading companies are expected to enhance profit stability through operational improvement, while the 3-year upward cycle brings performance improvement. Combined with Yili's three-year dividend commitment and Mengniu's expectation of increased annual dividends, investors can earn performance + excess + dividend returns. Growth outperformance: tech sector recovers, dairy earns certain performance Assuming external liquidity improves somewhat or the logic of the growth sector makes a breakthrough, the growth sector (including tech) is expected to rebound, and the market's siphon effect may reappear, suppressing the overall consumer market . However, due to its defensive attributes and the certainty of an upward cycle, the dairy sector is still expected to obtain excess and performance returns within the consumer sector, earning performance + dividend returns at reasonable valuations. Bear market and stagflation: low valuation, shallow positioning, defensive staples with rigid demand Assuming entry into a bear market phase of double pressure on valuations and earnings, the dairy sector returns to the traditional attribute of rigid staple demand, obtaining dividend protection amid a weak global economy and broad asset declines. If entering a stagflation environment, even if demand is weak, the dairy sector still has cyclical profit elasticity, and demand is rigid, so excess returns are expected to be significant. Investment recommendations For dairy leaders' dividend, Yili + Mengniu; under a pro-cyclical scenario, the advantages of traditional white milk leaders are expected to strengthen; under other scenarios, they still have the advantages of leaders' stable performance (improvement in investment income/impairments, etc.) + scarce consumer dividend attributes (based on the 2025 dividend amount and the October 26 closing price, the corresponding dividend yields for Yili/Mengniu are 5.1%/3.3%, respectively). Maintain Inner Mongolia Yili Industrial Group (600887.SH) earnings forecasts unchanged: 26-28 revenue of RMB120.7/126.1/129.4 billion; net profit attributable to parent of RMB10.3/13.5/14.2 billion; EPS of RMB1.62/2.14/2.25. Based on the October 26, 2026 closing price of RMB28.6, the corresponding P/E is 18/13/13x, respectively. Maintain "Buy" rating. Maintain MENGNIU DAIRY (02319) earnings forecasts unchanged: 26-28 revenue of RMB88.8/94.9/99.2 billion; net profit attributable to parent of RMB4.8/6.1/6.6 billion; EPS of RMB1.23/1.57/1.71. Based on the October 26, 2026 closing price of HK$18.63 (exchange rate 0.86), the corresponding PE valuation is 13/10/9x. Maintain "Buy" rating. For growth, prefer track leaders New Hope Dairy + Milkground; both the low-temperature and deep-processing tracks are important directions for the future upgrading of the dairy industry, and both tracks show a trend of scale increasing with penetration and fragmented competition; track leaders with both revenue and profit growth can capture low-valuation rebounds and excess returns. Maintain New Hope Dairy (002946.SZ) earnings forecasts unchanged: 26-28 revenue of RMB11.89/12.64/13.31 billion; net profit attributable to parent of RMB850/1.01/1.13 billion; EPS of RMB0.99/1.18/1.31. Based on the October 26, 2026 closing price of RMB15.2, the corresponding P/E is 15/13/12x, respectively. Maintain "Buy" rating. Maintain Shanghai Milkground Food Tech (600882.SH) earnings forecasts unchanged: 26-28 revenue of RMB6.8/8.0/9.0 billion; net profit attributable to parent of RMB320/460/570 million; EPS of RMB0.63/0.90/1.11. Based on the October 26, 2026 closing price of RMB19.92, the corresponding P/E is 32/22/18x, respectively. Maintain "Buy" rating. The core of earnings rebound from the raw milk cycle turning upward is YOURAN DAIRY + CH MODERN D; the rebound in loose milk prices has become a leading indicator of the cycle bottoming out and turning upward. Continue to be bullish on the raw milk cycle reversing and recovering to the historical average price level, and pay attention to the improvement in traditional demand and the release of incremental deep-processing demand in 26-27, which will become the key factors determining whether the raw milk cycle can break through the historical average price and move further upward; bullish on significant performance improvement driven by impairments in 26, and continued performance improvement driven by the rebound in milk prices in 27. Maintain YOURAN DAIRY (09858) earnings forecasts unchanged: 26-28 revenue of RMB21.5/24.2/24.6 billion; net profit attributable to parent of RMB1.75/3.50/3.65 billion; EPS of RMB0.39/0.78/0.81. Based on the October 26, 2026 closing price of HK$3.385 (exchange rate 0.86), the corresponding PE is 7/4/4x, respectively. Maintain "Buy" rating. Maintain CH MODERN D (01117) earnings forecasts unchanged: 26-28 revenue of RMB13.6/15.4/15.9 billion; net profit attributable to parent of RMB700/1.67/1.94 billion; EPS of RMB0.09/0.21/0.24. Based on the October 26, 2026 closing price of HK$1.31 (exchange rate 0.86), the corresponding PE is 13/5/5x, respectively. Maintain "Buy" rating. Risk warnings Food safety risks; sharp increases in raw material prices; intensified competition affecting revenue and performance; new product sales falling short of expectations, etc.