Liquid Milk Slows Down the Cycle Adjustment of Dairy Stocks Trapped, Yili’s Performance Will Say the Industry Will Improve in the Second Half of the Year

The cyclical decline of upstream raw milk also affects downstream dairy companies, putting them in a dilemma.

After experiencing rapid performance growth during the pandemic, the growth of listed dairy companies in 2023 is facing challenges, with the core business of various dairy companies, liquid milk, experiencing varying degrees of slowdown or decline in growth.

At today’s performance meeting, Pan Gang, Chairman and President of Yili Group (600887. SH), responded that the pressure on liquid dairy products is an industry issue, and the cyclical surplus of raw milk combined with less than expected recovery of consumer demand has led to supply-demand imbalance. It is expected that the industry situation will gradually improve by the second half of 2024.

Slow growth of liquid milk in dairy companies

On the evening of the 29th, Yili Group released its 2023 annual report, achieving a total operating revenue of 126.179 billion yuan, an increase of 2.4% from the previous year, and a net profit of 10.28 billion yuan, an increase of 10.4% from the previous year. The overall growth rate has slowed down compared to the same period in 2022.

From a business perspective, this performance change is mainly related to the performance of the liquid milk business. In 2023, Yili’s liquid milk business achieved a revenue of 85.54 billion yuan, an increase of 0.7% compared to the previous year. The business growth rate has slightly improved compared to the same period in 2022, but has declined compared to the double-digit growth during the epidemic period. In other businesses, milk powder and dairy products achieved a revenue of 27.6 billion yuan, an increase of 5.1% compared to the previous year; The operating revenue of the cold beverage business was 10.69 billion yuan, an increase of 11.7% compared to the previous year.

The liquid milk business has always been the main source of income for domestic dairy listed companies. A reporter from First Financial News noticed that in 2023, the liquid milk business of major dairy listed companies has slowed down or declined to varying degrees.

In 2023, Mengniu Dairy (02319. HK) achieved a revenue of 98.62 billion yuan, a year-on-year increase of 6.5%, of which liquid milk business revenue was 82.07 billion yuan, a year-on-year increase of 4.9%, higher than the same period last year, but also lower than the double-digit growth rate during the epidemic period.

Guangming Dairy (600597. SH) achieved a total operating revenue of 26.49 billion yuan in 2023, a year-on-year decrease of 6.1%, while liquid milk achieved a operating revenue of 15.65 billion yuan, a year-on-year decrease of 2.8%.

At the performance meeting, Pan Gang, Chairman of Yili, also responded to this market change. He said that the current problems faced by liquid milk are ultimately caused by the supply and demand contradictions brought about by the cyclical nature of the dairy industry. On the one hand, the structural upgrading of the upstream breeding industry has led to an extension of cyclical fluctuations, bringing more supply; On the other hand, the overall recovery of downstream consumer power was less than expected, causing an exacerbation of supply-demand imbalance and resulting in a series of chain effects.

After 2018, due to the rising cycle of raw milk prices, a new round of ranch construction fever has also emerged in China. However, starting from the second half of 2022, due to external factors, the supply and demand of raw milk upstream and downstream have gradually become imbalanced.

The reporter learned that due to insufficient market demand, some dairy companies did not renew contracts with some small and medium-sized farms after expiration. The raw milk that was not purchased by the latter entered the market at a low price in the form of loose milk. After some small and medium-sized dairy companies purchased low-priced loose milk, their products also engaged in a price war in the market with low-cost advantages, exacerbating the internal competition of the liquid milk market, causing difficulties in selling normal cost products for dairy companies, forcing them to increase promotion efforts, and bringing about overall market chaos.

The reporter noticed that Yili’s liquid milk revenue in 2023 increased by 2.19 billion yuan due to increased sales, 220 million yuan due to product structure adjustment, and 1.79 billion yuan due to changes in sales prices.

A milk vendor from Hebei told First Financial that the current price of loose milk has also been declining. One kilogram of loose milk is transported from Hebei to Xuzhou, and the local dairy company’s purchase price is only 1.5 yuan/kg, while the normal contract purchase price for ranches is above 3.5 yuan/kg.

Independent dairy analyst Song Liang told First Financial reporters that large dairy companies are currently facing a dilemma. On the one hand, domestic raw milk production capacity is still growing, and large dairy companies need to purchase more raw milk to protect the upstream breeding industry and assume social responsibility. However, downstream demand is insufficient; On the other hand, the continuous low price promotions and price wars in the terminal market have made it difficult for dairy companies to balance the digestion of excess raw milk and performance growth.

In the first quarter of 2024, the slowdown or decline in the liquid milk business of various dairy companies has intensified due to a combination of market recovery that was less than expected and a high base in the first quarter of last year.

The industry will experience some relief in the second half of the year

At the performance meeting, the performance of the liquid milk industry also became a focus of attention for analysts. In response to this, Pan Gang stated that Yili is currently undergoing a series of business adjustments. On the upstream end, the excess raw milk purchased by Yili has not been turned into products, but rather partially self powdered and digested. At the same time, he guides the upstream breeding industry to adjust its scale and structure, promoting the industry to restore supply-demand balance. It is expected that the surplus of upstream raw milk will gradually ease in the second half of 2024.

In terms of downstream channels, Pan Gang revealed that turnover is a very important aspect of consumer goods management. Since the Spring Festival, Yili has adjusted its shipping pace, given channels enough time and space to digest inventory while accelerating turnover speed. This year, the overall market competition environment is still relatively rational. Therefore, it is expected that the price system and inventory of liquid milk channels will gradually recover to a healthy level in the second half of the year.

In the industry’s view, the weak performance growth of dairy companies in this round is not only due to the impact of industry cyclical adjustments, but also related to changes in market demand.

At the previous performance meeting, Lu Minfang, Vice Chairman and Executive Director of Mengniu Dairy, believed that the industry is currently experiencing a temporary slowdown, and the development of China’s dairy industry has entered the second half stage. However, due to the single structure of the domestic dairy industry, the industry has not “reacted”. With the growth of health awareness among domestic consumers, the dairy industry still has huge growth potential in some segmented tracks, such as low sugar and fat, zero additives, formula optimization, and nutritional enhancement. It will also become a new track for innovation, upgrading, and competition among dairy companies in the future.

Nielsen IQ data shows that the growth model of the dairy industry is also changing in 2023. A significant factor in the growth of the domestic dairy industry in 2022 comes from the growth in sales of old products and price increases. However, in 2023, the contribution of old products to growth is decreasing, while the contribution of new products to performance is more pronounced.

The reporter noticed that in 2023, domestic dairy companies have increased their investment in nutrition and functional products, and have also gained some benefits.

The growth of Yili liquid milk mainly comes from the “health+function” track, with the retail sales of Jindian organic pure milk series maintaining double-digit growth compared to the previous year, and Jindian low-temperature fresh milk series increasing by 54.6% compared to the previous year. During the reporting period, the proportion of innovative product revenue to total revenue increased to 16.8%. Guangming Dairy has developed and launched 63 new products in 2023, including Zhiyou Original DHA Fresh Milk and Guangming Light UFIT Instant Probiotic Powder.

New Dairy (002946. SH) achieved a liquid milk revenue of 9.76 billion yuan in 2023, a year-on-year increase of 11.2%, mainly related to its “fresh+innovative” strategic adjustment in recent years. The financial report shows that its fresh milk business achieved double-digit growth year-on-year in 2023, with high-end products growing by 40% and the room temperature organic milk category growing by more than 50%.

At the performance meeting, the management of Yili also revealed that consumer preferences for dairy products have not fundamentally changed. On the one hand, Yili is increasing its expansion in the fields of health and nutrition. For example, in 2023, Yili will split adult nutrition products from its milk powder business unit into an independent business unit, in order to increase investment and implement precise strategies in the segmented nutrition and functional food sectors; On the other hand, it aims to develop more consumer demand and consumption scenarios, including catering, leisure, tourism, etc., all of which have the opportunity to become new incremental spaces in the future.

Song Liang told First Financial reporters that the current competition in the dairy product market is shifting from quality to functional upgrading, which has also brought about a new round of technological competition. This is also a new test for dairy companies. Future competition will not only rely on the construction of supply chain systems, but also test the innovation ability and technological reserves of dairy companies.