China Dairy Earnings: Industry Headwinds and Soft Consumer Sentiment Weigh on Earnings

Wide-moat Inner Mongolia Yili and narrow-moat China Feihe posted interim results that were broadly in line with our estimates. Sales growth for both was hurt by soft demand in the infant milk formula, or IMF, sector, due to low birthrates and inventory clearance of products under the old national standards. This is consistent with earlier results revealed by a2 Milk Company. Yili and Feihe management teams are optimistic about the second-half trend. Feihe said its excess inventory was mostly cleared in the first half, while Yili updated its full-year top-line and net margin guidance to mid-single-digit growth and 30 basis points of improvement, respectively. Top-line guidance is consistent with our estimates, but we continue to see difficulty in reaching the guided margin.