Haitong International has released a research report stating that the dairy industry experienced a deep clearance phase in 2025, setting the stage for a cyclical rebound, profit recovery, and valuation restoration in 2026. Driven by five key factors, the dairy sector is emerging as a high-quality track within consumer staples. Investment recommendations are prioritized as follows: The primary choices are industry leaders with integrated operations, namely Inner Mongolia Yili Industrial Group Co.,Ltd. (600887.SH) and MENGNIU DAIRY (02319). These companies offer the most stable investment logic, demonstrate strong resilience during downturns, are suitable for large capital allocation, and stand to benefit fully from the industry's recovery. Next, attention should be paid to New Dairy (002946.SH), a company focused on the high-growth chilled product segment, which has shown outstanding profitability leveraging its market positioning. Finally, consider upstream raw milk producers such as YOURAN DAIRY (09858) and CH MODERN D (01117). These companies possess the greatest earnings sensitivity driven by rising milk prices, and the logic for a cyclical upturn is clear. In the medium term, a recovery in consumption is expected to release benefits from product structure upgrades. Long-term advantages for the industry include significant economies of scale and strong cash flow generation, with leading companies likely to see continuous market share gains and profit improvement. Haitong International's main views are as follows:

2025 Performance Review: Weak Growth, Strong Divergence, Deep Adjustment 2025 was a year of deep industry clearance. Overall revenue growth was in the low single digits, representing a significant slowdown. Raw milk prices fell to near-decade lows, with the average price of fresh milk around 3.0 yuan per kilogram, below the cost line of 3.3-3.4 yuan per kilogram for large-scale farms, leading to widespread losses in the upstream sector. Downstream dairy companies faced profit pressures, although industry leaders demonstrated resilience. Yili's non-GAAP net profit increased by 19% in the first three quarters, while Mengniu showed profit recovery. New Dairy achieved a 5% revenue growth and a 36% increase in net profit. Bright Dairy was impacted by losses from its overseas subsidiary. Lower costs provided a temporary boost to gross margins, but price wars and high expenses eroded profits, accelerating the exit of smaller players and allowing leading companies to gain market share. The industry shifted its focus towards protecting profits in the fourth quarter. Sector valuations hit bottom, with the PE percentile for A-share dairy companies below 10% and only 4% for Hong Kong-listed stocks, while southbound and long-term foreign capital increased their holdings against the trend.

Industry Transformation: Cycle Bottom, Logic Restructuring Demand is underpinned by necessity but lacks elasticity. Competition in the ambient white milk segment, a mature market, has dragged on growth. Chilled yogurt, cheese, and frozen dairy products are bright spots for growth. Infant formula faces pressure from demographic factors. Recovery in the food service channel has been moderate. The logic of industry competition is changing; the traditional model of gaining share through heavy spending on sales expenses has become ineffective, shifting instead towards product upgrades and refined operations. The clearance of upstream production capacity has laid a solid foundation for a cyclical rebound in 2026.

2026 Outlook: Four Bottoms Resonate, Lower Start Followed by Higher Finish In the first quarter of 2026, the bottoms in demand, costs, competition, and capital are expected to resonate. Industry revenue in March was 339 billion yuan, a year-on-year decrease of 0.9%, with the rate of decline continuing to narrow, indicating a stronger-than-expected off-season. The price of fresh milk stabilized at 3.02 yuan per kilogram, suggesting limited room for further decline, while feed cost pressures remain manageable. End-market discounts have improved, and competition has moderated. For the full year, the three key drivers of a raw milk cycle rebound, demand recovery, and valuation repair are expected to converge. The industry is forecast to follow a pattern of a lower start and a higher finish, stabilizing in the first quarter and accelerating growth during the peak seasons in the second and third quarters, with profits being released quarter by quarter.

Risk warnings include a slower-than-expected consumer recovery, fluctuations in raw milk prices, intensifying industry competition, and food safety issues.