China Mengniu Dairy - Worst is over; recovery on track
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- FY25 results in line; core profit dropped 22% on topline contraction
- 1Q26 recovery well on track, pointing to a mid-single digit revenue rebound for FY26
- Raw milk price bottoming out, price competition easing. Product diversification helps sustain strong operating margin.
- Expect strong core profit recovery of 27% in FY26F. Maintain BUY with TP of HKD21.00.
FY25 results highlights. Revenue declined 7.3% y/y to RMB82.2bn, reflecting weak consumer demand, channel changes, and intensified competition. Despite topline pressure, lower raw milk costs supported a 0.3ppts y/y improvement in gross margin to 39.9%. However, reduced economies of scale led to a slight 0.2ppts y/y contraction in operating margin to 8.0%, with operating profit of RMB6.6bn. Attributable profit rebounded to RMB1.55bn (vs. RMB105mn in FY24), primarily due to the absence of prior-year large goodwill impairment, although earnings were still affected by impairment losses (including financial assets) and share of losses from associates of RMB804mn (mainly China Modern Dairy). In 2H25, revenue fell 7.6%, with attributable loss of RMB0.5bn or core profit of RMB1.6bn (down 30%). A final DPS of RMB0.520 was proposed, implying a 54% payout on core profit (FY24: RMB0.509, 41% payout).
By segment, liquid milk revenue declined 11% to RMB64.9bn, though fresh milk delivered double-digit growth. Milk powder and cheese grew 10% and 22%, respectively. Ice cream, weighed down by Indonesia and Philippines, still grew 4%, with China-only sales posting double-digit growth. Overall, category diversification continues to gain traction.
Easing oversupply of raw milk. Looking ahead, industry raw milk supply-demand dynamics are expected to gradually improve, helping to stabilize pricing. Industry raw milk prices have averaged RMB3.03/kg since 3Q25 amid upstream consolidation, while spot milk volumes are declining and spot prices are rising, pointing to reduced oversupply. The reconstituted cost of imported whole milk powder remains higher than domestic raw milk, supporting demand for local substitutes. With ongoing consolidation, raw milk prices are likely bottoming out and may recover toward 2H26, with the full-year average expected to be largely flat.
Sales recovery and market share gains. A potential recovery in raw milk prices may support market share gains and revenue rebound for leading players like Mengniu, especially as smaller downstream players face higher raw material costs. Mengniu continues to focus on high-quality protein and functional nutrition, catering to diversified channels (O2O, warehouse clubs, craft beverage stores) and consumption occasions. In 2H25, SG&A ratio rose 1.1ppts y/y due to marketing and channel investment, positioning the company for recovery in FY26.
1Q26 momentum is encouraging, with liquid milk growing high-single digits and fresh milk continuing double-digit growth. Ice cream, milk powder, and cheese registered high-teen growth. While 2M26 performance may have been partially supported by the later timing of Chinese New Year, the strong March sales should be driven by underlying demand recovery and easing competition. This sustained March performance suggests that the recovery may extend into the coming quarters, particularly in 2H26 with a lower base. Management expects mid-single-digit revenue growth for FY26.
Category diversification is the key to margin expansion. Despite potential raw milk cost upside, gross margin is expected to remain stable. Leading players like Mengniu have stronger pricing power amid the upcycle, while smaller peers lack stable and cheap supplies. Commodity volatility should have limited impact as packaging costs are largely locked in. While initiatives like affordable UHT milk and channel diversification may weigh on short-term profitability, non-liquid milk segments (ice cream, milk powder, and cheese) offer higher gross margins and are rapidly catching up on operating profitability with better scale effects. For instance, milk powder segment turned around from loss in 2024 (excluding impairment) and saw nearly 3ppt operating margin expansion in 2025. We believe further growth in these segments should support group operating margin improvement. Liquid milk contribution has declined from ~90% in 2020 to 79% in 2025, and over-concentration is expected to reduce further. On a high base, FY26 operating margin is likely to be stable, with management reiterating a 30–50bps annual expansion target over the medium term.
Overseas opportunities. Under its “two wings” strategy (health products & overseas expansion), Mengniu continues to grow in SEA. Milk powder, particularly Bellamy’s, saw ~70% growth, with strong momentum in Vietnam and supply shortages in some markets. Registration of infant formula in Indonesia and the Philippines positions these markets for strong growth in FY26. Ice cream sales in SEA were impacted by short-term volatility but have started recovering in early 2026. Overseas diversification, from ice cream to infant formula, lays a strong foundation for long-term category expansion.
Maintain BUY, TP HKD21.00. We cut FY26F earnings by 15% given more cautious margin assumptions, but we expect core profit to grow by 27% in FY26F, riding on decent sales recovery and further product diversification.Our TP of HKD21.00 is based on 16x forward PE, 1SD below the average. Maintain BUY as we believe the worst should be over and sales recovery should continue in the coming quarters. Valuation remains undemanding (c.11x forward P/E, ~1.5 S.D. below its historical average).
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