Incident: Yili Co., Ltd. released its 2024 mid-year report. 24H1 achieved operating income of 59.915 billion yuan, -9.49% year over year; net profit to mother of 7.531 billion yuan, +19.44% year over year; net profit after deducting non-return to mother of 5.324 billion yuan, -12.81% year over year. Among them, 24Q2 achieved revenue of 27.338 billion yuan in a single quarter, -16.54%; net profit to mother of 1.608 billion yuan, or -40.21% year-on-year; and net profit of 1.597 billion yuan after deducting non-return to mother, or -35.61% year-on-year.

Room temperature liquid milk adjusted the sales pace, and the low temperature category achieved contrarian growth. 1) Liquid Milk 24H1/24Q2 achieved revenue of 36.887/16.626 billion yuan respectively, -13.05%/-19.61% YoY. In terms of room temperature liquid milk, the company took the initiative to adjust the freshness of terminal products, and the year-on-year growth rate of shipments slowed down. Among them, the revenue performance of the Jindian series was better than that of basic white milk. In terms of low-temperature liquid milk, the company's low-temperature white milk and low-temperature yogurt categories all achieved contrarian growth. Among them, Jindian's low-temperature fresh milk revenue maintained a high year-on-year growth rate, and profitability also improved. 2) Milk powder and milk products achieved revenue of 14.509/7.081 billion yuan respectively, or +7.31%/+16.49% year-on-year. The company consolidated its brand influence through product innovation, guaranteed revenue growth, and achieved profit-side improvements. The gross margin of 24H1 milk powder and dairy products increased. The 2C side of the cheese business gradually stabilized, and 24Q2 revenue achieved positive year-on-year growth. 3) Cold drink products 24H1/24Q2 achieved revenue of 7.322/2.989 billion yuan respectively, -20.04%/-44.27% year-on-year. 4) In terms of the non-dairy business, the company created a second growth curve in the field of drinking fresh water and brewing tea, and the 24H1 water drink business achieved a high year-on-year growth in revenue.

The decline in raw milk prices has increased gross profit margins, and promotional investment has led to an increase in sales expenses. In terms of gross margin, 24H1/24Q2 companies' gross margins were 35.02%/33.84%, respectively, and 24Q2 were +1.11/-2.18pcts year-over-year, respectively. The year-on-year increase in gross margin was mainly due to a decline in raw milk prices, but the slowdown in income-side growth led to a weakening of the scale effect, and gross margin decreased month-on-month. On the cost side, 24H1/24Q2 sales expense ratios were 19.41%/20.56%, respectively, and 24Q2 were +2.51/ +2.11pcts year over month, respectively, mainly due to the increase in marketing expenses brought about by the liquid milk channel adjustment process. The 24H1/24Q2 management fee rates were 3.92%/3.26%, respectively, and 24Q2 were -0.57/-1.21pcts year over month, respectively. Taken together, 24H1/24Q2 net profit margins were 12.57%/5.88%, respectively, and 24Q2 were -2.33/ -12.30pcts yoy.

Net interest rates for 24H1/24Q2 after deducting non-return mother were 8.89%/5.84%, respectively, and -1.73/ -5.60pcts YoY/Q for 24Q2, respectively. Looking ahead to the whole year, the company's 24H1 focuses on digesting channel inventory. Currently, channel adjustments have basically been completed. The 24H2 is lightweight and the company's profitability is expected to recover as the scale of operations steadily increases.

Profit forecast, valuation and rating: Considering that terminal sales have yet to recover, the 2024-2026 net profit forecast was lowered to 11.597/11.506/12.313 billion yuan (-11.22%/-6.23%/-6.35% from the previous adjustment); the corresponding EPS for 2024-2026 was 1.82/1.81/1.93 yuan, and the current stock price corresponding to P/E is 12/12/11 times, respectively. As a leading dairy company, the company has clear medium- to long-term advantages and maintains a “buy” rating.

Risk warning: Demand recovery falls short of expectations, raw material costs fluctuate, and core product growth falls short of expectations.