Comprehensive excellence creates Yili, and diversified expansion lays an advantage. Reviewing history, the management model of dairy companies has changed from extensive to detailed, and the core product system has changed from single to diversified. With advantages such as brands, channels, capital, and milk sources, Yimon gradually increased its share of room temperature liquid milk, forming a two-tier pattern. With the stabilization of the Shuangxiong pattern, the correlation between Yimeng's liquid milk revenue and the macro consumption environment has increased in recent years, and the diversified layout of products has been strengthened. In addition to liquid milk, Yili's cold drinks and milk powder contributed to large-scale performance, which also established it as an absolute leader in dairy products. In the current environment of weak consumption, dairy companies such as Yili are increasing their profit demands. For example, Yili has set a target net interest rate of 9% for 25 years.

The lightweight package is combined with policy support, and revenue growth is expected to improve month-on-month. Liquid milk: White milk is still in demand, and sales are under slight pressure due to weak consumption; fresh milk grows faster than white milk due to increased permeability; room temperature yogurt declines significantly in weak consumption environments. 24H1 took the initiative to leave the warehouse, and the current inventory level is low; benefiting from improvements on the shipping side, Yili's revenue decline narrowed in Q3; the decline in sales of room temperature white milk terminals narrowed in October. Milk powder: Yili's share of infant formula continued to increase, and Tmall Taobao's sales improved markedly in August. Goat milk powder has entered a stage of high growth overseas, contributing to large-scale revenue. Cold drinks: Domestic stocks are low, and the younger half are entering the market; overseas markets such as Southeast Asia are developing well, creating a second growth curve. Cheese: The penetration rate of bakery and catering has gradually increased, and the 24H1ToB enterprise channel has grown.

Erie may benefit from upstream removal of production capacity and focus on leading dairy products with high dividends and undervalued products. Upstream dairy cow production capacity removal has begun, small and medium-sized ranches are being withdrawn relatively quickly, and large enterprises are gradually eliminating inefficient production capacity; raw milk may balance supply and demand in 2025. If milk prices enter the recovery stage, we believe that Yili's net operating interest rate (excluding one-time investment income) is expected to increase further: 1) gross margin perspective: structural upgrade+moderate price increase, with little room for gross margin reduction; 2) Expense ratio perspective: Expenses have been concentrated in 24H1, and it is expected that there will be room for reduction in promotional expenses in 24H2 and 25; the recovery in milk prices will slow down competition in dairy sales, and there is plenty of room for decline in impairment losses and credit impairment losses. Overall, the recovery in milk prices is beneficial to increasing Yili's net operating interest rate (excluding one-time investment income). Furthermore, the company is a high-quality target with high dividends and undervaluation. (November 4) The dividend rate is 4.2%, and the company promises a dividend rate of at least 70% for 24 years; and there is room for further decline in capital expenditure. Yili's November 4 dynamic PE is only 15 times. The vertical and horizontal comparisons are all low, and there is a margin of safety.

We forecast the company's 2024-2026 earnings per share of 2.01, 1.79, and 1.88 yuan, respectively. Combined with comparable companies, we believe that the current reasonable valuation level of the company is 21 times the price-earnings ratio of 2024, and the corresponding target price is 42.21 yuan, giving it a purchase rating for the first time.

Risk warning: Economic recovery falls short of expectations; competition intensifies due to continued decline in raw milk prices; impairment losses fall short of expectations; risk of food safety incidents.