According to the Zhitong Finance and Economics APP, Galaxy Securities issued a research report stating that in the short term, the policy is expected to first promote the valuation recovery of the sector, and subsequent consumption voucher distribution and pre-purchase for the Spring Festival in the fourth quarter are expected to drive demand recovery, anticipating a rise in milk prices; in the long term, dairy product consumption fits with the attributes of big health and still has growth space. Recommendations: 1) Product structure optimization + internal quality improvement to enhance profitability for dairy companies with confirmed profit margin enhancement, such as New Hope Dairy (002946.SZ); 2) Leading position stability with potential to cross the cycle and currently having high dividend companies, such as Inner Mongolia Yili Industrial Group (600887.SH).

Event:

On September 26, the Ministry of Agriculture and Rural Affairs, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the People's Bank of China, the State Administration for Market Regulation, and the China Banking and Insurance Regulatory Commission jointly issued the "Notice on Promoting the Stable Development of Beef Cattle and Dairy Cattle Production", deploying the stable production of beef cattle and dairy cattle to help breeding farms overcome difficulties.

The main viewpoints of Galaxy Securities are as follows:

Policy Content:

The 'Notice' specifies seven policy measures, focusing mainly on stabilizing beef and dairy cattle production capacity, helping breeding households alleviate difficulties, and promoting the upgrading and efficiency improvement of the dairy and animal husbandry industry on the supply side. On the demand side, three measures are proposed to promote beef and milk consumption: firstly, scientifically promote the quality and nutritional value of fresh beef and milk; secondly, promote the 'student drinking milk' program; and thirdly, encourage regions with conditions to boost milk consumption through methods like issuing consumption vouchers, providing guidance on the universal value, specific scenarios, and specific operations of raw milk consumption to stimulate the industry's end consumer buying capacity and willingness.

Policy background:

Since 2023, the industry has been facing a supply-demand imbalance dilemma. Although milk prices have cyclical characteristics, this round of adjustments, due to structural changes in supply and demand, is deeper and longer. In May 2024, the average price of fresh milk in the main production areas in China fell to 3.34 yuan/kg, with kilogram milk profits turning negative for the first time, and industry losses expanding to over 80%. The increase in the number of dairy cows in China since 2019, combined with improved productivity after the scale of breeding farms, has led to a national milk production compound annual growth rate of about 7% from 2019 to 2023. On the demand side, the slow slope of economic recovery, coupled with a weak consumption demand and gifting scenarios in the dairy product industry. Nielsen data shows that the per capita consumption of dairy products in 2023 decreased by 1.5% compared to the previous year, further widening the gap between supply and demand, resulting in continued downward pressure on raw milk prices. For dairy companies, low demand sentiment puts pressure on income, while passive competition increases cost inputs, and the cost dividend from falling milk prices and devaluation of milk powder gradually offsets, affecting profit margin flexibility.

Policy Outlook:

Consumer policy stimulus is expected to drive a recovery in milk prices. The current industry supply side has been destocking. From March to July 2024, monthly dairy product production experienced year-on-year declines, but the narrowing of the average price drop for fresh milk is limited. The slow recovery on the demand side is the core reason, and this policy mainly focuses on the demand side to accelerate the achievement of supply-demand balance and drive a recovery in milk prices.

① Strengthening awareness of essential consumer goods. In 2023, the per capita consumption of dairy products in China was only 39.9% of the global average level and did not reach the recommended intake according to the national dietary guidelines for Chinese residents (2022), leaving ample room for improvement. The notification emphasizes the use of various methods to open propaganda columns, strengthen the promotion of nutritional value and knowledge, and is expected to enhance consumers' awareness of the essential nature of milk, increase penetration rates and per capita consumption.

② Promoting benefits and coverage of student milk consumption. In 2023, the daily supply of milk consumed by students nationwide was 27.75 million servings per day, benefiting 32.1 million students. There remains a 15.3%/9.0% potential for improvement to reach the daily supply goal of 32 million servings/coverage of 35 million people by 2025 as outlined in the National "Student Milk Consumption Program" promotion plan (2021-2025).

③ Subsidizing end consumer purchasing power. The consumption of dairy products in tier-one cities is relatively sufficient, while the lower-tier markets show clear gifting characteristics in the early stage. There is currently significant consumption potential. From Q1 to Q3 of 2023, county-level cities have shown sales growth rates higher than tier-one cities, and subsidies such as consumption vouchers are expected to further stimulate demand.

Risk warning:

Risks include the risk of slower-than-expected demand recovery, intensified competition, and food safety risks.