Huachuang Securities: The dairy sector establishes an upward cycle and suggests an allocation along three main lines

The Zhitong Finance App learned that Huachuang Securities released a research report saying that it has been more than four years since the high in October '21, with a cumulative decline of about 30%. The length and magnitude of the adjustment have exceeded the previous two cycles. Since mid-July, milk prices have corrected ahead of schedule year on year, slightly ahead of the market's neutral expectations of 26H2. An upward cycle has been established. The dairy industry is recommended on a sectoral basis, and it is recommended to follow the three main lines. The first is the main line of reverse elasticity of raw milk; the second is the main line of improving sector characteristics; and the third is the main line of growth in deep processing.

The main views of Huachuang Securities are as follows:

Raw milk cycle: demand improves first, supply accelerates later, and an upward cycle has been established

1) Demand improvement first: the basic market for C-side liquid milk gradually stabilized to form the undertone of demand. The compound growth rate of dairy production remained positive in the five years after the epidemic, and China's 26H1 dairy production improved at an accelerated rate; demand for B-side deep processing is booming and domestic substitution is accelerating. According to sorting, major dairy companies and professional processing companies are currently planning to consume more than 5 million tons of raw milk per year and are being put into operation at an accelerated pace. At the same time, leading dairy companies will switch to full acquisitions and price incentives; at the same time, leading dairy companies will switch to full acquisitions and give price incentives. The upward shift in the milk collection center further boosts milk prices. 2) Accelerated supply elimination relay: Short-term yield increases hedge storage elimination, and fresh milk production is still increasing, but herd structure estimates suggest that cows are expected to decline at an accelerated pace starting in '27, and supply contraction will continue until at least 28 years. 3) Milk prices are expected to rise in three levels: first recovering to a break-even line of 3.2-3.3 yuan/kg, then moving closer to a normal profit level of around 3.5 yuan/kg. If it is eliminated in 28 years, it may further open up upward flexibility.

Upstream ranching: Cash and profit have improved one after another, and fair value has increased flexibility

Driven by declining costs, profits have increased year by year since leading ranches have excluded fair value losses since 24 years ago, free cash flow has been positive, and interest-bearing debt has declined from a high point, and it has entered a self-repair channel for reporting. Meanwhile, the reported profit was covered up by fair value losses. For example, the 25-year fair value loss reached 4.31 billion yuan, and the net profit in the statement was crushed to a loss of 430 million yuan. Further dismantling fair value losses: First, depreciation of adult cows occurs rigidly, and the growth rate naturally declines after the expansion of the shelf slows down, which is a slow variable; second, loss of eliminated cows depends on the disposal price difference and number of elimination, narrowing is most certain; third, revaluation of cow herd value adjusts the valuation assumption according to milk price expectations. After the inflection point is confirmed, it is the main elastic force. The three-factor resonance will improve in the future. The bank estimates that for every 0.1 yuan/kg increase in milk prices, Youran/Hyundai (and after shoushengmu) profits can increase by at least 10/5-10 billion yuan.

Downstream dairy companies: two major switches for conductivity, dairy companies report heat and cold differentiation

The same upward trend in milk prices was mapped to downstream dairy companies, but the report's performance was divided by two major factors: the actual self-sufficiency rate of milk sources on the operating side. The price difference between loose milk and contract milk prices during the downturn period once exceeded 2 yuan/kg. Small dairy companies encroached on their shares at low prices, while leaders internalized excess milk sources and impairment precipitation reports. The pressure peaked in 23-24 years, and was clearly relieved over 25 years. After the reversal, share recovery, promotion contraction, and narrowing impairment will be realized simultaneously. Second, financial accounting standards are different from IFRS fair value revaluation. The CAS cost model unidirectional calculation forms a firewall. Therefore, in 23, Excellent IFRS lost 1.05 billion yuan, Yili CAS actually confirmed investment income of only 0.07 billion yuan, and Mengniu fully covered modern losses. Furthermore, Junlebao CAS is consolidated, and cycle fluctuations are spread on the cost side. The new dairy industry uses FVOCI accounting and is insulated from the profit statement, and the same cycle reflects a completely different reporting pattern.

Elasticity Map of the Whole Industry Chain: Elasticity looks at the mapping, rhythm is transmitted

In terms of elasticity, determined by the degree of reflection of the increase in milk prices to the report, the farm itself directly benefits and is most flexible. Dairy companies directly benefit and are indirectly cashed out through self-sufficiency hedging and joint returns, and the magnitude is significantly smaller. Based on the calculation of every 0.1 yuan/kg increase in milk prices, head ranches can increase by nearly 1 billion yuan, and Mengniu undertakes modern (and subsequent) restoration by about 170 million yuan. Yiran only confirmed that Youran's cash profit increased by about 140 million yuan. Judging from the pace of cash out, fair value increases and joint venture profits and losses can be reported in the current quarter, but operational improvements such as share recovery and promotion contraction need to be gradually realized along with the reshaping of the competitive landscape. Therefore, it is expected that in the raw milk reversal cycle, the direct flexibility (fair value restoration and return of joint profit and loss) of representative dairy companies is ranked as Excellent > Hyundai > Mengniu > Tianrun > Junlebao > New Dairy > Yili > Mioke, and additional increases in operational improvements such as share recovery and narrowing impairment (Yili, Mioko, and New Dairy will mainly benefit from this dimension).

Risk warning: The reversal in raw milk prices fell short of expectations, feed costs rose sharply, the sharp decline in international milk prices dragged down the domestic substitution process, the decline in beef prices, and loss reduction fell short of expectations, calculation errors, etc.