Mengniu reported 16.4% YoY net profit decrease on 6.9% YoY revenue drop in 1H25, below expectations. Core OPM expansion of 1.5ppts YoY was still encouraging, thanks to lower raw milk cost and strict expenses control. For FY25, however, management has revised down guidance, now with MSD% or HSD% YoY revenue decline and YoY flat core OPM.
　　Dairy demand recovery looks invisible in the short term, despite policy catalysts (such as personal consumption loan subsidies and childcare subsidies nationwide). It is worthwhile to wait for a turning point in the industry cycle, which may be the premise of potential re-rating of dairy giants in China like Mengniu, in our view. Downgrade to HOLD.
　　Key Factors for Rating
　　1H25 results review. The Company’s total revenue and net profit came in at RMB41.6bn (down 6.9% YoY) and RMB2,046m (down 16.4% YoY), both missing expectations. Core OPM went up 1.5ppts YoY to 8.5%, well above expectations, mainly due to 1) GPM expansion on lower raw milk cost, 2) disciplined expenses control. Cash flow largely improved, with CFO at RMB2.8bn (1H24: RMB1.9bn), given better working capital management and lower capex (at RMB1.0bn in 1H, down 40% YoY or 19% HoH).
　　Category wise: Liquid milk sales dropped 11% YoY in 1H, reflecting insufficient dairy consumption demand in a fluid environment. However, YoY sales decrease narrowed down in 2Q vs. 1Q, according to mgmt. Ice cream/milk formula/other products (e.g. cheese) reported resilient YoY growth of 15%/2%/12% in 1H.
　　Announced CFO change. With Mr. Ping Zhang retiring, Mr. Xinwen Shen was appointed as the new CFO, effective from 1 September 2025. Mr. Shen was an executive director of China Foods (506 HK/HK$3.96, NR) from September 2022 to August 2025, and served many positions in certain COFCO Corporation Group subsidiaries for around 30 years.
　　Guidance. Management now looks for MSD% or HSD% YoY revenue decrease for 2025; core OPM is likely to be stable YoY at >8%, implying a HoH decrease.
　　However, long-term OPM expansion target of +30-50bps for each year is intact, given a still considerable room for mix upgrade and efficiency gain. Mengniu is to renew its share repurchase plan (likely with up to HK$1bn in value during the next 12-month period), besides a steady dividend payout ratio of >45% (on an adjusted net profit basis).
　　Key Risks for Rating
　　Risks: 1) weaker-than-expected liquid milk demand recovery, 2) ASP softness, 3) market share risk, given fierce competition from local/emerging dairy brands.