Guotai Haitong: Policy accelerates convergence of supply and demand in the dairy industry, destocking of inventory becomes an important drive.

Guotai Haitong released a research report, stating that in recent times, many areas have introduced detailed guidelines for childbirth subsidies. Some dairy companies have voluntarily proposed plans for childbirth subsidies, which are expected to drive the recovery of the infant formula, liquid milk, and other categories and accelerate the convergence of supply and demand gaps in the raw milk industry. The more proactive childbirth policy, considering the dairy industry is at a triple bottom of supply, demand, and inventory, the bank believes that destocking is an important drive for the convergence of supply and demand gaps in this cycle. With the catalyzation of domestic demand and childbirth-related policies, the prosperity is expected to improve more rapidly and accelerate this process. Guotai Haitong's main points are as follows: Recent intensification of childbirth policies Since March, many areas including Hohhot, Guangzhou (some communities), Jiangxi, and Macau have introduced detailed guidelines for childbirth subsidies, with annual subsidies amounting to more than tens of thousands of yuan. Feihe, Yili, Junlebao, and other dairy companies have voluntarily proposed childbirth subsidy plans, with a total value of 4.4 billion yuan. The bank believes that the importance of domestic demand has increased under the current export situation, and childbirth and consumption are important drivers of domestic demand. On April 15th, Seeking Truth magazine once again emphasized "increasing support for childbirth and child-rearing". With the recovery of the consumer market and the continuous implementation of childbirth policies, the bank believes that infant formula, liquid milk, and other categories are likely to accelerate their recovery. Continuous capacity reduction in the dairy industry By the end of 2024, the number of dairy cows in China will be approximately 6.2 million. The destocking of dairy cows has continued in the first quarter of 2025, and it is estimated that the number of dairy cows will drop to over 6.1 million by the end of March. Currently, there is still an oversupply of raw milk, reflected in the continued decline in milk prices. Recently, under the impact of international trade, soybean meal, corn, and beef prices have slightly risen, driving up feed costs and the price of culling cows, and the industry is expected to continue the pace of capacity reduction. At the same time, the import volume of bulk powder in January-February is expected to continue to decrease year-on-year, and the domestic production and import volume of raw milk are expected to continue to decrease. The darkest is over, looking forward to a reversal Since the second half of 2023, the demand for dairy products has been weakening continuously, and the bank believes that the industry's most pessimistic point (2nd quarter of 2024) has passed. According to the bank's calculations, if the number of dairy cows is reduced to 6 million or below by the end of 2025, considering the large probability of stabilization and possibly stronger demand under a low base, it is expected to achieve a balance between supply and demand within the year. Combining supply and demand rhythm (on the supply side, the concentrated testing of silage collection in August-September tests the cash flow of pastures, and on the demand side, more childbirth policies are implemented, and the demand is released in September-October for Mid-Autumn Festival and National Day), the bank predicts that the equilibrium point for fresh milk may appear in the third quarter of 2025, when milk prices are expected to stabilize, leading to an improvement in the industry landscape; if childbirth and domestic demand policies show more positive performance, the time for supply and demand balance is expected to be brought forward. Based on historical experience, during the period of rising milk prices, leading companies usually improve gross margin, while reducing some expenses and losses, resulting in profit restoration and market share increase. Risk warning: unforeseen destocking of dairy cows leading to continued decline in milk prices, continued decline in dairy product sales, and food safety risks.