Dongwu Securities: Dairy and beverage differentiation intensifies, leading dairy companies will benefit from improved supply patterns

The Zhitong Finance App learned that Dongwu Securities released a research report saying that since July '26, milk prices have risen slightly moderately from the bottom, driven by seasonal factors such as heat stress/alfalfa harvesting season/peak demand season. Following a moderate rise in milk prices, leading dairy companies will benefit from an improvement in the supply pattern, as reflected in price recovery and cost optimization, etc., and the profits of joint farm farms will also improve. Q3 revenue growth in various categories, such as beverages, snacks, condiments, and liquor, all showed pressure, as reflected in the reports of listed companies; secondly, extreme weather also had an impact on beverage sales.

The main views of Dongwu Securities are as follows:

Dairy products: raw milk stabilizes and transmits positively

Since July '26, driven by seasonal factors such as heat stress/alfalfa harvesting season/peak demand season, milk prices have risen slightly from the bottom. In October '26, contract milk prices rose slowly from 3.10 yuan/kg, compared to the low point of 3.02 yuan/kg in April. Looking ahead to Q4 and 2027, it is expected that the domestic beef cattle price increase cycle will continue, the contribution of deep milk processing to raw milk digestion will increase, and the balance between raw milk supply and demand will be established. The bank judged a moderate upward path for milk prices, mainly due to weak recovery in demand, a high degree of scale upstream ranches, and a gradual increase in the share of deep processing. Supply-side changes will not be drastic. Following a moderate rise in milk prices, leading dairy companies will benefit from an improvement in the supply pattern, as reflected in price recovery and cost optimization, etc., and the profits of joint farm farms will also improve.

1) Revenue side: From January to September '26, the total revenue of the dairy sector was +2.6%, Q3 revenue was +1.5%. Overall demand recovered steadily, and dairy products developed more diversified. Room temperature milk relied on product structure upgrades to stick to the basic market. Low-temperature milk continued to penetrate, and infant formula continued to be pressured by a decline in the birth population, but the share was concentrated more towards the head, testing the enterprise's omni-channel operation capability. In addition, China's dairy industry is gradually entering a new stage, and leading dairy companies are gradually building production capacity Currently, dairy products, lactoferrin, and milk represented by “two oils and one cheese” Production of high-value-added raw materials such as protein will also increase significantly.

2) Profit side: In terms of gross margin, the gross margin of the 26q3 dairy sector was +1.07pct year on year, mainly due to the continuous improvement of the product structure of leading national/regional dairy companies; in terms of cost rates, the 26Q3 dairy sector's three cost rates (sales expense rate+management fee rate+financial expense ratio) totaled -0.15 pct year on year, and strategic results such as optimizing the cost investment structure/improving internal management efficiency of dairy companies have been revealed; in terms of non-financial accounts, dairy companies have generally been affected by the update of tax enforcement standards. Since '26, the national tax system has unified tax collection and administration standards. Strict taxing of dairy products High value-added raw materials such as fermented milk/formula, dairy and lactoferritin/whey protein represented by “two oils and one cheese” were included in the tax scope, and tax payments increased year-on-year in a single quarter.

Soft drinks: poor overall performance of “high before and after low”

The quarterly revenue and profit growth performance showed a quarterly decline, mainly due to overall weak consumption at the macro level. Zero social growth in July-August was at a low level. In September alone, there was a slight increase in Q3 revenue growth in various categories such as beverages, snacks, condiments, and liquor. The Q3 revenue growth in various categories such as beverages, snacks, condiments, and liquor all showed pressure, as reflected in listed company reports; secondarily, extreme weather also had an impact on beverage sales. 1) Revenue side: From January to September '26, the total revenue of the soft drink sector was +12.1%, with net profit attributable to owners of the parent company +10.4%; total revenue in Q3 was +2.0%, and net profit attributable to owners of the parent company was -10.3% YoY. 2) Profit side: In terms of gross margin, the gross margin of the 26q3 soft drink sector was -0.64pct year on year. The decline in gross margin was affected by the increase in the share of low-profit products/channels and rising costs of core raw materials, but some companies continued to improve their product structure/strong cost control; in terms of cost ratio, the 26Q3 soft drink sector's three cost rates (sales expense rate+management fee rate+financial expense ratio) totaled -0.23 pct year on year. Some manufacturers increased their investment expenses in the face of weak consumption margins.

Investment advice

I am optimistic about the continuation of the fundamentals of the dairy industry - the demand side continues to recover, the supply side continues to optimize, and the dairy industry transmits significant marginal improvements from upstream to downstream. I recommend Mengniu Dairy and Yili shares, which have good growth and profit release. In the beverage sector, we continue to focus on companies that occupy long-life cycle categories and have the ability to create large single products; Dongpeng Drinks, which has returned to Bairun shares with steady growth and gradual implementation of systematic promotion strategies; Quanyangquan, which has both regional expansion and profit flexibility; and Chengde Lulu/Yangyuan Drinks, which continues to have high dividend rates.

Risk warning: Food safety risks, raw milk price fluctuation risks, market competition exacerbates risks.