Amid the consumption recovery trend in the first half of 2023, dairy giant Yili maintained a stable upward trajectory, achieving growth in both revenue and net profit. On August 28, Yili Co., Ltd. (600887) released its 2023 interim report: revenue reached 66.197 billion yuan, up 4.31% year-on-year; net profit attributable to shareholders was 6.305 billion yuan, up 2.81%; non-GAAP net profit was 5.797 billion yuan, down 1.55%. By segment, Yili's liquid milk scale and market share remain the largest; milk powder and cold drinks businesses are becoming new growth engines. Among them, Yili's adult milk powder business ranks first in the market, and its cold drinks business also ranks first in both scale and market share. Yet Yili seems unsatisfied with its current achievements. In 2020, Pan Gang, Chairman and President of Yili Group, officially announced the strategic goal of "entering the global top three dairy companies by 2025 and becoming the world's No.1 by 2030." Over the past three years, this goal has been reiterated; at the "Yili 2023 Third Investor Day" held in July this year, Yili stated that this goal has never changed. Although Yili has been the No.1 in Asia for many years, achieving the global top three in just two years and the world's No.1 in seven years still seems like a distant dream. Industry Hitting the Ceiling How Yili Responds Currently, Yili's biggest challenge is that its growth space is nearly saturated. Although revenue and net profit still saw slight growth in the first half, a review of the overall data reveals a clear slowdown in Yili's growth rate. Data shows that Yili's revenue growth rate in the first half was 4.31% year-on-year, the lowest in seven years, even lower than in 2020 when it was 5.45%. Looking back at Yili's revenue changes over the years, it is not difficult to see that Yili's revenue grew from 34 million yuan in 1992 to 123.2 billion yuan in 2022, a 3,623-fold increase over 30 years, with an annual growth rate of 31.4%, which is almost mythical. However, public information shows that since 2012, Yili's growth has slowed significantly, entering an era of medium-to-low growth, with a compound annual growth rate of 11.4% over the past decade and 12.7% over the past five years. Now, with the dairy market highly saturated, Yili's growth rate is still slowing. Low growth does not mean Yili will lose its absolute advantage in the domestic and Asian markets, but in the face of low growth, it will be difficult for Yili to achieve its goals of being in the global top three within two years and the world's No.1 within seven years. At the same time, "increasing revenue without increasing profit" is also a core issue Yili must face. Overall, Yili's gross margin and net margin both declined year-on-year in the first half of this year. Specifically, gross margin fell from 33.48% in the same period last year to 33.15%, and net margin fell from 9.71% to 9.57%. Media statistics show that over the past decade, Yili's average gross margin was 34.63%, while Mengniu's was 34.19%, roughly equivalent. Looking at specific years, from 2016 to 2019, Yili's gross margin exceeded 37%, ranging between 37.3% and 37.9%, higher than Mengniu in the first three years and roughly equal in 2019. But starting in 2020, Yili's gross margin began to decline significantly, dropping to 36% in 2020, and even falling to 30.6% in 2021. Although it rebounded to 32.3% in 2022, it still lags far behind the peak of 37.9%. A deeper comparison shows that although Yili's revenue exceeded Mengniu's by 30.6 billion yuan in 2022, giving it an absolute advantage in the industry, Mengniu's gross margin has been consistently higher than Yili's in recent years, generally controlled between 35% and 37%, which also reflects Mengniu's strong profitability. Perhaps the low gross margin has put pressure on Yili, leading it to continuously cut costs in the first half. The report shows that Yili's sales expense ratio and advertising and marketing expense ratio were 17.55% and 10.64% respectively in the first half, down 0.79% and 1.25% year-on-year. In the second quarter, its sales and management expense ratios were 18.0% and 3.8%, both down 0.5% year-on-year. Under the New National Standard The Realistic Dilemmas of Two Growth Curves Thanks to continuous brand expansion and product diversification, Yili has built two growth segments—milk powder and dairy products, and cold drinks—which serve as strong second and third curves. In the first half, Yili's milk powder and dairy products business revenue was 13.52 billion yuan, up 12.01% year-on-year; its gross margin was as high as 40.38%, the highest among Yili's major product categories, accounting for 24.96% of profit. Yili's cold drinks business revenue was 9.158 billion yuan, up 25.54% year-on-year, with a relatively high gross margin of 39.17%. These two "growth flywheels" are undoubtedly the most eye-catching parts of Yili's performance this time. However, looking at recent months' data, the milk powder and dairy products business, which accounts for as much as 20.49% of Yili's revenue, is still under pressure. The report shows that in the second quarter, Yili's milk powder and dairy products revenue was 6.08 billion yuan, down 8.9% year-on-year. There is no shortage of analysis in the industry suggesting that the decline in Yili's milk powder and dairy products business in the second quarter was due to intensified competition from small and medium-sized dairy companies clearing inventory under the new national standard. However, from an industry-wide perspective, the decline in "infant formula" is an inevitable trend. According to data from the National Bureau of Statistics, China's birth population in 2022 was 9.56 million, with a birth rate of 6.77‰—the first time since 1950 that annual births fell below 10 million. Nielsen IQ also pointed out in its "Infant Formula Market Insights and Trends Report" released in May that against the backdrop of declining demographic dividends and falling fertility rates, maternal and infant-related categories in the Chinese market, such as milk powder, baby food, and pregnant women's milk powder, have all declined. According to Yili's disclosure, in the milk powder and dairy products business, the retail market share of adult milk powder is about 23.8%, infant formula is 13.6%, and cheese offline retail market share is about 17.2%. From this perspective, infant formula accounts for a relatively small proportion of Yili's overall business revenue, but as a high-margin revenue module, whether "infant formula" can maintain market growth in the future will likely have a significant impact on overall profits. At the same time, the milk powder business must take on the "main task" for a more important reason: Yili's liquid milk business has hit the "ceiling." In the first half, the liquid milk business, which accounts for 64.29% of Yili's revenue, achieved revenue of 42.423 billion yuan, down 1.09% year-on-year; although its gross margin slightly increased from 29.96% in the same period last year, it remained relatively low at 30.06%. In response, Yili also provided expectations at the beginning of its interim report: "Currently, the domestic economy is in a recovery period, and the consumer goods industry faces challenges such as insufficient consumer confidence, weak demand growth, and a declining number of newborns. In the short term, the scale of dairy consumption has shrunk compared to the same period last year." In fact, Yili's liquid milk business revenue in 2022 was 84.926 billion yuan, up only 0.02% year-on-year; in the first quarter of 2023, revenue was 21.741 billion yuan, down 2.58% year-on-year. Thus, it is clear that Yili's liquid milk business growth is weak, and it is already difficult to maintain its No.1 position in fierce competition. It is unrealistic for Yili to expect rapid growth in the highly saturated liquid milk market. From Asia's No.1 to the World's No.1 How Much Further Does Yili Need to Go? Recently, Rabobank released its 2023 Global Dairy Top 20, with Yili maintaining fifth place with a turnover of $18.3 billion. This is the fourth consecutive year Yili has held fifth place since first achieving it in 2020. The top four are Lactalis, DFA, Nestlé, and Danone. For Yili now, the domestic market has formed a pattern of "one superpower and multiple strong players." In the 2023 Global Dairy Top 20, Mengniu ranked eighth with a turnover of $14.4 billion. From a purely business scale perspective, Yili's No.1 position in the domestic market is currently relatively stable. However, if we talk about its goal of "entering the global top three by 2025 and becoming the world's No.1 by 2030," it is still very difficult to achieve. A Xueqiu netizen once calculated this for Yili: In 2022, the world's No.3 dairy company was Danone Group, with revenue of $20.9 billion; Danone's revenue in 2019 was $18 billion, with a three-year average growth rate of 5.1%. If calculated at a 5.1% growth rate, by 2025, Danone's revenue will reach $24.3 billion (approximately 176.4 billion yuan). Based on this, if Yili is to become the world's No.3 by 2025, its revenue should be above 176.4 billion yuan; at the same time, if revenue is calculated at 176.4 billion yuan, Yili's net margin should reach 8.5% by 2025, meaning a full-year profit of 15 billion yuan. However, according to CITIC Construction Investment Securities' earnings forecast for Yili, by 2025, Yili still cannot achieve this expected revenue and profit for the world's No.3. The research report predicts that Yili will achieve revenue of 134.412 billion yuan, 146.856 billion yuan, and 160.01 billion yuan in 2023-2025, and net profit attributable to shareholders of 10.843 billion yuan, 12.42 billion yuan, and 14.03 billion yuan. This shows that Yili still has a gap, and if Danone and other top four dairy companies run faster and achieve better-than-expected growth, Yili will be even further from this goal. More importantly, from the perspective of existing businesses and main markets, Yili still faces challenges in achieving high growth in the coming years. First, Yili mainly relies on the Chinese market as its base, but its main business has already hit the "ceiling." The first curve, liquid milk, has seen revenue decline rather than increase; the second curve, milk powder and dairy products, including "infant formula" and cheese, faces competition from rivals like Feihe and Mengniu, and is affected by market conditions such as declining birth rates, making it difficult to achieve high future growth. It is reported that Feihe's revenue in 2022 was 21.311 billion yuan, ranking first in the "infant formula" market share. But even Feihe, which has long held a core position in the milk powder track, has seen a decline; according to Feihe's semi-annual report, its net profit fell 28.8% year-on-year in the first half. As a representative of Yili's diversified innovation, the cheese business has also long faced strong competition from rivals like Mengniu. Mengniu's acquired Milkground surpassed France's Bongrain in 2021 to become the champion of China's cheese retail market; together with Arla, Mengniu holds a market share of over 30%, firmly ranking first in the domestic cheese market. At the same time, the cheese market has now entered a period of low expectations. Data shows that the retail growth rate of China's cheese market has declined for three consecutive years, slowing to 8.9% in 2022. Second, looking globally, Yili still needs time to catch up with other dairy giants. Taking the No.1 position Yili aspires to, Lactalis had a turnover of $28.6 billion in 2022, $4.1 billion higher than DFA's $24.5 billion, and Yili still lags behind by $10.3 billion (approximately 74.8 billion yuan). Obviously, if it mainly relies on the domestic market, achieving an increase of 74.8 billion yuan in seven years is almost completely impossible. Therefore, for Yili, going overseas to generate revenue has become a necessary path. In recent years, Yili has been accelerating its overseas development, but it has not mentioned much about the proportion of its overseas revenue. According to its interim report data, overseas business revenue grew 19.9% in the first half, which is not particularly high for a new market and business. Overall, to become the world's No.1, Yili still needs time to deeply cultivate its overseas business, driving new growth through globalization rather than focusing on domestic market competition and continuous brand and product expansion. Going to new markets and creating new miracles—this might be the direction Yili should seriously consider now.