[Guotai Haitong] Dairy Sector Rally in A-Shares and H-Shares Today, Likely Driven by Cycle Catalysts and Capital Flows

English summary

On one hand, the upward cycle for raw milk is relatively certain: 1) Supply side: loose milk prices are rising, and 2H26 is highly likely to enter the right side of the raw milk cycle. Since May, the impact of foot-and-mouth disease has faded, dairy cow inventory continues to decline, and summer heat stress on cows is common, jointly constraining supply. From August to October, the upstream enters another silage season, which may further push inventory reduction. 2) Demand side: liquid milk demand has stabilized and rebounded since 2026. Although Q2 mass consumer product sell-through declined sequentially, from a marginal change perspective, June liquid milk sell-through accelerated compared to April-May, and full-year prosperity is expected to be better than last year. Meanwhile, dairy companies' deep-processing business capacity is ramping up, increasing milk consumption. The cycle reversal directly benefits upstream pastures while improving downstream industry structure and profitability. On the other hand, the dairy sector had previously lagged behind and saw chip clearing, benefiting from high-to-low switching: in 1H26, dairy sell-through growth was mediocre among food and beverage mass products, during which dairy cow inventory rebounded and milk production continued to grow, leading to a sector-wide pullback. As the cycle bottoms out and recovers, coupled with positive catalysts, the dairy sector has the ability to absorb capital. ...