Key takeaway

SANYUAN is the leading liquid milk company in Beijing, consistently ranking first by liquid milk market share in the city. At the industry level, an inflection point in the raw milk price cycle is approaching, and the industry is expected to bottom out and stabilize in 2H26. The company's self-owned milk sources account for more than 70% of its supply, reaching 100% in Beijing. Its profit offers upside potential amid the industry recovery, while easing competition at the consumer end will help SANYUAN unlock the benefits of its reforms. At the company level, the new management team has advanced organizational reforms since 2024. It has substantially streamlined headquarters staffing, scaled back loss-making operations outside Beijing, phased out inefficient SKUs, focused on Beijing and strengthened its presence in the chilled dairy segment. It has launched flagship chilled products, including SANYUAN Beijing Fresh Milk and SANYUAN Beijing Yogurt, and revitalized brand awareness through multiple initiatives. Its market share in Beijing is expected to continue recovering. Meanwhile, the company is increasing investment in Baxy ice cream, while Beijing McDonald's contributes additional profit. The company has ample room to unlock earnings potential, and we remain firmly optimistic about this round of reforms at SANYUAN.

Event

The company released 1H26 earnings results

In 1H26, the company recorded revenue of RMB3.468bn, up 4.11% YoY, and net profit attributable to shareholders of the parent company of RMB185mn, up 1.15% YoY. In 2Q26, the company recorded revenue of RMB1.748bn, up 3.77% YoY, and net profit attributable to shareholders of the parent company of RMB85mn, down 10.98% YoY.

Quick Take

Strong main business growth, but dragged down by Beijing McDonald's

By product, ice cream and solid dairy products delivered strong growth in 2Q26, rising 18.04% and 7.68% YoY, respectively. Liquid milk declined slightly by 3.22%, with the decrease narrowing from 1Q26. Sales of SANYUAN Beijing Fresh Milk increased 61.6% YoY in 1H26.

By region, revenue in Beijing increased 11.2% YoY in 2Q26, accelerating from 1Q26, driven by new products such as SANYUAN Beijing Fresh Milk. Revenue outside Beijing declined 1.4% YoY in 2Q26, as growth driven mainly by Baxy ice cream was offset by the contraction in ambient liquid milk.

In 1H26, the company's e-commerce business grew 26% YoY, while its school milk business grew 19% YoY. It launched the company-level “Fresh Delivery to Every Household” strategic initiative and established a dedicated task force to advance the development of an integrated three-pronged operating system. More than 4,000 new retail outlets were added to its distribution network in 1H26. The revenue contribution from the cus tomized OEM business became evident. The company continued to deepen strategic cooperation with major customers such as Walmart and Freshippo, while projects including #“Walmart Fresh” achieved strategic breakthroughs.

Beijing McDonald's recorded 1.6% YoY revenue growth and an 11.4% YoY decline in net profit in 1H26, creating a notable drag on the company's investment income. In 1H26, the company recorded investment income of RMB72.55mn, down approximately RMB12.61mn YoY.

Wider gap between gross margin and selling expense ratio, with net margin dragged down by investment income

Gross margin was 21.29% in 2Q26, down 3.44 pcts YoY, mainly due to changes in the business mix and logistics costs. The selling expense ratio improved significantly, down 3.96 pcts YoY, reflecting more efficient marketing spending. In 2Q26, the gap between the company’s gross margin and selling expense ratio was 7.0%, up 0.52 pcts YoY, indicating continued improvement in its main business. The administrative expense ratio edged down in 2Q26, reflecting the results of leaner management. Financing expense increased due to higher foreign exchange losses. The company’s net margin attributable to shareholders of the parent company was 4.84% in 2Q26, down 0.8 pcts YoY, mainly dragged down by investment income.

Clear reform direction and a completely renewed outlook

In its 2025 annual report, the company elaborated on its operating approach and plans, including developing strategic flagship products, revitalizing its brand strategy, focusing on retail outlets in Beijing, implementing a T-shaped channel strategy, and strengthening its talent foundation. It remains firmly focused on Beijing, chilled products, and special channels. The cover title of the company’s annual report was also changed t o “Strive and forge ahead to start a new venture; unite as one to build a new Sanyuan,” unde rscoring its clear reform direction. We believe Sanyuan is currently in the early stage of reform. Its team is being restructured and new products are being launched successively. As measures to improve management efficiency, optimize products and channels, and streamline assets are gradually implemented, the company is expected to unlock substantial profit potential and revitalize its brand.

Earnings forecast and investment recommendation: Revenue is expected to reach

RMB6.601bn/RMB7.066bn/RMB7.540bn in 2026–2028, while net profit attributable to shareholders of the parent company is expected to reach RMB316mn/RMB399mn/RMB466mn. We assign “buy” rating.

Risks:

1. Food safety: Food safety is always the focus of consumers. Although the company has continuously improved production quality control levels, since it involves many links and enterprises, there are still food quality and safety risks.

2. Risk of continued decline in raw milk prices: Direct materials account for a relatively high proportion of dairy product costs, among which raw milk and milk powder represent a large share. In recent years, oversupply of upstream raw milk has driven continuous declines in raw milk prices, causing impairment losses from spray-drying milk into powder and other items, which will affect the company's profitability.

3. Slower-than-expected easing of competition: Competition among dairy companies may intensify, leading to continued growth in market expenses such as advertising and promotions, which will affect the company's profitability.