UOB Kay Hian (Hong Kong) Limited
Date of Report: 25 June 2025

Greater China Market Outlook: Dairy Sector Faces Headwinds, Hong Kong Landlords Poised for Recovery

Market Overview and Key Indices Snapshot

The Greater China region presents a mixed landscape for investors as of late June 2025. Major global indices have shown resilience, with the Dow Jones Industrial Average closing at 43,089 (+1.2% day-on-day), S&P 500 at 6,092.2 (+1.1%), and the Hang Seng Index (HSI) standing out with a robust 2.1% daily gain and an impressive 20.5% year-to-date increase. The Hang Seng China Enterprises Index (HSCEI) is up 1.9% on the day, also boasting a 20.2% YTD return.

Key economic events ahead include China’s May Industrial Profits, Q1 Balance of Payments, and June PMI data, as well as Hong Kong’s May trade balance and money supply figures.

Sector Update: Dairy – China

Weak Retail Demand and Temporary Supply-Demand Balance

The Chinese dairy sector faces persistent challenges with retail demand for room temperature products remaining weak on a quarter-to-date basis. This sluggish demand is prompting leading dairy companies to adopt a cautious approach to shipments. Despite this, a sequential topline improvement is anticipated for Q2 2025 over Q1, largely due to the low base effect.

• Premium products continue to outperform basic offerings, reflecting Chinese consumers’ ongoing appetite for high-nutrition and diversified dairy products, even amid broader macroeconomic headwinds.
• Other segments, such as chilled products and milk formula, have managed to post positive growth year-to-date.

Margins Supported by Efficiency Gains

While top-line growth is under pressure, operational efficiency initiatives are expected to help maintain margins. Mengniu targets a stable operating margin, while Yili aims for a 9% net margin in 2025.

Raw Milk Market: Approaching Equilibrium

The supply-demand dynamics for raw milk have improved, with prices falling by low single digits year-to-date and high single digits year-on-year. A temporary balance is expected in Q3 2025, coinciding with anticipated stronger holiday demand. However, this outlook is clouded by uncertainty around the pace of consumer recovery and adjustments in upstream capacity.

ToB Segment: Customisation as a Growth Opportunity

Dairy companies’ business-to-business (ToB) segment remains a minor contributor (low-to-mid single digits of revenue), but domestic brands are making headway against foreign competitors by offering customised processed products tailored to client needs.

Sector Downgrade and Top Picks

Given the subdued demand environment, the sector rating is downgraded from Overweight to Market Weight. Mengniu remains the top pick, praised for its focus on operational efficiency and a commitment to stable dividend payouts.

Earnings Revision and Valuation

• Mengniu (2319 HK): 2025/26 revenue forecast cut by 2%/3%, reflecting weak demand and losses from associate China Modern Dairy. Earnings forecasts lowered by 15% (2025) and 10% (2026). Target price reduced by 3% to HK\$23.00 (18.7x 2025F PE, 15.9x 2026F PE).
• Yili (600887 CH): 2025/26 revenue forecast cut by 1%/1%; gross margin and selling/distribution expense ratios also revised. Earnings estimates lowered by 11% (2025) and 9% (2026). Target price down 4% to RMB 31.80 (19.0x 2025F PE, 17.0x 2026F PE).
• Feihe (6186 HK): BUY rating and target price of HK\$6.80 maintained, implying 14.5x 2025F PE, 13.8x 2026F PE. Currently trades at 11.9x 2025F PE.

Raw Milk Prices Trend

Raw milk prices have steadily declined since early 2023, providing some relief to producers, but ongoing monitoring is warranted as volatility remains possible.

Sector Update: Hong Kong Landlords

Liquidity Improvements, Falling Finance Costs, and Local Spending Trends

Despite headwinds such as a 2.3% year-on-year drop in retail sales (April 2025) and a peak vacancy rate of 11.8% (end-2024), signs of recovery are emerging for Hong Kong landlords:

• Per capita spending by overnight visitors increased by 0.9% quarter-on-quarter to HK\$5,539 in Q1 2025, marking the first sequential increase since 2023.
• Total restaurant receipts rose 1.7% qoq in Q1 2025, with non-Chinese restaurants seeing a 15.3% qoq and 2.4% yoy gain, even as Chinese restaurants declined 6% qoq.
• The average 1-month HIBOR dropped to 2.95% year-to-date, down 143 bps from the 2024 average of 4.38%, easing financing costs for property owners.

Market Weight Upgrade and Stock Recommendations

The sector outlook is upgraded to Market Weight, with expectations of further improvement in retail sales and profitability in the second half of 2025, driven by improved liquidity, a lower risk-free rate, and potential US rate cuts.

Impact of Lower HIBOR on Landlords’ Earnings

A scenario analysis shows that Wharf REIC, with the highest exposure to floating rate debt, stands to benefit most from lower HIBOR:

*Assumed 100% HKD debt due to high Hong Kong asset exposure.

Stock-Specific Actions and Forward Dividend Yield Analysis

• Wharf REIC (1997 HK): Upgraded to top pick, target price raised 10.7% to HK\$26.50 (targeted 2025 dividend yield: 4.8%). Wharf is best positioned to benefit from lower finance costs and holds premium core-location assets.
• Link REIT (823 HK): Target price up 8% to HK\$48.48 (FY26 yield: 5.5%), reflecting lower cost of equity assumptions.
• Hysan Development (14 HK): Target price increased by 9% to HK\$15.43 (2025 dividend yield: 7.0%).

Traders’ Corner: Featured Stock Opportunities

China International Capital Corporation (3908 HK)

• Trading Buy Range: HK\$17.18 – HK\$17.30
• Last Price: HK\$17.14
• Target Price: HK\$18.24 / HK\$19.40
• Protective Stop: Below HK\$16.00
• Highlights: Q1 2025 revenue surged 47.7% YoY to RMB 5.72bn; net profit attributable to shareholders up 64.9% YoY to RMB 2.04bn.
• Technical View: Share price above major moving averages, positive momentum indicated by RSI and MACD. Potential for further upside if it recovers to November 2024 highs. Average holding period: around two weeks.

Cathay Pacific Airways Limited (293 HK)

• Trading Buy Range: HK\$10.48 – HK\$10.58
• Last Price: HK\$10.56
• Target Price: HK\$11.10 / HK\$11.66
• Protective Stop: Below HK\$10.00
• Highlights: May passenger numbers up 36.1% YoY; available seat kilometres grew 31.2% YoY.
• Technical View: Support found above 50-day MA; RSI indicates strengthening momentum. Positive technical signals suggest recent downtrend may have ended. Average timeframe: around two weeks.

Macroeconomic and Commodity Assumptions

• CPO (RM/mt): 2024: 4,180; 2025F: 4,500; 2026F: 4,000
• Brent Crude (US\$/bbl): 2024: 80.0; 2025F: 70.0; 2026F: 67.0

Conclusion: Sector Strategies for the Second Half of 2025

Investors should remain vigilant amidst persistent retail headwinds in China’s dairy sector and signs of a nascent recovery among Hong Kong landlords. While operational efficiency and margin management provide a lifeline for dairy companies, the property sector in Hong Kong is set to benefit from improving liquidity, lower borrowing costs, and a potential rebound in local consumption and retail sales. For both sectors, active stock selection and close monitoring of macroeconomic trends will be key to capturing upside opportunities in the months ahead.