Subsidy war encounters short-term self-consumption? Feihe's revenue is expected to decrease by 1 billion yuan in the first half of the year

"Milk Powder King" Feihe (6186.HK) faces pressure on mid-term performance.

In the first half of 2025, Feihe expects revenue of 9.1 billion to 9.3 billion yuan, a decrease of about 1 billion yuan compared to 10.1 billion yuan in the same period last year.

Net profit is expected to be around 1 billion to 1.2 billion yuan, a decline of 37.2% to 47.6% compared to 1.91 billion yuan in the same period last year.

The market reacted strongly, with Feihe's stock opening down nearly 15% today, hitting a low of 4.65 Hong Kong dollars during trading, a drop of over 18%.

Feihe attributes the main reason for the decline in performance to the fertility subsidy program launched in early April.

The program invests 1.2 billion yuan in special funds to provide a fertility subsidy of no less than 1,500 yuan in the form of free milk powder to eligible pregnant families nationwide, with an expected implementation period of about one year.

Pregnant women who have completed 26 weeks of pregnancy can apply for one can of maternal milk powder and five cans of high-end milk powder "Xing Fei Fan Zhuo Rui" in multiple installments after passing the review.

In June, Feihe further launched the "He Li New Customer 2.0" campaign, expanding the subsidy scope to families with babies under 12 months old who have not purchased Feihe infant formula milk powder.

Since the subsidized products can only be shipped directly from the manufacturer to consumers, the related policy has objectively weakened the performance contribution of traditional sales channels.

In addition, some subsidized products did not reach end consumers and flowed into the market through second-hand platforms, further impacting the pricing system.

Feihe stated that to ensure the freshness and health of products on retail shelves, it actively reduced the channel inventory level of infant formula milk powder in the first half of the year. The inventory adjustment is expected to end in the third quarter of 2025.

Market views suggest that the fertility subsidies from milk powder companies have limited impact on driving sales growth and are more seen as a marketing strategy aimed at capturing market share and reaching a broader potential user base.

Within a month of Feihe announcing the fertility subsidy, Yili (600887.SH) and Junlebao quickly followed suit, launching a 1.6 billion yuan subsidy for their high-end star products.

The continued increase in subsidies by leading companies is a direct reflection of the intense competition in the infant formula milk powder market.

In 2024, benefiting from the "Dragon Baby" effect leading to a small peak in births, Feihe temporarily reversed two consecutive years of revenue decline, with revenue returning to over 20 billion yuan.

However, it still faces the long-term challenge of a continuous decline in the birth population.

Dongxing Securities analyst Su Cheng believes that the rebound in the birth population in 2024 is expected to drive the expansion of the second-stage infant formula market, with demand continuing to show marginal improvement in 2025, and the sales decline is expected to narrow from 6% to 1.2%.

From January to April 2025, the total sales of infant formula milk powder in the domestic market grew by 2.3% year-on-year.

The growth momentum is mainly contributed by "price increases."

While sales of ultra-high-end and high-end products declined, the ultra-high-end + milk powder segment saw a year-on-year growth of 13.3%, accounting for more than one-third of the overall market.

Driving the product structure upgrade to higher price ranges is the key contributing factor to Feihe's current performance growth.

In 2024, Feihe's average price per can of milk powder increased by over 40 yuan, with the ultra-high-end product line exceeding 450 yuan/kg Starry Fly's sales of Zhuorui surged 62% last year to 6.7 billion yuan, accounting for over 35% of the infant formula business, replacing the classic Starry Fly as the top product.

Thanks to product structure upgrades and a decline in raw milk prices, Feihe's gross margin increased by 1.5 percentage points to 66.3%.

Reducing subsidies to continuously adjust profits may also be a necessary operation.

By the end of 2024, Feihe will lower the "electronic fence" red envelope for Starry Fly Zhuorui Stage 1 and Stage 2 from 20 yuan per can to 15 yuan per can, effectively increasing the price by 5 yuan per can.

For the full-year performance, Feihe still expects to achieve low single-digit growth, maintaining a stable dividend policy, with an expected total dividend distribution of no less than 2 billion yuan in 2025, and announcing a 1 billion yuan share repurchase plan.

However, these repurchased shares will not be canceled but are intended for subsequent sale or employee equity incentives.

This move indicates Feihe's long-term commitment to future development, but the "non-cancellation repurchase" wavering seems to corroborate its lack of unconditional support for the current price