Flush with cash and high dividends, China Feihe still needs new growth drivers.

Many value investors have regarded China Feihe (6186.HK) as the "Moutai in the milk powder industry". With its strong strength of being the market share leader and having a gross profit margin of over 70%, it has held the top position in the industry for six consecutive years and is the most sought-after growth benchmark during the golden period of domestic milk powder.

However, its stock price has dropped from a high of about HK$25.7 in 2021 to about HK$3.2 in May 2026, a decline of up to 87%, and its market value has evaporated by tens of billions.

As the number of newborns in China has continuously declined from 12 million to 7.92 million, the infant formula milk powder industry has completely shifted from an incremental to a stock competition. This once glorious enterprise is now at a turning point.

The management has repeatedly described the transformation blueprint of "full-life cycle nutrition", attempting to transform from a leading infant formula milk powder company to a nutrition expert covering all age groups. However, the reality is that the highly anticipated second growth curve has not taken shape for a long time. Against the background of continuous pressure on the main business, the company's resource allocation logic has attracted the market's attention to its long-term competitiveness.

Is Feihe's transformation a steady layout to cross the cycle or a passive move due to weak growth? Can its "second curve" really take shape?

01 The Dividend Fades, Seeking New Growth

In the past decade, Feihe's growth logic was simple and clear.

That is, by seizing the newborn dividend, the wave of domestic substitution, and the expansion of the sinking channels, it established itself as the number one in the industry with high-end infant formula milk powder.

From 2016 to 2021, the company's revenue, gross profit, and market share all climbed simultaneously, making it the most representative growth target during the industry's golden period.

Since 2021, the underlying logic of the industry has changed. The number of newborns has continued to decline, and the infant formula milk powder market has officially entered the stage of stock competition from incremental expansion. The previous model of "product distribution leads to sales and payment leads to growth" no longer holds. Terminal inventory is high, channel profits are thinning, and price competition is intensifying. Naturally, Feihe's main business growth has hit the ceiling.

Therefore, in the face of the peak of the main business growth, the company proposed the "full-life cycle nutrition" strategy, incorporating adult milk powder, children's cheese, baby food, and milk protein raw materials into the new business system, attempting to transform from a "leading infant formula milk powder company" to an "all-age nutrition expert". From a strategic perspective, this layout conforms to the trend of population structure change, and the silver economy and children's nutrition tracks have long-term potential.

In terms of industry potential, the adult milk powder market is not a niche track. According to Euromonitor data, the domestic adult milk powder market size has exceeded 30 billion yuan, with an annual growth rate of 8% - 10%, far higher than the single-digit growth of infant formula milk powder. It is one of the few high-certainty incremental tracks in the dairy industry.

The market has proven that adult milk powder can be profitable, but that's someone else's profit statement. What about Feihe's?

Source: Flush

Judging from Feihe's implementation data, the transformation is still in the early climbing stage.

In 2025, the new business revenue was 2.06 billion yuan, with a growth rate of 36.1%, but its revenue accounted for only 11.4%, and its contribution to the overall performance was still limited. More importantly, the new business has not yet established a stable profit model, with a gross profit margin of only 1%, and is in the investment stage of "having volume but no profit".

When communicating with the Investor Relations Department of China Feihe, the management made it clear that the layout of children's cheese products and adult milk protein products is still in the early development stage, and the overseas infant formula milk powder business is also in progress. It is indeed necessary to build a second growth curve now, but in the past few years, it is necessary to stabilize the main business first and then expand into other fields.

Transformation requires money. Where does Feihe's money come from and where does it go?

First, let's look at the change in the profitability of the main business. In 2020, Feihe's gross profit reached a peak of 15.5 billion yuan; after that, it declined year by year, dropping to 11.5 billion yuan in 2025, evaporating 4 billion yuan in four years.

Source: Flush

Although the main business is shrinking, Feihe is not short of money. With an ultra-high gross profit margin of 73.5% in the infant formula milk powder business, Feihe has accumulated sufficient cash in the past few years. Even in 2025 when the main business was under pressure, the net cash flow from operating activities still reached 2.214 billion yuan, and the cash and cash equivalents at the end of the year were 7.54 billion yuan. The foundation of the leading infant formula milk powder company is still generating cash continuously.

Where does the money mainly go? There are two outlets.

First, sales. In 2025, the sales expenses were 7.162 billion yuan, with an expense ratio of 39.5%.

Second, dividends. In 2025, the dividends were 2.03 billion yuan, accounting for 92% of the operating cash flow.

To make an adult dairy product, continuous investment is required at every step, from formula research and development to channel construction and brand awareness building.

Source: Flush

In terms of research and development, Feihe's R & D expenses from 2022 to 2024 were 493 million yuan, 611 million yuan, and 585 million yuan respectively, with R & D expense ratios of 2.31%, 3.13%, and 2.82% respectively. Compared with sales expenses and dividends, this level of R & D expenses is not much.

02 Dividends First

Let's look at another chart.

Source: Flush

From the trend of the operating cash flow in the past decade, it can be clearly seen that 2020 was the peak period of its cash flow, and it was also the best time for the overall market of the infant milk powder industry. The market demand was strong, the terminal payment collection was smooth, and the cash flow that the enterprise actually received reached the peak.

Since 2020, the company's operating cash flow has continued to shrink, which is the result of the combined effect of the industry cycle and business strategy. It further reflects that the infant milk powder market has completely shifted from incremental expansion to stock competition, and the industry involution has intensified.

To stabilize the channels and market share, Feihe had to relax the payment terms for dealers, increase terminal promotion efforts and channel subsidies. As a result, after the products were sold, the cash collection speed slowed down significantly, and a large amount of funds were tied up in the circulation link, directly leading to a continuous decline in the operating cash flow.

However, Feihe is not without a trump card for breakthrough: although the operating cash flow has narrowed, the company has sufficient cash on the books, a low asset - liability ratio, and an extremely stable financial structure; at the same time, it has the technology of fresh extraction of milk protein, the Canadian factory has been put into production, and there is room for breakthrough in the overseas market.

Source: Flush

From the continuous decline of the asset - liability ratio, it can be clearly seen that Feihe's financial foundation is constantly being strengthened. In 2018, the company's asset - liability ratio was close to 50%, and by 2025, it had dropped to about 23.3%. It has been continuously reduced in eight years, with very little debt pressure. Coupled with the cash reserve of 7.54 billion yuan on the books, the company has strong anti - risk ability and financial safety margin.

This just confirms that Feihe is not short of money.

Against the background of shrinking operating cash flow and slowdown in reinvestment, the company's capital flow is clear, that is, to give priority to rewarding shareholders.

Behind this arrangement is the clear strategic inclination of the management. The main business has reached its peak, and the return on investment for large - scale expansion is too low; the new business has a long profit cycle and high uncertainty. Instead of making inefficient reinvestment, it is better to distribute the cash to shareholders first.

In the communication with the company's Investor Relations Department, this idea was directly confirmed. When asked "whether the capital market will increase the dividend payout", the staff clearly stated that the company currently has relatively sufficient cash on the books, and the main uses are for subsequent continuous dividends, share repurchases, and potential industrial mergers and acquisitions.

At the same time, they also admitted that in 2025, almost all the profits of that year were used for dividends. In the future, depending on the operating situation and stock price performance, there is no ruling out the possibility of further increasing the dividend payout ratio. Previously, the company's CFO also publicly gave guidance that on the premise of sufficient cash, the dividend return to shareholders will be continuously improved.

Source: Flush

This means that Feihe's dividend is a stable and continuous cash distribution strategy.

In contrast, competitors in the adult nutrition track are accelerating continuously. Yili's adult milk powder has a market share of 25%, ranking first for 11 consecutive years, and functional products contribute more than half of the growth. Mengniu's Yourui series has topped the all - channel list, and the online channel has seen rapid growth.

Feihe's goal in 2026 is to achieve an adult nutrition revenue of 400 million yuan and turn a profit. To go from a 1% gross profit margin to break - even, it needs to increase by 5 - 8 percentage points. This requires continuous efforts in all aspects.

Back to the core question at the beginning: Can Feihe's "second curve" succeed?

The answer does not depend on whether the technology is advanced or whether the track is broad, but on whether the enterprise can truly restructure its resource allocation.

Before that, Feihe will still be in the transformation transition period of "sufficient in maintaining the status quo but lacking in breakthrough", and the real implementation of the second growth curve still has a long way to go.

This article is from the WeChat official account "Financial Thinking and Sharing Community", author: Financial Thinking and Sharing Community. Republished by 36Kr with permission.