China Pet Food – Growth Outruns Profitability

China’s pet food market continues to expand, but stronger demand has yet to convert into better economics. Industry leaders such as Gambol Pet and China Pet Foods are actively cultivating proprietary brands, but the heavy costs for brand and channel building are eating up most of the marginal benefit from the incremental sales.

Gambol and China Pet Foods follow distinctly different business models. Gambol (301498 SZ, RMB41.40, RMB16.6bn) has been shifting its product mix toward branded staple pet food. During 1H26, revenue from staple food rose 24% YoY to RMB2.3bn, lifting its share of total revenue by roughly 7.4ppts to 65.8%. The segment delivered a GPM of 42.6%, well above that of pet snacks (35.2%). Among that, direct sales through third-party e-commerce platforms, including Tmall, Douyin and JD.com, increased by 3.4ppts to 41.2% of total revenue, mainly through the Myfoodie and Fregate brands. This strategy yields higher margins but requires heavier marketing spending. Gambol’s selling expenses stood at 24.3% of revenue, while promotional spending represented more than 60% of selling expenses and increased 44.4% YoY. Its brand investment is growing much faster than revenue, pointing to higher customer acquisition costs and weaker marginal returns.

China Pet Foods (002891 SZ, RMB29.62, RMB9.5bn) is on the other end of the value chain which focuses on overseas OEM and ODM orders.  While it is also actively developing several proprietary brands, it saw moderate sales gain both domestically and overseas in 1H26, up 33.2% YoY and 35.8% YoY, respectively.  However, GPM of overseas sales fell 8.6ppts to 19.4% compared to the 38.1% generated by the domestic market.  This divergence of profitability is the key factor for the company to expand its own brands.  Similar to Gambol, the cost for brand development is still high compared to the yet small revenue base of its own brands, with a sharp increase in selling expenses dragging on overall profitability.

The deterioration extended beyond the income statement. The process of brand building requires ample cash resources.  Gambol remained cash-generative, but OCF declined 49% YoY in 2Q26 and 57% to RMB151mn in 1H26, equivalent to 79% of attributable net profit. On the other hand, China Pet Foods recorded negative OCF for two consecutive quarters, with a 1H26 outflow of RMB193mn despite attributable net profit of RMB127mn. Rising receivables and inventories weakened cash conversion. After capital expenditure, the FCF stood at negative RMB289mn for Gambol and negative RMB474mn for China Pet Foods, leaving the latter under greater pressure.

Expansion Is Increasing Balance Sheet Pressure: Investment in production capacity, warehouse infrastructure and supply chains are also increasing their financial burdens. Gambol’s interest-bearing debt increased 2.4x from RMB370mn at end-2025 to RMB1.26bn (18% of total assets). China Pet Foods’ debt rose approximately 22% from RMB1.52bn to RMB1.86bn (29% of total assets). Gambol nevertheless held more than RMB2.1bn in cash and other highly liquid financial assets, comfortably covering its debt. China Pet Foods has less financial flexibility given its negative OCF, higher short-term borrowings and continued capital expenditure.

Our View: Currently, pet food in China is still a fragmented market, the relatively lucrative profit is attracting newcomers.  It is also a consumer segment that is isolated from the low birth-rate.  As such, consumer giants such as Yili and Mengniu are already stepping up their investment in this segment.  Looking ahead, it is believed that an established brand and sales network are key to success.  Moreover, with deep pocket players now in the arena, successful brands can easily become acquisition targets. Gambol is trading at 29x FY26E P/E and China pet is trading at 27x FY26E P/E. (Research Department)