Pace of recovery in the China dairy sector has been stepping up. While the market competition remains fierce, the market leaders have seen a rising market share gain; and the industry sales growth has been improving well (to 6-7% in the second quarter of 2017). Following the aggressive price war due to the adverse impact from the supply glut of raw milk as seen last year, the competitive landscape of the industry returns to a better shape this year. Further, with the implementation of the "two-child policy" last year, a new round of baby boomers is set to drive more demand for all types of dairy products. Currently, compared to the global per capita consumption of dairy products, the per capita consumption in China remains low. In particular, the per capita consumption of dairy products in the rural area is less than half of those in the urban area. With increasing income growth, this is set to become a rising growth engine for China’s dairy product sector. In light of all these, we recommend investors to accumulate the leading China dairy stocks.