Summary of the Conference Call Company and Industry Overview - The conference call discusses the dairy industry in China, specifically focusing on the company China Shengmu (中国圣牧) and its operations in the dairy farming sector, including milk and beef cattle production. Key Points and Arguments Dairy Cattle Market Dynamics - **Slower Culling Rate**: The culling rate of dairy cows has slowed down due to stable sales channels, alleviated cost pressures, high raw milk prices, and rising beef prices. The market turning point may be delayed until 2026 [2][3][4]. - **Raw Milk Prices**: The price of raw milk is expected to remain low, with some farms potentially opting for quicker culling under current beef prices [5][6]. - **Profitability Challenges for Social Farms**: Social farms face significant profitability challenges, with a breakeven point around 3 RMB/kg for raw milk. Including calf costs leads to widespread losses [2][7][8]. Beef Cattle Market Influence - **Rising Beef Prices**: Beef prices have increased from 14-15 RMB/kg to approximately 19 RMB/kg, prompting some farms to cull inefficient dairy cows. However, some farmers are holding out for a milk price recovery [9][10]. - **Market Strategy Adjustments**: Social farms are adjusting their strategies more flexibly, with some opting to shift towards beef cattle farming due to better market certainty [9][12]. Financial and Credit Environment - **Tightened Bank Credit Policies**: Banks have become stricter with credit policies compared to last year, although support may still be available for farms with stable sales channels [14][15]. - **Feed Supply Issues**: Many social farms faced low feed reserves last year, leading to feed shortages and potential quality issues [16][17]. Market Expectations and Price Fluctuations - **Divergent Expectations on Milk Price Recovery**: There are differing opinions on when milk prices will recover, with some expecting a rise in Q3 or Q4 of 2025, while others believe it may take longer [4][18]. - **Impact of Downstream Dairy Companies**: The strategy of downstream dairy companies regarding milk collection significantly impacts farm cash flow, often more than milk price fluctuations [4][20]. Cost Structures and Profitability - **Cash Cost Composition**: The cash cost of fresh milk is complex, with current costs around 2.3-2.4 RMB/kg excluding calves, and approximately 3 RMB/kg including calves [35][36]. - **Profitability Under Current Prices**: At current milk prices (around 3 RMB/kg), farms are likely operating at a loss, with losses estimated between 0.1 to 0.5 RMB/kg depending on calf numbers [36]. Future Outlook - **Potential for Price Stabilization**: If demand conditions do not change significantly, a clear turning point in the fresh milk market is unlikely in the short term, with potential stabilization only expected in early 2026 [5][23]. - **Beef Price Impact on Industry**: A significant increase in beef prices in 2025 could positively affect the entire industry, while stable prices would maintain market balance [32]. Specialty Milk Products - **Organic and Specialty Milk**: The company has a strong focus on organic milk, with about 75-80% of its products being organic. The company aims to increase the proportion of specialty milk to counteract low ordinary milk prices [42][43]. Other Important Insights - **Market Structure and Trends**: The average dairy cow's production cycle and culling age are around 2.9 lactations and 5 years, respectively, indicating a relatively short production cycle driven by economic factors [40][41]. - **A2 Milk Production**: A2 milk production has lower barriers but currently faces limited market demand, with only one farm producing it [44][45]. This summary encapsulates the key insights from the conference call, highlighting the challenges and dynamics within the dairy industry, particularly for China Shengmu.

Group 1 - The core viewpoint is that the dairy price has stabilized at the bottom, with an inflection point expected soon, as indicated by the recent data from the Ministry of Agriculture and Rural Affairs showing the raw milk price at 3.07 CNY/kg, which has been fluctuating slightly for about 11 weeks [1] - Modern Dairy's data supports this, with a projected raw milk price of 3.61 CNY/kg in 2024, reflecting a year-on-year decrease of 10.4%, but the decline is narrowing, with a forecasted price of approximately 3.56 CNY/kg in the second half of 2024, indicating a low single-digit decline [1] - The industry is showing signs of a cyclical bottom, with a continuous reduction in the cattle supply, as evidenced by the monthly decrease of about 40,000 heads, leading to an expected cattle population of 5.8 to 5.9 million by the end of the year [1] Group 2 - Modern Dairy has demonstrated significant cost control effectiveness, with the cost of milk per kilogram dropping to 2.53 CNY, a year-on-year decrease of 13.4%, particularly in feed costs which fell by 16.7% to 1.95 CNY/kg [2] - The company is expected to see further reductions in feed costs, with a projected decrease of about 6.9% to 1.88 CNY/kg in the second half of 2024, while other costs remain stable at 0.58 CNY/kg [2] - This comprehensive cost optimization has resulted in an increase in the gross profit margin for raw milk business to 31.2%, up 2.8 percentage points year-on-year, showcasing the management's ability to control costs and maintain operational resilience [2] Group 3 - The industry is experiencing a significant Matthew effect, with the top 20 dairy companies increasing their milk production by 14.9% despite a 2.8% decline in national milk production in 2024 [3] - Modern Dairy's market share is increasing, with raw milk sales reaching 2.893 million tons in 2024, a year-on-year growth of 13.6%, and an expansion in the breeding scale to 491,000 heads, up 9% [3] - The company is expected to enter a dual growth cycle of volume and price increase once milk prices begin to rise [3] Group 4 - Revenue forecasts for Modern Dairy are projected at 14.44 billion CNY, 15.28 billion CNY, and 16.06 billion CNY for 2025-2027, with net profits of 310 million CNY, 750 million CNY, and 1.1 billion CNY respectively [3] - The estimated EPS for 2025-2027 is 0.04 CNY, 0.10 CNY, and 0.14 CNY, with a target price set at 1.3 HKD based on an increased valuation due to the anticipated industry reversal [3]