Summary of China Shengmu's Conference Call Industry Overview - The dairy industry is experiencing weak raw milk demand and excess upstream capacity, but a price turning point is expected next year, potentially accelerated by improved downstream demand or large-scale upstream clearance [2][3] - Beef prices have significantly increased since the end of 2024 and are expected to continue rising in the second half of the year, reflecting optimistic market expectations [2][3] Company Strategy and Focus - China Shengmu is focusing on the organic dairy sector, aiming to increase its market share, with organic milk accounting for 80% of its products, while phasing out regular milk [2][10] - The company plans to enhance its specialty milk offerings, including A2 and DHA milk, which have a stable price premium of around 30% compared to regular products [2][10][12] - The company aims for a slight increase in livestock numbers and a production target of nearly 12.5 tons per cow in 2025, emphasizing animal welfare and sustainable practices [2][13] Financial Performance - The company has a strong financial position, having increased long-term loans and cash reserves to navigate the industry downturn effectively [4][23] - The average valuation of dairy cows is approximately 21,000 yuan, which is among the lowest in the industry, providing potential for increased profitability as beef prices rise [4][17] Market Position - Shengmu is a core supplier of organic milk to Mengniu, providing 80% of its organic raw milk needs, and holds a significant market share in the organic milk sector [4][9] - The company currently holds about 35% to 40% of the overall organic raw milk market, with a competitive landscape that includes other suppliers like Youyuan and several smaller firms [8][9] Pricing and Cost Structure - The current selling price for organic milk is around 4.4 to 4.45 yuan per kilogram, with a cost of approximately 3.1 yuan, resulting in a gross margin of about 29% for 2024 [22] - The company expects a slight decrease in gross margin for 2025, but overall profitability is anticipated to remain stable due to declining costs [22] Beef Business Development - The beef business is seen as a secondary focus, with plans to increase investment in specialty beef to enhance profit margins [5][28] - The company has begun to see profitability in its beef operations, with expectations for further improvement as beef prices continue to rise [26] Future Outlook - The company is optimistic about the growth potential of the organic milk market, despite a potential slowdown in growth rates compared to previous years [6][8] - Shengmu plans to maintain its focus on specialty milk and improve production efficiency to meet rising consumer demand [7][10] Challenges and Considerations - The company faces challenges in expanding its organic tea production capacity due to higher barriers compared to regular tea, but it has resources and systems in place to facilitate this transition [42][43] - Shengmu does not plan to expand its scale or import more cows during the current market downturn, focusing instead on optimizing its herd structure [35] Conclusion - China Shengmu is strategically positioned in the organic dairy market with a strong focus on specialty products and a solid financial foundation, while also navigating challenges in the beef sector and overall market conditions. The company is optimistic about future growth opportunities in the organic segment and is committed to sustainable practices.

Summary of the Conference Call for YouRan Dairy (优然牧业) Industry Overview - **Accelerated Culling in Dairy Industry**: Due to rising beef prices, financially pressured farms are accelerating the culling of dairy cows. It is expected that production capacity will clear more rapidly in Q3, although the overall raw milk output will not be significantly affected [2][3]. - **Consumer Recovery Expectations**: The upcoming Mid-Autumn Festival and National Day are anticipated to stimulate consumption, with social raw milk prices already showing an increase, indicating marginal supply-demand improvement. A moderate recovery in milk prices is expected by the end of the year to early next year [2][3]. Company Performance - **Stable Raw Milk Business**: In early July, the decline in raw milk prices narrowed. The company’s unique milk products account for a high proportion, leading to stable gross margins. Raw milk business revenue achieved mid-double-digit growth, outperforming the industry average [2][7]. - **Revenue Growth**: Overall revenue in the first half of the year showed steady growth, primarily driven by the raw milk business. However, the solutions business faced pressure due to the breeding cycle, impacting overall performance [2][8]. - **Gross Margin Improvement**: In the first half of 2025, the gross margin for the raw milk business increased by over 1 percentage point year-on-year, benefiting from a larger decline in feed and sales costs compared to raw milk prices [2][9]. Production and Capacity - **Stable Annual Production**: The company expects its annual raw milk production and sales to remain stable, with over 2 million tons produced in the first half of the year. The full-year target is set at 4 million tons, with a slight single-digit growth in stock expected by year-end [2][12][13]. - **Biological Asset Value Improvement**: The rise in beef prices has increased income from culling cows, reducing fair value fluctuations of biological assets. A positive profit trend is anticipated for the second half of the year, with a decrease in capital expenditures [2][14][15]. Market Trends and Pricing - **Raw Milk Demand and Pricing**: The first half of the year saw a 2% year-on-year decline in dairy product output, indicating weak consumption. However, seasonal factors and holiday consumption are expected to improve trends in the second half [5][6]. - **Collaboration with Yili**: YouRan Dairy is the largest producer of specialty milk in the country, with pricing based on cost-plus and profit contribution, collaborating with Yili to set prices annually. The company expects to increase the proportion of raw milk supplied to Yili to over 40% in 2025 [11][20][21]. Strategic Outlook - **Diversification of Downstream Clients**: YouRan Dairy has a three-year long-term agreement with Yili, ensuring a supply ratio of no less than 70%. The company is also open to expanding its customer base beyond Yili, with existing clients including Guangming and Junlebao [22]. - **Impact of Industry Policies**: Government policies have been supportive of both upstream and downstream sectors, with measures to assist small and medium-sized farms and subsidies for downstream dairy companies [24]. - **Long-term Demand from Deep Processing**: The domestic deep processing capacity for raw milk is expected to significantly enhance demand for raw milk, particularly as the consumption structure shifts from liquid milk to processed products [25]. Financial Considerations - **Capital Expenditure Trends**: Capital expenditures are expected to decrease this year, primarily due to reduced costs associated with new farm constructions and biological asset management [17][18]. - **Profitability and Dividend Plans**: The company will consider dividend distribution based on overall cash flow, prioritizing debt repayment due to high leverage. Shareholder returns will be a focus when appropriate [19]. Competitive Positioning - **Differentiation in Raw Milk Business**: YouRan Dairy's specialty milk accounts for nearly 30% of its raw milk business, significantly higher than competitors. The company offers a diverse range of specialty milk products, maintaining stable pricing and margins [26].

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.