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.

Investment Rating - The report assigns a "Buy" rating to the company, Modern Dairy, with a target price of HKD 1.59 per share, corresponding to a 1.09 times P/B ratio for 2025 [7][11][17]. Core Insights - The company is positioned as a leader in the dairy industry, benefiting from a cyclical recovery and demonstrating strong earnings elasticity. The report anticipates a rebound in raw milk prices and a return to supply-demand balance in the second half of 2025 [3][11][53]. - The company has implemented a cost leadership strategy across its entire supply chain, which includes feed production, dairy farming, and processing, aiming to reduce procurement costs and enhance operational efficiency [11][20][45]. Financial Summary - Total revenue projections for 2025-2027 are estimated at RMB 133.50 billion, RMB 145.99 billion, and RMB 163.47 billion, reflecting growth rates of 0.7%, 9.4%, and 12.0% respectively. The net profit for the same period is expected to be -RMB 5.80 billion, RMB 4.38 billion, and RMB 15.84 billion, with EPS of -0.07, 0.06, and 0.20 yuan per share [5][16][19]. - The gross margin is projected to improve from 26.0% in 2024 to 33.6% by 2027, driven by cost reductions and increased milk prices [5][19]. Industry Position - Modern Dairy holds a 7% market share in the dairy industry as of 2024, with a significant portion of its raw milk sales being secured by its major shareholder, Mengniu Dairy, which has consistently purchased over 90% of the company's raw milk [11][32][20]. - The company has expanded its operations through acquisitions and innovative leasing models, allowing for low-cost expansion and increased production capacity [20][32]. Operational Efficiency - The company has focused on optimizing its herd structure, increasing the proportion of productive cows, and enhancing milk yield through digital management systems. The average milk yield per cow is expected to exceed 13 tons in the first half of 2025 [60][11]. - Cost control measures have led to a significant reduction in feed costs, with the cost per kilogram of milk dropping by 16.7% year-on-year to RMB 1.95 in 2024 [45][46].

Summary of China Shengmu's Conference Call Company Overview - **Company**: China Shengmu - **Industry**: Organic Dairy Market in China Key Points and Arguments Market Demand and Growth - The demand for organic milk in China is growing, benefiting Shengmu as the largest organic farm in the country due to consumer preference for high-end, healthy products [2][3] - The optimistic market outlook is supported by rising per capita consumption levels, which will further drive the organic milk market [2] Raw Milk and Beef Prices - Raw milk prices have been declining since 2021, but the rate of decline has slowed, with prices expected to stabilize as production capacity nears clearance [2][4] - Beef prices have rebounded since 2023 due to anti-dumping policies and supply shortages, significantly improving Shengmu's profit performance [2][4] Financial Projections - Shengmu is expected to incur losses in 2025 but conservatively estimated to achieve a profit of approximately 400 million yuan in 2026, corresponding to a PE ratio of about 5 times, indicating significant valuation upside compared to peers [2][6] - The company maintains a gross margin of around 30% and exhibits strong financial metrics, including cash ratios [2][4] Competitive Advantages - Shengmu's raw milk sales price has consistently remained around 4 yuan, with a high proportion of specialty milk (organic, A2, etc.) enhancing its defensive and operational resilience during price downturns [2][24] - The geographical advantage of being located in the Ulan Buh Desert provides ample underground water and fertile soil, supporting feed crop cultivation [2][25] - The partnership with Mengniu ensures stable milk supply, with a structure requiring over 80% of milk to be supplied to Mengniu [2][22] Industry Dynamics - The Chinese dairy processing industry is characterized by a fragmented upstream supply of dairy farms, while midstream and downstream sectors are dominated by major players like Yili and Mengniu [2][7] - The scarcity of upstream breeding resources is pushing the industry towards larger-scale operations, with only about 2% of farms having over 100 cows as of 2022 [2][8][9] Future Trends - The global organic food market is valued at hundreds of billions, with China's market expected to continue double-digit growth, indicating a strong future for high-end organic products [2][21] - Shengmu's unique position as the first brand to receive dual organic certification from China and the EU enhances its market standing [2][23] Profitability and Valuation - The stabilization and potential rebound of milk prices will significantly enhance the fair value of biological assets, with a potential increase of 240 million yuan if each cow appreciates by 1,000 yuan [2][27] - The beef business, which was previously a loss-maker, is expected to contribute positively to profits in 2025 due to rising beef prices [2][28] Challenges and Risks - The industry faces challenges such as high costs associated with feed crop cultivation and environmental management for large-scale farms [2][11] - Socialized farms are under pressure due to low profitability and high debt levels, leading to a potential wave of exits from the market [2][16][17] Conclusion - Shengmu's focus on high-margin organic products, strategic partnerships, and favorable market conditions position it well for future growth, despite short-term challenges and expected losses in 2025 [2][26][30]

Summary of China Shengmu's Conference Call Industry Overview - The raw milk market price in the first half of 2025 is higher than the same period last year, alleviating some financial pressure on companies and delaying the industry's exit speed [2][3] - The industry exit is characterized by a staggered approach, with different types of farms exiting at different stages, leading to a slowdown in overall exit speed [2][3] - The market anticipates a turning point in milk prices in Q3 2025, prompting many farms to continue operations instead of exiting immediately [2][3] Company Insights - China Shengmu's high-quality raw milk products (including organic milk, DHA, A2) account for over 80% of its offerings, primarily supplying Mengniu, with 85% of sales directed to them [2][8] - A three-year strategic agreement and annual milk sales agreement with Mengniu are in place, with milk prices following market trends without locking in prices [2][10][11] - The price of specialty milk has decreased slightly but remains above 4 RMB, with last year's average milk price around 4.4 RMB, showing a decline of less than a single-digit percentage [2][12] - The company expects its annual revenue to remain flat or see slight growth compared to last year, with profits dependent on milk and beef prices in the second half of the year [2][14] Financial Performance - The cash flow situation for the first half of 2025 is stable or slightly down due to lower milk prices, but free cash flow has improved due to reduced investment spending [2][20] - The company is currently in a cash loss state when considering the costs of raising calves, with an average milk price of 4.4 RMB and cash operating costs around 3 RMB [2][7] - The overall milk sales cost is high, particularly due to a large proportion of replacement calves, which increases cash pressure [2][25] Market Dynamics - The supply and demand dynamics are expected to change, with potential market clearing in Q3 2025 now anticipated to be pushed to Q3 2026 [2][26][27] - Factors that could accelerate market clearing include cash flow issues leading to liquidity problems for large farms and significant increases in beef prices [2][28] - The demand for high-end dairy products, especially organic products, continues to grow, with Mengniu's order demand remaining stable [2][15][17] Future Outlook - China Shengmu has no plans for expansion and aims to maintain its current scale while improving efficiency and reducing costs [2][4][18] - The company plans to gradually increase its dividend payout ratio to 30%, depending on profit and cash flow improvements [2][19] - The proportion of breeding cows is expected to increase gradually, contributing positively to production levels [2][30] Additional Considerations - The company does not track overall industry data closely, focusing instead on maintaining quality and meeting supply agreements with core customers [2][5] - The cash cost of feed is approximately 2.65 RMB, slightly above the industry average due to the use of organic feed [2][8]

Core Insights - The Chinese dairy industry is currently facing a supply-demand imbalance, leading to a need for capacity reduction as a key strategy for alleviating industry distress [2][4][10] - The bottom of the current milk price cycle has been established, with a potential reversal expected within a year, making the second half of this year or the first half of next year critical [10] Industry Overview - From 2018 to 2022, the dairy industry saw an increase of over 1 million dairy cows, resulting in excessive production capacity amid declining consumption [2][4] - The dairy farming sector is projected to incur cumulative income losses of 70 billion yuan from 2023 to 2025, with losses from fresh milk powder reaching 20 billion yuan [2] Production Trends - The total production of raw milk in China is expected to decline by 2.8% in 2024, marking the first decrease since 2018 [3] - The number of dairy cows in the top 10 producing provinces is estimated to decrease by 6.7% by the end of 2024, with around 12 million dairy cows expected to be eliminated from the industry [3][4] Market Dynamics - Despite the acceleration of capacity reduction and favorable conditions such as rising international milk prices and falling feed costs, the domestic raw milk supply remains ample due to slowing downstream demand [4] - The average price of fresh milk in major producing provinces was 3.04 yuan/kg as of early July 2025, reflecting a year-on-year decline of 6.5% [4] Strategic Recommendations - Industry leaders are advised to control the overall increase in dairy cow numbers to no more than 500,000 during the 14th Five-Year Plan period, with an annual increase capped at 100,000 [5] - Major dairy companies should enhance their self-sourced milk supply through mergers, equity stakes, and long-term management of social farms to stabilize foundational production capacity [4][5] Consumer Trends - There is a shift in consumer preferences towards high-quality, nutritious dairy products, with a notable increase in demand for B-end (commercial) dairy products, which currently sees 70%-80% of its market share dominated by imported brands [7] - The industry is responding to the evolving nutritional needs of various demographic groups by developing tailored products for different age segments [7][8] Future Outlook - The dairy industry is expected to see a significant adjustment in production capacity, with a projected decline exceeding 5% in the fourth quarter of 2024 and the first quarter of 2025 [9] - The market is anticipated to reach a supply-demand balance by the third quarter of 2025, driven by the exit of smaller farms and consumption stimulus policies [9][10]

Investment Rating - The investment rating for the company is "Buy" and is maintained [7] Core Viewpoints - The company reported a revenue of 18.26 billion yuan in 2024, representing a year-on-year growth of 2.8%. The net profit attributable to the parent company was 130 million yuan, a decline of 3.3% year-on-year, while the net profit excluding non-recurring items was 120 million yuan, an increase of 17.2% [2][4] - In the first quarter of 2025, the company achieved a revenue of 4.94 billion yuan, a year-on-year decline of 4.8%, with a net profit attributable to the parent company of 140 million yuan, down 3.6% year-on-year, and a net profit excluding non-recurring items of 140 million yuan, an increase of 3.9% [2][4] - The company is focusing on high-quality transformation and optimizing its network layout and resource allocation, with a total of 1,095 stores as of the first quarter of 2025, including 945 direct-operated stores and 150 franchise stores [11] Summary by Relevant Sections Financial Performance - In 2024, the company achieved a gross profit margin of 23.3%, a decrease of 0.6 percentage points year-on-year, primarily due to operational optimization and product mix adjustments [11] - The company’s operating expenses for 2024 were 18.5% for sales, 2.0% for management, and 1.4% for financial expenses, reflecting a slight decrease in expense ratios due to improved operational efficiency [11] Strategic Initiatives - The company is actively enhancing its supply chain and has completed the second phase of the Huai Bei comprehensive industrial park project, which is expected to improve logistics efficiency [11] - The company is also focusing on product development, with self-owned and customized products accounting for 13.63% of total sales in 2024, showing a steady increase [11] Future Outlook - The company aims to transition from scale retail to quality retail, with plans to optimize store layouts and ensure high-quality openings for new stores [11] - Earnings per share (EPS) are projected to reach 0.32 yuan, 0.40 yuan, and 0.49 yuan for the years 2025, 2026, and 2027 respectively [11]

Investment Rating - The investment rating for the company is "Buy" and is maintained [8]. Core Views - The company reported a revenue of 18.26 billion yuan in 2024, representing a year-on-year growth of 2.8%. The net profit attributable to the parent company was 130 million yuan, a decline of 3.3% year-on-year, while the net profit excluding non-recurring items was 120 million yuan, an increase of 17.2% [2][6]. - In the first quarter of 2025, the company achieved a revenue of 4.94 billion yuan, a year-on-year decline of 4.8%, with a net profit attributable to the parent company of 140 million yuan, down 3.6% year-on-year, and a net profit excluding non-recurring items of 140 million yuan, up 3.9% [2][6]. - The company is focusing on high-quality transformation and optimizing its network layout and resource allocation, with a total of 1,095 stores as of the first quarter of 2025, including 945 direct-operated stores and 150 franchise stores [12][12]. - The company is enhancing its supply chain strategy, with a gross margin of 24.3% in the first quarter of 2025, reflecting a year-on-year increase of 0.2 percentage points [12][12]. - The company aims to shift from scale retail to quality retail, ensuring the quality of new store openings and enhancing product competitiveness through optimized procurement strategies [12][12]. Summary by Sections Financial Performance - In 2024, the company achieved total revenue of 18.26 billion yuan, with a gross profit margin of 23.3%, a decrease of 0.6 percentage points year-on-year. The net profit attributable to the parent company was 130 million yuan, down 3.3% year-on-year [2][12]. - For the first quarter of 2025, the company reported a revenue of 4.94 billion yuan, with a gross margin of 24.3%, showing signs of stabilization [12][12]. Store Operations - As of the first quarter of 2025, the company had 1,095 stores, including various formats such as community fresh food supermarkets and discount stores. The company is actively optimizing its store network and resource allocation [12][12]. - The company has closed 46 direct-operated stores since the end of 2023 to improve operational efficiency and profitability [12][12]. Supply Chain and Product Strategy - The company is strengthening its supply chain, with a focus on enhancing logistics efficiency and product development capabilities. The proportion of self-owned and customized products reached 13.63% in 2024, a steady increase of 0.1 percentage points year-on-year [12][12]. - The company is implementing a strategy of "product optimization, reasonable structure, and extreme cost performance" to enhance overall product competitiveness [12][12].

Core Viewpoint - The transformation of Jiajiayue Group represents a significant shift in the retail industry, focusing on consumer-centric strategies and the use of "small data" to enhance shopping experiences and operational efficiency [1][9]. Group 1: Company Transformation - Jiajiayue has evolved from a small supermarket in Weihai to a comprehensive retail group with a focus on supply chain and multi-format operations, having gone public in 2016 [1]. - The company is undergoing a transformation from a "product-centric" to a "consumer-centric" approach, emphasizing understanding consumer preferences over merely competing on price [2][4]. - The introduction of a new store layout and various shopping scenarios aims to create a more enjoyable shopping experience for consumers [1][2]. Group 2: Data Utilization - Jiajiayue utilizes "small data" to analyze consumer behavior, creating a detailed database that allows stores to understand the demographics and preferences of customers within a 3-kilometer radius [3]. - The company has reported a 3% increase in store efficiency and a 2-day acceleration in inventory turnover due to enhanced data analytics [3]. Group 3: Supply Chain and Product Development - The procurement team at Jiajiayue has transitioned to "product officers," focusing on designing solutions that meet consumer needs rather than just negotiating prices [4][5]. - The company aims to balance quality and price by optimizing the supply chain, reducing costs through direct sourcing and customized production [5][7]. - Jiajiayue's self-branded and customized products accounted for 13.63% of sales in 2024, reflecting a shift towards "manufacturing retail" to enhance competitive differentiation [7]. Group 4: Market Opportunities - The ongoing international trade tensions have provided Jiajiayue with opportunities to expand its domestic market by introducing foreign products, with over 500 tons of foreign goods already launched [8]. - The company has engaged with over 200 foreign trade enterprises to facilitate the introduction of diverse products into the domestic market, leveraging its extensive store network [8]. Group 5: Industry Implications - Jiajiayue's transformation highlights a broader trend in the Chinese retail industry, where understanding consumer needs through "small data" is essential for driving growth in a competitive landscape [9].