Summary of China Shengmu's Conference Call Company Overview - **Company**: China Shengmu - **Industry**: Organic Dairy Farming - **Market Position**: One of the largest suppliers of desert organic raw milk in China, holding approximately 35%-40% market share alongside Yili's YouRan Dairy [2][4]. Strategic Transformation - **Focus Shift**: Transitioned from a full-chain dairy product company to specializing in upstream cattle farming, selling downstream operations to Mengniu in 2019 [4]. - **Current Strategy**: Concentration on desert organic raw milk production, maintaining a stable customer base with 85% of raw milk sales to Mengniu [2][6]. Financial Performance - **Profitability Amid Price Decline**: Despite a downward trend in milk prices since 2021, China Shengmu has maintained a price premium of approximately 30% for organic raw milk compared to regular raw milk, helping sustain profit margins [5]. - **Cost Control**: Average selling price of raw milk in 2024 is projected at 4.4 RMB per kg, exceeding the industry average by about 1 RMB, with total costs controlled at around 3.31 RMB per kg [10]. - **Debt and Expense Ratios**: The company has a debt ratio of about 50% and a low expense ratio of less than 0.4 RMB per kg, indicating a solid financial position [8]. Cattle Management - **Herd Composition**: As of 2024, the company has approximately 157,000 cattle, with 147,000 being dairy cows. The proportion of breeding cows is about 42%, which is lower than the industry average, allowing for potential growth when milk prices recover [7]. - **Valuation of Cattle**: The average valuation per cow is less than 20,000 RMB, not fully reflecting the organic certification value, indicating significant asset appreciation potential in a market upturn [9]. Market Dynamics - **Beef Price Impact**: Rising beef prices positively affect profits through increased cash recovery from culling cows and direct profitability from beef operations. The price of culled cows has risen from under 500 RMB to approximately 1,000-1,200 RMB per head [14]. - **Culling Strategy**: The company plans to maintain a culling rate of about 70,000 dairy cows annually, with a focus on retaining more heifers to enhance future production capacity [41]. Industry Challenges - **Current Market Conditions**: The dairy industry is facing cash flow challenges due to low milk prices and high operational costs, leading to widespread losses among farms [12][13]. - **Future Price Outlook**: It is unlikely that milk prices will return to the highs of 2021 due to weaker demand and structural changes in the industry [32][33]. Future Prospects - **Production Growth**: The company anticipates a modest annual growth of 5%-7% in herd size under current market conditions, with no significant expansion plans due to market uncertainties [40]. - **Investment in Genetics**: Recent imports of high-quality dairy cattle are expected to improve herd quality and production efficiency in the long term [38]. Additional Insights - **Cash Flow Assessment**: The evaluation of cash flow is primarily based on free cash flow, which includes regular milk sales and capital expenditures related to raising calves [20][21]. - **Market Recovery Potential**: The company remains cautiously optimistic about future profitability, contingent on market recovery and improved demand dynamics [40]. This summary encapsulates the key points from the conference call, highlighting the strategic direction, financial health, market dynamics, and future outlook of China Shengmu in the organic dairy industry.