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].