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]