Summary of Conference Call Notes Industry Overview - The dairy industry is characterized by its cyclical nature, influenced by the growth cycle of cattle, which takes approximately 13 months from calf to mature cow [1] - The industry has become increasingly large-scale since 2008, driven by food safety incidents and environmental regulations, leading to a consolidation of farms [2] - As of 2020, leading farms accounted for 43% of the market, although the overall competition remains fragmented with top companies holding less than 4% market share [2] Supply and Demand Analysis - Milk price fluctuations are influenced by both supply and demand factors [3] - Supply factors include the price of imported milk powder, which serves as a substitute for fresh milk when prices are lower abroad [3] - Demand factors are driven by population growth and per capita dairy consumption, which is affected by income levels and health awareness [5] - Feed costs constitute about 70% of the raw milk sales cost, making it a significant factor in dairy farming profitability [5] Historical Price Cycles - The industry has experienced three major cycles from 2008 to present: - **2008-2013**: Milk prices fell due to the melamine scandal, leading to reduced demand [6] - **2013-2018**: Prices rose due to supply constraints from disease outbreaks and rising feed costs, followed by a decline due to increased imports [7] - **2019-Present**: Prices have been rising due to supply reductions from farm exits and supportive policies, although a recent oversupply has led to price declines starting in 2021 [9] Current Market Conditions - Current milk prices are around 3203, showing a slight decline from the previous week [9] - The industry is in a phase of bottoming out, with many farms facing losses due to falling prices and rising feed costs [10] - Factors such as rising beef prices and seasonal procurement pressures are expected to increase financial strain on smaller farms [11] Future Outlook - The second half of the year may see a balance between supply and demand, aided by government subsidies and new standards reducing reliance on imported milk powder [12] - Companies like YouRan are expected to benefit from a rebound in milk prices, with potential profit increases linked to higher proportions of premium milk sales [13] - The integration of supply chains and cost management strategies are expected to enhance profitability for leading firms [17] Company-Specific Insights - YouRan's revenue is significantly supported by stable demand from major customers like Yili, which accounts for 95% of its raw milk income [16] - The company has a diversified product range, including organic and premium milk, which helps mitigate risks associated with falling milk prices [14] - The overall industry outlook suggests that leading companies will benefit from cost reductions and a potential rebound in milk prices, with historical price cycles indicating a strong likelihood of recovery [23][24] Conclusion - The dairy industry is currently navigating a challenging environment with fluctuating prices and rising costs, but there are signs of potential recovery driven by policy support and market adjustments. Leading companies are well-positioned to capitalize on these changes through strategic management and product differentiation.

Core Viewpoint - Tianrun Dairy is facing significant financial challenges, with a projected net loss for the first half of 2025, attributed to oversupply of raw milk, increased market competition, and high depreciation costs resulting from previous expansion efforts [1][2]. Financial Performance - Tianrun Dairy's net profit has declined sharply from 197 million yuan in 2022 to 43.66 million yuan in 2024, and is expected to turn into a loss this year [1][2]. - The company reported a net loss of 73.30 million yuan in Q1 2024, with an estimated profit of 47.30 million to 55.30 million yuan in Q2, indicating a potential turnaround [2]. - The company's non-recurring net profit for 2024 has decreased by 45.78% year-on-year, suggesting ongoing performance challenges [2]. Market Conditions - The price of fresh milk remains low at 3.07 yuan per kilogram, with expectations of continued low prices due to oversupply despite a decrease in dairy cow inventory [2]. - Raw milk prices have dropped nearly 30% over the past three years, primarily due to stagnant growth in the dairy market and oversupply from previous expansions [2][3]. Expansion Strategy - Tianrun Dairy has pursued aggressive expansion, including a 990 million yuan convertible bond issuance aimed at increasing production capacity by 20,000 tons, which represents a 57% increase over its existing capacity of 35,120 tons [3]. - The company has also engaged in acquisitions, such as the full acquisition of Xin Nong Dairy, which adds another 10,000 tons of production capacity [3]. Capacity Utilization - The company's capacity utilization rate has declined from 80.93% in 2023 to 70.06% in the first half of 2024, raising concerns about the efficiency of new investments [4]. - Despite a slight increase in sales volume from 267,900 tons in 2022 to 297,400 tons in 2024, the growth is primarily attributed to acquisitions, with organic growth stagnating [4]. Financial Health - As of 2024, Tianrun Dairy's fixed assets reached 2.56 billion yuan, a 142% increase since 2020, while revenue grew only 59%, leading to a 70% decline in net profit [5]. - The company's debt ratio has risen to 57.27% in 2024, with short-term debts exceeding cash reserves, indicating potential liquidity issues [6]. Product Performance - Revenue growth for Tianrun Dairy has slowed significantly, with a mere 3.33% increase in 2024 and a 2.5% decline in Q1 2025 [6]. - The company has experienced a decline in revenue from long-life products, which were previously a key growth driver, raising concerns about future revenue generation [6]. Debt Management - The issuance of convertible bonds in October 2024 has alleviated some financial pressure, but has also led to a 107.59% increase in financial expenses due to interest payments [6]. - The low conversion rate of the convertible bonds, with only 11,500 yuan converted by June 30, 2025, highlights challenges in optimizing the company's debt structure [7].