150724

China / Hong Kong Industry Focus
China Dairy Sector

Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 July 2015
Awakening of the rising giants HSI: 25,399

• Dairy demand should continue to outperform the F&B
ANALYST
sector on favourable consumption trends in the Alice HUI CFA, +852 2971 1960
medium term alice_hui@hk.dbsvickers.com
• Prefer downstream dairy giants over upstream players; Alison Fok +852 2971 1938
cautious on infant milk formula plays on pricing alison_fok@hk.dbsvickers.com
pressure concerns
• Stock picks: China Mengniu and Bright Dairy Recommendation & valuation
Expect dairy to outperform overall F&B sector. Despite
Pric e T arget Upside Rec F Y 16 Mkt
near term challenges, dairy demand should continue to
Local$ Pric e % PE (x ) Cap
outstrip most other F&B segments, on consumption upgrades
Local$ US$bn
and continuing shift towards products with healthy
proposition. But the change in competitive landscape (as more Bright Dairy 'A'
CNY 18.08 19.70 9 Buy 25.2 3.6
(600597 CH)
global players get in), as well as shift in distribution channels
(in particularly e-commerce) and supply dynamics (local China Mengniu Dairy
HKD 38.35 47.10 23 Buy 19.6 9.7
(2319 HK)
production vs imported raw milk sources) would have different
implications on different players along the dairy supply chain. China Modern Dairy
HKD 2.53 3.35 32 Buy 9.1 1.7
(1117 HK)
Prefer downstream; pricing pressure for infant formula Yashili International^
and upstream. We are more positive on downstream dairy HKD 2.27 n.a. n.a. NR 18.8 1.4
(1230 HK)
players, in particularly market leaders such as Mengniu and Yili.
Inner Mongolia Yili
A segment where market concentration is the highest along 'A'^ (600887 CH)
CNY 18.63 n.a. n.a. NR 17.7 18.4
the chain, we expect leaders will continue to gain market
Biostime International^
share given their dominant presence, strong product (1112 HK)
HKD 21.60 n.a. n.a. NR 11.3 1.7
innovation ability and ASP flexibility. We are cautious however,
China Huishan Dairy#^
on the infant milk formula market which remains very HKD 2.17 n.a. n.a. NR 16.1 4.0
(6863 HK)
fragmented in China with downward pricing pressure going
forward. As for upstream dairy farms, their near-term ^ Consensus
profitability would undoubtedly be affected by the sharp # FY16: FY17
decline in raw milk prices since last year, but in the longer run, Source: Thomson Reuters, DBS Vickers
major players in the field should still have room for market
share gains as industry consolidation continues.
Top picks – China Mengniu and Bright Dairy. We maintain
our BUY rating on China Mengniu as we expect the company
to record consistent earnings growth with its JV with Danone
providing a new earnings driver in the medium to longer term.
We initiate coverage on Bright Dairy with BUY given its strong
foothold in East China with room for further earnings upside
as scale ramps up and impact from its acquisitions kick in. In
the longer run, the increasing popularity of pasteurised milk
would make Bright Dairy a key beneficiary. While we are
cautious on the near term earnings outlook for upstream
farms, we maintain our BUY rating on China Modern Dairy as
current valuation should have already priced in the weaker
outlook, with the company remaining as a key beneficiary of
market consolidation.
www.dbsvickers.com
ed- JS / sa- CW
Industry Focus
China Dairy Sector
Table of Contents
Dairy growth to outperform overall F&B sector 3
Liquid milk and milk beverages – product upgrades are keys 5
Upstream dairy farms – Margin pressure from raw milk price decline 10
Infant formula – plagued by price wars and channel evolution 14
Stock recommendation 18
Stock Profiles 22

Bright Dairy & Food (600597 CH) 22
China Mengniu Dairy (2319 HK) 42
China Modern Dairy (1117 HK) 48
Yashili International (1230 HK) 54
Inner Mongolia Yili (600887 CH) 58
Biostime International (1112 HK) 62
China Huishan Dairy (6863 HK) 66
Appendix 70
PE & PB band charts 78
Page 2
Industry Focus
China Dairy Sector
Dairy growth to outperform overall F&B sector attractive in the F&B universe, helped by the following key
drivers:
While the dairy sector has not been immune to the overall
slowdown seen in the China consumption market facing most (i) Still room to grow on consumption per capita
F&B players in general, the sector’s growth has nonetheless
Despite the strong growth in the past with China already
displayed stronger momentum than most. The
becoming the third largest market for dairy products, China’s
outperformance has also been apparent for listed dairy
per capita consumption remains well below the global average.
companies, which saw higher growth in general against players
Even compared with other Asian countries with more similar
in other sectors.
dietary preferences (such as Taiwan, where per capita
consumption of milk is c.40% higher than in China), China’s
Dairy sector growth vs. other F&B beverages – 2014 current level still represents abundant room for growth.
Juice Milk - Per capita consumption (2014)
Carbonates kg per capita

120 110 109
RTD tea
100 90
Bottled water
80
Drinking milk
60
Sports drinks
40 31
Yogurt 15
20 11
-10% 0% 10% 20% 30%
0
Source: Euromonitor, DBS Vickers Australia New United Japan Taiwan China
Zealand States
2014 sales growth – key F&B players Source: ilat.il, DBS Vickers
(ii) Continual urbanisation

Tingyi
UPC One driver to boost demand growth ahead would be China’s

Want Want
urbanisation. Although there has been significant growth in
consumption of dairy products in rural areas in the past few
China Foods years, the gap between rural and urban consumption remains
Tsingtao Brewery large. As China’s urbanisation continues, this would further
increase demand for dairy products.
Yili
Mengniu
Bright
CMD
(20) 0 20 40 60
Source: Company data, DBS Vickers
We are positive on the dairy sector in the medium to long run,

with overall sector growth expected to remain one of the most
Page 3
Industry Focus
China Dairy Sector
consumers are becoming more sophisticated and demanding

Dairy consumption – urban vs. rural more varieties of dairy products with higher focus on quality.
As a response, the dairy companies have come up with higher
RMB value-added and premium products, which have been well
350 received by consumers.
292.6
300 272.9
253.6 Consumption of dairy products by type – trend
250 234
196.1 198.5
200 179.4 RMB bn
160.2 250
144.3
150 120.5
91.3 91.7 200
100
125
50 150 115
106
97
0 88
100 81
2009 2010 2011 2012 2013 2014 76 47
38 43
30 34
Urban Rural 50 24 27
46 52 57 64
32 36 41
Source: Frost & Sullivan, DBS Vickers 0
2015E
2016E
2017E
2018E
2012
2013
2014
(iii) China consumer’s changing appetite
Yogurt Fresh milk UHT milk
While not a traditional diet for Chinese, dairy consumption has
been rising on government support and shifting of food
Source: Frost & Sullivan, DBS Vickers
consumption patterns as incomes rise. As consumers are now
more health conscious, the strong nutritional value of dairy
While the overall outlook for the dairy sector remains positive
products perceived by most is also one reason for rising
in the medium to longer run, there are also many challenges
popularity of dairy products.
facing the industry, including the sharp volatility of raw milk
prices in the past 1-2 years, the significant change in
Chinese consumption patterns trends distribution channels and the intensifying competition from
both domestic and global plays. Meanwhile, heightened food
100% 3% 3% 4% safety concerns means the Chinese government would also be
90% 11% 10% 11%
more incentivised to encourage market consolidation.
80% 10% 14%
3% 17%
70% 10% 4% Against this backdrop, not all players will be able to benefit
6%
60% 14% from the growth trend. In our view, liquid milk and milk
15%
50% beverage players should see the best potential on margin
40% expansion, while upstream and infant formula players may see
30% 63% more pricing pressure down the road.
54%
47%
20%
10%
0%
1991 2001 2011
Grain Produce Dairy & Eggs
Meats Sugar & Fat Others
Source: National Geographics, DBS Vickers
(iv) Consumption upgrading
Another trend which is becoming more prominent is trading

up by consumers. Instead of consuming just plain UHT milk,
Page 4
Industry Focus
China Dairy Sector
Liquid milk and milk beverages – product upgrades are … but there is still abundant room for market share gains
keys
With already a strong lead over its smaller players, leading
players like Mengniu and Yili should continue to gain market
Relatively high market concentration with leaders shares given their strong scale, established supply chain and
dominating… extensive market penetration. In fact, their combined market
share has been growing in the past few years, with the trend
Among the three dairy segments that we covered in this report,
likely to continue.
downstream liquid milk and beverage segment has the highest
market concentration. The top three players, Mengniu, Yili
and Bright Dairy account for over 42% share in the liquid milk Market share trend
market in China. Despite this, compared with other F&B
segments, the concentration is not particularly high, indicating %
there is room for leaders to grow market shares further. 50
45
40 6.3 7.1
Dairy - Market shares of top players 5.1 5.5 5.7
35 5.2
4.1
30
Nestlé SA Hebei 16.2 18.1 17.9 17.8 18.3
Wahaha 25 14.4
5% 4% Yangyuan 14.2
Zhihui Want Want 20
4% 4% 15
Bright
7% 10 18.8 19.7 18 18.2 18.7 18.9
Coca-Cola 15.8
5
Yili Co, The
2% 0
18%
Beijing San 2006 2008 2010 2012 2013 2014 2015
Yuan
2% Mengniu Yili Bright Dairy
Mengniu Source: Euromonitor, DBS Vickers

Dairy Others
19% 35%
Source: Euromonitor, DBS Vickers
Market share: Top 3 players vs. other sectors
%
100
90 2.3
80 29
70
60 10.8
50 14 13.6
13.2
40 7.1
30 63.3 18.4 16.8 18.3
20 39.4
10 23.2 23.3 18.9
0
1 2 3
Page 5
Industry Focus
China Dairy Sector
Intense competition at the mass-end, yet a necessity Growth to be driven by new products…
While we expect top players to maintain their leading positions To tackle this, domestic leaders have been increasingly focusing
in the UHT plain milk category, the real growth drivers should on newer and valued-added products. Following the success
come from new and value-added products or new categories. of Mengniu’s Milk Deluxe, which created a whole new
The mass market UHT plain milk category, although still a big premium milk market in China (market size now estimated at
component of dairy sales, is already a commoditised market c.Rmb35bn), the good market reception of UHT yogurt, first
where even key players are not having much pricing power. launched by Bright Dairy in 2010, is another such example.
This is also a market where we see increasing, and viable,
competition coming from imported UHT milk through the e- Bright Dairy – market share in yogurt had double since
commerce channel. launch of UHT yogurt Momchilovtsi
%
China UHT milk imports
25 23
Launch of 22
MT % Momchilovtsi
40,000 250 20 18
35,000 15
200
30,000 15 13
150 12 11
25,000 11
10
20,000 100 10
15,000
50
10,000 5
0
5,000
0 (50) 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
Oct-13
Feb-14
Oct-14
Feb-15
Apr-14
Apr-15
Aug-14
Dec-13
Dec-14
Jun-14

Fresh milk % yoy
Source: WIND, DBS Vickers … an area where domestic players have clear advantages
For the downstream liquid milk and dairy beverages market,

UHT milk pricing comparison: local brands vs imported we expect new products would be the key to drive growth, as
brands well as margins. Domestic brands, given their better
understanding of consumer tastes and preferences, are in
Name O rigin Siz e (x no) Pric e Pric e/ml
stronger positions compared to their international peers. This,
Int ernat ional ML RM B RM B
Dev ondale New Zealand 200 x 24 79.0 0.016
coupled with their extensive distribution network, should
A nc hor Australia 250 x 24 94.0 0.016 continue to give domestic leaders some competitive
Weidendor Germany 200 x 30 79.0 0.013 advantages in launching new products and categories.
O ldenburger Germany 200 x 24 69.9 0.015
M eadow F resh New Zealand 250 x 24 69.9 0.012 Room for margin expansion
0.014
Premium loc al UHT milk
We expect launch of new premium products to remain the key
M engniu - Milk Deluxe 250 x 12 52.5 0.018 focus for most domestic players. The resultant improvement
Bright Dairy - U+ 250 x 12 39.8 0.013 in product mix, coupled with lower raw milk costs, bodes well
Y ili - Satine 240 x 12 50.6 0.018 for margins going forward. Currently, operating margins for
China M odern Dairy - Modern F arming 250 x 12 42.8 0.014
the three major domestic players range between 2-6%, below
New Hope - Hobuxun 250 x 12 39.0 0.013 international peer (Danone at 10% in FY14), partly on
0.015 differences in product mix.
Source: YHD.com, DBS Vickers
Page 6
Industry Focus
China Dairy Sector
China raw milk cost Breakdown of current dairy retail sales %
RMB/kg Powder
4.50 Milk
5% Yoghurt
Milk - UHT
and Sour Other
28%
4.00 Milk Drinks Dairy
26% 1%
3.50
Cheese
1%
3.00
2.50
Flavoured
2.00 Milk - Milk Drinks
Fresh 31%
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
8%
Source: CEIC, DBS Vickers Source: Euromonitor, DBS Vickers
Operating margins – Mengniu, Yili, Bright Dairy

Given that production of fresh dairy products such as
pasteurized milk would require support of consistent local
% source of quality raw milk, this would provide domestic dairy
9 leaders some competitive advantages over their global peers
8 given their established raw milk supply locally. Bright Dairy,
7 with a long operating history in pasteurized milk
6 manufacturing, is the leader in this market. Its pending
5 acquisition of Tnuva Food, which is well-known for its cottage
4 cheese products in Israel, could also provide some advantages
3 to Bright in expanding its product line to niche category such
2 as cheese.
1
0
2010 2011 2012 2013 2014
Mengniu Bright Yili
Source: CEIC, DBS Vickers
Is fresh the next big trend?
Pasteurised milk definitely has strong potential and despite

good growth in the past few years; it still represents a relatively
small portion of overall dairy consumption. As consumers
continue to trade up, together with continual development of
the cold chain infrastructure in China, pasteurized milk, as well
as other “fresh” products (such as cheese and butter), should
see further penetration into China. In fact, Mengniu has been
increasingly active in pursuing the refrigerated product
category through its JV with Danone.
Page 7
Industry Focus
China Dairy Sector
Key financials
2010 2011 2012 2013 2014

Sales
Mengniu 30,265 37,388 36,080 43,357 50,049
Bright 9,572 11,789 13,775 16,290 20,385
Yili 29,665 37,451 41,991 47,779 54,436
Sales grow t h (% )
Mengniu 17.7 23.5 -3.5 20.2 15.4
Bright 20.5 23.2 16.8 18.3 25.1
Yili 22.0 26.2 12.1 13.8 13.9
Av erage 19.9 24.6 6.0 17.0 16.2
G ross margin (% )
Mengniu 25.7 25.7 25.1 27.0 30.8
Bright 34.0 32.9 34.6 34.2 34.2
Yili 30.0 28.7 29.1 28.2 32.8
Av erage 28.7 27.9 28.4 28.6 32.2
O perat ing margin (%)
Mengniu 4.8 5.1 4.1 4.3 5.3
Bright 2.2 1.7 2.6 3.8 3.9
Yili 1.9 4.4 4.1 5.5 8.3
Av erage 3.0 3.7 3.6 4.5 5.9
Net prof it (RM B m)
Mengniu 1,237 1,589 1,257 1,631 2,351
Bright 194 238 311 406 568
Yili 777 1,809 1,717 3,187 4,144
Net margin (% )
Mengniu 4.1 4.3 3.5 3.8 4.7
Bright 2.0 2.0 2.3 2.5 2.8
Yili 2.6 4.8 4.1 6.7 7.6
Av erage 3.2 4.2 3.6 4.9 5.7
Net c ash (debt ) (RM B m)
Mengniu 5,707 6,099 6,264 5,416 (4,034)
Bright 1,319 584 929 (578) 4,087
Yili 734 314 (366) 838 1,314
CA PEX (RM B m)
Mengniu (1,084) (2,293) (1,960) (2,867) (2,931)
Yili (1,987) (3,789) (3,102) (3,241) (3,946)
Bright (343) (977) (1,091) (1,195) (1,796)
O perat ing c ash f low (RM B m)
Mengniu 2,485 2,520 2,007 3,284 3,080
Yili 1,475 3,670 2,409 5,475 2,436
Bright 534 89 1,242 1,305 336
Page 8
Industry Focus
China Dairy Sector
Mengniu – FY14 sales breakdown (%) Yili – sales FY14 breakdown (%)
Ice cream Other dairy

Mixed feeds
6% products
Milk 1%
1%
powder &
UHT milk dairy
51% related
Ice-cream 11%
Yogurt 8%
16%
Liquid milk
Milk 78%
beverages
26%
Source: Company data, DBS Vickers Source: Company data, DBS Vickers
Bright Dairy – FY14 sales breakdown (%)
Others
6%
Milk powder
Momchilovtsi
and others
29%
19%
Ubest
6%
Other liquid
milk
39% Changyou
1%
Page 9
Industry Focus
China Dairy Sector
Upstream dairy farms – Margin pressure from raw milk

China’s milk powder imports
price decline
MT %
What happened to raw milk prices? 180,000 200
160,000
One of the key concerns facing upstream dairy farms in the 150
140,000
past one year or so is the sharp decrease in raw milk prices. 120,000 100
Following the strong surge in 2013, raw milk prices in China 100,000
50
have fallen by c.20% from its peak in early 2014, alongside 80,000
with the volatility seen in the international price. Fonterra’s 60,000 0
WMP prices, a key benchmark of dairy prices, plunged c.60% 40,000
(50)
during the same period, on increased supply from EU as well as 20,000
0 (100)
weaker demand from China due to overstocking of milk
May-13
May-14
May-15
Mar-13
Mar-14
Mar-15
Sep-13
Sep-14
Jan-13
Jan-14
Jan-15
Jul-13
Nov-13
Jul-14
Nov-14
powder.
Imported milk powder prices versus China raw milk Milk powder % yoy
price*
RMB/kg Source: CEIC, DBS Vickers
5.0
4.5
4.0 As such, we expect raw milk prices to remain at a low level for
3.5 most of 2015, with full year average estimated to record a
3.0 20% decline y-o-y. In 2016, we believe dairy prices may start
2.5
to normalise as excess inventory of milk powder in China
2.0
1.5 should have been largely exhausted.
1.0
0.5 Was there an over-supply of raw milk in China?
0.0
Despite strong growth in production capacity from major dairy
May/10
May/15
Oct/10
Feb/14
Mar/11
Sep/13
Apr/13
Jan/12
Aug/11
Dec/09
Dec/14
Jun/12
Nov/12
Jul/09
Jul/14
farms during the past few years, China’s milk demand remains
well above domestic supply. But the supply gap has been
Fonterra raw milk (RMB/kg)
easily filled by imported milk powder, especially considering the
China raw milk (RMB/kg)
abundant supply overseas as well as pricing differences
Source: CEIC, DBS Vickers (Fonterra’s WMP prices are at a 47% discount to China prices).
*imported milk powder inclusive of VAT, import tax & transportation

cost est. & milk powder to raw milk conversion ratio of 1:9
While China raw milk prices appear to have stabilised in recent

months, international prices remain weak with the latest
Fonterra auction in July seeing another c.10% decline in WMP.
The price weakness, coupled with the sharp decline in milk
powder imports, indicate that there is still excess milk powder
inventory held by industry players. Based on USDA’s earlier
projection of 300,000 tonnes of stocks that were carried over
from 2014, the excess inventory may not be fully digested until
towards the end of 2015. This would likely cap any potential
upside in raw milk prices in the near term.
Page 10
Industry Focus
China Dairy Sector
Estimated supply gap in China Dairy farms distribution in China (based on herd size)
100%
m tonnes
10% 15%
90% 19%
80 10%
80% 10%
69
13% 11%
70 63.7 70% 17%
58.6
60 54.8 60% 24%
52.3
49 50%
50
38.5 39.6 40.8 40%
35.3 37.3 37.7
40 67%
28.2 30% 59%
30 24.1 47%
20.1 20%
15 17.1
20 13.7 10%
10 0%
2009 2014 2018E
0
2013 2014 2015E 2016E 2017E 2018E <100 heads 100-499 heads
Supply Demand Gap 500-999 heads >1000 heads
Source: Euromonitor, DBS Vickers Source: MoA, Frost & Sullivan, DBS Vickers
We expect dairy demand in China will continue to be satisfied

by a mix of both domestic and imported products. As such, Major dairy farms in China & respective market share
local raw milk prices, to a certain extent, would still be highly
affected by prices of imported milk powder. Despite this, Companies No. c ow s %
domestic prices are likely to remain at a premium over China Modern Dairy 201,507 1.4%
international prices (given cost differences). And we do not Huishan Dairy 180,331 1.2%
expect imports to replace domestic raw milk production, as (i) Shengmu 103,252 0.7%
there are products, such as those labeled as pure milk and J apfa 57,000 0.4%
pasteurised milk, which can only be produced from raw milk, Bright Dairy -related 50,000 0.3%
and not milk powder; (ii) it is in the downstream producers’ F ontera 49,000 0.3%
interest to have a steady source of local raw milk to ensure a YST Dairy 44,623 0.3%
consistent supply; (iii) following the melamine incident in 2008, Zhongdi Dairy 21,433 0.1%
the government is encouraging the development of an Top ten 707,146 4.9%
integrated dairy supply chain, which is a necessity in order to A s of 2014 (China) 14.5m
ensure food safety.
Source: Company data, CEIC, DBS Vickers
Large-scale farms to gain market share
Near term margin pressure remains
Despite the fast development of big scale farms in the past few
years, which already represented 14.6% of total herd size in While we see further growth potential for big scale farms in
China in 2014 (vs 10% in 2009), there should still be further China, earnings outlook in the near term would nonetheless be
market consolidation as the market remains highly fragmented affected by the low raw milk prices. YTD, raw milk prices of
and smaller and less efficient players will continue be phased major farms such as CMD have declined by 8%, and are likely
out. to remain at a relatively low level in 2H15. This would take a
toll on margins, despite favourable feed costs and potential
yield improvement.
Page 11
Industry Focus
China Dairy Sector
Is funding a necessity?
We believe the upstream segment requires the most funding

compared to the other dairy segments. In terms of cash flow,
committed expansion in dairy farms as well as cultivation of
milkable cows have consistently hampered companies’ free
cash flow generation. Hence, developing downstream
operations will be necessary to support cash flow and any
potential dividend payouts. CMD should see the most
improvement in its net gearing, having recently done a new
share placement as well as having less capex commitment with
a more mature herd size to grow organically.
Net gearing (%)
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
2012/13 2013/14 2014/15
Huishan YST CMD
In summary, we believe the raw milk price decline remains the

biggest concern for dairy farmers in the near term, with earnings
expected to take a hit in FY15. However, with the possibility of
dairy prices bottoming out in 2016 and continual gain in market
shares as smaller players phase out, we expect large scale farmers
like China Modern Dairy to see some recovery in earnings in
FY16.
Page 12
Industry Focus
China Dairy Sector
Upstream sector - Peer comparison
2011 2012 2013 2014

Consolidat ed sales (RM B m)
China Modern Dairy 1,392 2,040 3,289 5,027
Huishan Dairy 1,333 2,552 3,530 3,923
YST Dairy 149 689 881 1,163
Upst ream sales (RM B m)
Huishan Dairy 1,143 1,825 1,240 1,491
YST Dairy 149 689 881 1,163
Upst ream as % of t ot al
China Modern Dairy 99 97 90 83
Huishan Dairy 86 72 35 38
YST Dairy 100 100 100 100
Dow nst ream sales (RM B m)
Huishan Dairy 190 727 2,290 2,432
YST Dairy 0 0 0 0
G ross margin (%) - c onsolidat ed
China Modern Dairy 20.0 22.0 25.0 16.4
Huishan Dairy 38.4 54.0 65.5 61.9
YST Dairy 34.5 37.8 42.6 45.7
Gross margin (%) - upst ream
China Modern Dairy 31% 32% 40% 41%
Huishan Dairy 49% 59% 62% 60%
YST Dairy 35% 38% 43% 46%
Herd siz e
Huishan Dairy 90,254 112,851 144,191 180,331
YST Dairy 32,219 37,000 40,396 44,623
M ilk able c ow s % of t ot al
Huishan Dairy 35 44 43 41
YST Dairy 46 56 53 58
Sales v olume (t onne/annum)
Huishan Dairy 213,920 352,411 482,428 577,071
YST Dairy 35,722 168,070 183,702 230,121
Raw milk A SP (c onso)
Huishan Dairy 4.5 4.5 5.0 4.9
YST Dairy 4.2 4.1 4.8 5.1
M ilk y ield (t onne/annum)
Huishan Dairy 8.6 9.1 9.0 9.1
YST Dairy 9.2 8.9 9.0 9.4
Page 13
Industry Focus
China Dairy Sector
Infant formula – plagued by price wars and channel

Top 3 players market share – China vs. overseas
evolution
120%
A battlefield for all
100%
Among the various segments in the dairy supply chain, infant 4%
20%
formula commands the highest margins, but also attracts the 80% 6%
strongest competition from both domestic and global players. 43% 3%
60%
We expect price competition will continue to intensify in this
segment, due to the following: 40% 64%
74%
(i) Low market concentration. The infant formula market 48% 8%
20% 9%
in China is relatively fragmented. The top three players
command only 33% of the market whereas in 12% 14%
0%
developed markets, the top three typically account for New Zealand Philippines India China
75%+ of the market. This suggests that there is lots of Nestle Mead Johnson Abbott
room for market consolidation. In fact, it is also the Danone Heinz Beingmate
government’s intention to consolidate the market by
encouraging M&A activities. Source: Coriolis, DBS Vickers
China infant formula – market share (ii) High ASP risk imminent. Infant formula products in
China are in general commanding on average a 30% -
American 90% premium over the same product overseas. It is
Dairy
Abbott 3% also one of few IMF markets where a premium segment,
4% in which products are selling at more than double the
Mengniu mass market products, exists. Price promotions have
5% Others
33% been more aggressive in recent months, partly a result
Biostime of certain brands preparing for product upgrades. We
5%
expect aggressive promotions and price cuts to
Friesland continue across all segments, helped by highly
6%
favourable raw material costs.
Yili
6% Nestle
14% Going forward, we expect the infant formula category
Mead to transform into a two tier structure – the first as
Beingmate Johnson
9% locally manufactured & locally manufactured with
7% Danone
imported sources targeting mass market, and the
8%
second as imported packaging focusing on a more
Source: Euromonitor, DBS Vickers premium segment. The price difference between the
two tiers is likely to narrow in due course.
IMF product – price comparison
R M B p ric e Premiu m
B ased B ran d V o l (g )
O v erseas Ch in a (% )
F rance Aptamil 900 115.4 149.0 29%

UK Cow & Gate 900 101.0 179.0 77%
UK F riso 900 173.2 255.0 47%
USA Wy eth 900 150.2 186.0 24%
USA Abbott/ Similac 900 92.1 175.0 90%
Source: Tesco UK, JD.com, DBS Vickers
Page 14
Industry Focus
China Dairy Sector
(iii) Rapid changes in distribution dynamics. It is well

known that the infant formula segment is experiencing EBIT margins (%)
a more significant shift in distribution channel from the
traditional ones to baby stores and e-commerce than 40.0
any other F&B products. The online platform, in 35.0

particular, offers improved price transparency and also 30.0
increases competition as it provides a formalised low-
25.0
cost platform for any brand to enter into China.
20.0
International competitors along with domestic players
are facing the same issues at the moment. For example, 15.0
Mead Johnson traditionally enjoyed a dominant market 10.0
share in Hong Kong, a significant infant formula 5.0
distribution channel particularly in South China, and
0.0
now also faces a significant number of online 2012 2013 2014
competitors. The pilot roll-out of free trade zones and Mead Johnson Biostime Yashili Beingmate
O2O shopping centres recently is likely further fuel
potential online competition. Source: Company data, DBS Vickers
IMF – distribution channels

Unlikely to stop players from competing. Despite falling ASPs,
100%
domestic players are unlikely to give up on this segment as IMF
1.88 3.42 7.17 9.9 11.7 sector margins remain well above other dairy segments. Infant
90%
24.62 25.08 formula capacity expansion is ongoing with Yili partnering with
80% 25.63 26 26.2 one of the largest global processors, Dairy Farmers of America,
70%
and Yashili’s expanding capacity with recent commencement
60%
of New Zealand plant.
50%
40%
73.5 71.5 67.2 Demand – both good and bad
30% 64.1 62.1
20% The good – One catalyst for the infant formula demand in
10% China would be the potential relaxation of the one-child
0% policy. With China’s fertility rate fallen to a low 1.5x, versus
2010 2011 2012 2013 2014 Japan’s 1.4x and India’s 2.5, and the replacement rate of 2.1x,
Modern channels Traditional channels there is obviously strong urgency for policy relaxation. In fact,
Internet retailing some local media has reported recently that China may do so
by the end of the year, allowing couples to have a second
Source: CEIC, DBS Vickers child.
Last time when there was a change in the one-child policy was
As such, we expect a continual pressure on product pricing, and back in late 2013, when the government relaxed the rules and
hence further margin pressure going forward. In fact, EBIT allows couples to have a second child if one of them is an only
margins have declined across the board for both domestic and child.
global players in 2014. To drive growth, infant formula players
would have to rely more on volume and product mix. While a policy relaxation is positive, we believe it is unlikely to
cause a sharp surge in birth rates and the impact would likely
to be gradual. For example, following the relaxation in 2013,
new births in 2014 rose only mildly by 3%. There were only
on average 80-90k couples applying for second birth
applications every month since the relaxation, with total
application representing less than 10% of total eligible. As
economy expands, there are also more cost concerns on raising
a second child in China.
Page 15
Industry Focus
China Dairy Sector
Birth rates The bad – Apart from a slower economy, China’s State Council
aims to raise the breast feeding rate, targeting 50% by 2020
from less than one-third at the moment. This could potentially
(%)
dampen demand growth stemming from new births and
12.50
income growth. There is also recent news that China is
12.40 considering a ban on advertisements for infant formula, a
12.30 move which illustrates the government’s intention to promote
12.20 breastfeeding.
12.10
12.00
Cautious outlook, but M&A possibilities exist
11.90 Based on the above, we are cautious on the IMF market, as we
11.80 believe in terms of price competition, it is likely to be the most
11.70 intense along the dairy supply chain. At the same time,
11.60 however, there are lots of M&A and partnership opportunities.
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
International players have been actively seeking local

partnerships to strengthen their market position. For example,
Danone entered as a strategic shareholder of Yashili in early
Source: CEIC, DBS Vickers 2015 with a 25% stake, while Fonterra now holds an 18.8%
stake in Beingmate.
Overseas partnerships
St ak e In t ' l Ex is t in g b ran d s
D at e* D o mes t ic Paid D esc rip t io n
(% ) p lay er o w n ed b y in t ' l p lay er
Intends to use Yashili as an infant formula

product segment arm; Mengniu may inject
Yashili HK$3.70/share its existing infant formula business into
F eb-15 25% Danone Dumex, Nutrilon, A ptamil
(1230 HK) or HK$4.4bn Yashili in future. In addition, Yashili and
Mengniu w ill study the possibility of
inv esting in Dumex China.
With intention to raise to 20% equity
Beingsmate RMB18/share stake; establish J V to purchase Darnum
Mar-15 18.80% F onterra A nnum
(0002570:CH) or RMB3.5bn plant in A ustralia, and exclusiv e distribution
agreement for F onterras A nnum in China
Includes a purchased plant in Xiushui plant
near Sheny ang. The Companies w ill be
RMB692m for
Huishan Dairy F riesland running their existing infant-related Dutch Lady , F oremost,
A pr-15 n.a a 50% J V
(6863 HK) Campina businesses separately - meaning Huishan w ill F risian F lag, Peak, F riso
stake
market its ow n brands, w hile F riesland's
F riso w ill be independent as w ell.
* date of completion
Page 16
Industry Focus
China Dairy Sector
Infant formula - Peer comparison
2010 2011 2012 2013 2014

Sales (RM B m)
Yashili 2,954 2,958 3,655 3,890 2,816
Biostime 1,234 2,189 3,382 4,561 4,732
Beingmate 4,028 4,727 5,354 6,117 5,049
Sales t urnov er (y - o- y %)
Yashili 14.2 0.1 23.6 6.4 (27.6)
Biostime 120.7 77.5 54.5 34.9 3.7
Beingmate 24.1 17.3 13.3 14.2 (17.5)
Gross margin (%)
Yashili 56.9 52.0 53.7 53.5 51.3
Biostime 71.1 66.5 65.9 65.2 61.9
Beingmate 61.4 62.9 63.3 60.2 52.7
SG &A of sales (% )
Yashili 38.6 42.2 39.0 41.5 46.2
Biostime 43.5 36.1 35.3 37.1 37.3
Beingmate 46.7 51.3 49.8 45.5 51.0
Operat ing margin (%)
Yashili 20.0 10.6 15.3 12.4 9.1
Biostime 27.1 32.6 31.1 25.7 25.5
Beingmate 14.4 11.5 13.5 14.5 1.4
Pret ax margin (%)
Yashili 20.0 12.7 17.7 14.8 11.0
Biostime 27.1 32.6 31.1 25.5 23.7
Beingmate 13.6 12.5 13.5 15.7 2.1
Net margin (%)
Yashili 17.0 10.4 12.8 11.2 8.8
Biostime 21.5 24.1 22.0 18.0 17.1
Beingmate 10.5 9.2 9.5 11.8 1.4
Net c ash (debt ) (RM B m)
Yashili 2,643 2,623 2,654 410 37
Biostime 1,728 1,974 2,341 1,767 2,083
Beingmate (177) 1,777 2,197 1,514 558
Operat ing c ash f low (RM B m)
Yashili 313 458 772 141 264
Biostime 381 516 947 660 972
Beingmate 250 420 1,009 210 (188)
Page 17
Industry Focus
China Dairy Sector
Stock recommendation earnings expected to grow at 14.2% CAGR for FY14-16F. Its
JV with Danone, despite limited scale but growing fast, could
be a more significant driver in the medium term considering
To conclude, our preferences in the dairy industry chain are the
the strong know-how of Danone and Mengniu’s strength in
downstream dairy giants. Amid competition, we expect their
branding and distribution. The stock is currently trading at 19x
strong market dominance, extensive distribution and product
FY16F PE, below its historical (24x) as well as sector average
innovation efficiency will enable them to gain further market
valuation (25.5x). Our TP is now rolled over to HK$47.1 (Prev.
share and drive out smaller regional players. There is also room
HK$45.8/sh), based on 24x FY16F PE. BUY.
for margin improvement as product mix improves, while raw
material costs remain generally favourable in the near term. Yili (600887: CH, NR). An even fiercer competitor than
We maintain our BUY rating on Mengniu, and initiate coverage Mengniu, Yili has consistently outperformed its peers through
on Bright Dairy with a BUY. Meanwhile, we believe Yili (Not improving product mix and strong operating efficiency. We
Rated) would also be a strong performer under this trend. believe Yili will likely beat its own guidance of 12% and 15%
growth on FY15 sales and profit respectively, via stronger
We are cautious on the infant milk formula sector, as we
contribution from high-margin products such as Satine, QQ
expect price competition to intensify, which coupled with the
Star, Ambrosial and Chang Qing. Based on consensus
shift in distribution channel will put pressure on margins. We
estimates, Yili trades at 17.7x FY16F PE, undemanding against
expect the high-end market will continue to be dominated by
its peers.
global brands but there could be potential for domestic players
at the mass market end. China Modern Dairy (1117: HK, Buy). Weaker earnings in
FY15, a 17% decline under our estimates, should have been
As for the upstream dairy farms, the key concern would be on
largely priced in at the current valuation, with possible
raw milk prices which dictate profitability. But in the longer
resumption of earnings growth in FY16. In the medium term,
run, we continue to see market consolidation potential for
we believe leading upstream players should continue to benefit
major farms, with growth expected to be more driven by top
from rising demand from downstream, in particular pasteurised
line. Despite weakness in near-term earnings, we maintain
operations, as well as market consolidation. Our new TP is
BUY on China Modern Dairy on possible bottoming out of milk
HK$3.35 (Prev. HK$3.45ps), based on DCF valuation. BUY.
prices towards the year end and on valuation ground.
Yashili (1230: HK, NR). A leading domestic infant milk formula
Bright Dairy (600597: CH, Buy). We like Bright Dairy for its manufacturer, Yashili holds a 5.4% market share in China as of
solid positioning as the market leader in Shanghai. As of end-
FY14. With the introduction of Mengniu and Danone as its
FY14, it also has a dominant market share in pasteurised milk
controlling and second largest shareholders respectively in the
(53%) and low-temperature yogurt (31%) nationwide, which
past couple of years, Yashili is undergoing restructuring and
suggests some immunity from rising competition in the UHT
changes in strategy. While Yashili is unlikely to see a
dairy segment. Although Bright Dairy’s profitability and
turnaround in FY15, we expect Mengniu and Yashili’s potential
operating efficiency lags behind peers Mengniu and Yili, we
investment in Danone’s Dumex China, as well as opportunities
believe its’ product mix, coupled with expanding distribution
to leverage on Danone’s existing online platform, could be
network will help margins to catch up over the medium run. In
potential re-rating catalysts. Valuation is at 18.8x FY16F PE
addition, the pending acquisition of Israel’s Tnuva Foods via a
(based on consensus estimates), a premium to Biostime, owing
new share placement should help transform Bright Dairy as an
to distortion in earnings from the restructuring in addition to
integrated dairy player with a solid overseas footprint. However,
heavy competition. However, with the backing of two giants,
it will take time for benefits from restructuring and integration
Yashili will be a strong contender in the domestic market in the
to materialize. Bright Dairy offers the highest earnings CAGR of
long run.
25% among its peers. Initiating coverage with BUY, TP at
Rmb19.7/sh, pegged to 27.5x FY16F PE, equivalent to 1.1x Biostime (1112: HK, NR). Biostime is a major domestic infant
PEG. milk formula player in China with a 7.6% market share in FY14.
Since late 2014, Biostime has been clearing its old core-infant
China Mengniu (2319: HK, Buy). Product mix upgrades formula inventory, paving the way for a re-launch of upgraded
(yogurt and milk beverages) and margin expansion will be key
products (new packaging) in Jul-15. There should also be
drivers to decent earnings growth in the next 1-2 years. We
some margin benefits from lower raw material costs, partly
expect China Mengniu to continue gaining market share with
offset by higher marketing expenses associated with the
Page 18
Industry Focus
China Dairy Sector
upgraded product launches. With rising competition and rapid upstream margins in China. However, Huishan’s FYMar15
distribution channel changes within the infant formula sector, profitability was still affected by the decline in raw milk prices
Biostime’s product ASP faces the largest downside. Despite and weaker than expected downstream sales. It is yet to be
relatively cheap valuation at 11x FY16F PE based on consensus determined whether Huishan is able to successfully venture out
estimates, there is no re-rating catalyst in sight in the near term. of NE China into East China, a strong foothold of Bright Dairy.
On a positive note, Huishan’s Chairman purchased c.427m
Huishan (6863: HK, NR). A vertically integrated dairy player, shares in the open market, in addition to Huishan’s own share
Huishan’s key cost advantage is its ability to command lower buyback of 338m since August-14, providing some support to
feed costs against peers, hence enjoying the strongest share price.
Peers valuation – Dairy Sector
Mkt PE PE Y ield Y ield P/Bk P/Bk RO E RO E

Currenc y Pric e Cap 15F 16F 15F 16F 15F 16F 15F 16F
Company Name Code L oc al$ US$m x x % % x x % %
L iquid M ilk
China Mengniu Dairy * 2319 HK HKD 38.35 9,705 22.3 19.6 1.0 1.1 2.5 2.3 11.9 12.3
Inner Mongolia Yili 'A' 600887 CH CNY 18.63 18,383 22.6 17.7 2.1 2.6 4.7 4.4 26.4 27.7
Sany uan F oods 'A' 600429 CH CNY 10.44 2,517 261.0 261.0 n.a. n.a. 2.8 2.7 1.6 1.1
Huangshi Dairy 'A' 002329 CH CNY 69.48 2,980 143.3 66.2 0.3 0.5 11.6 10.2 13.0 15.0
Bright Dairy 'A'* 600597 CH CNY 18.08 3,581 31.4 25.2 1.9 2.4 4.6 4.3 15.2 17.8
A v erage 96.1 77.9 1.3 1.6 5.2 4.8 13.6 14.8
Inf ant F ormula

Yashili International 1230 HK HKD 2.27 1,390 23.6 18.8 1.3 1.9 1.2 1.2 6.8 7.0
Ausnutria Dairy 1717 HK HKD 3.03 386 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Biostime International 1112 HK HKD 21.6 1,698 12.0 11.3 3.8 4.0 3.1 2.7 28.1 25.2
Beingmate Baby & Child F ood 'A' 002570 CH CNY 18 2,963 36.9 37.5 0.5 0.7 4.5 4.9 4.9 7.6
Sy nutra International# SYUT US USD 6.52 374 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
A v erage 24.2 22.5 1.9 2.2 2.9 2.9 13.3 13.3
M ult inat ional Brands

Nestle 'R' NESN V X CHF 72.6 241,525 21.6 20.3 3.1 3.2 3.3 3.1 15.0 15.6
Mead J ohnson Nutrition MJ N US USD 91.17 18,467 24.7 22.4 1.8 2.0 20.7 14.9 104.0 85.5
Meiji Holdings# 2269 J P J PY 17250 10,630 28.8 31.2 0.7 0.9 3.1 2.9 11.4 10.0
Danone BN F P EUR 62.16 44,528 21.3 19.4 2.5 2.7 3.0 2.7 14.4 14.7
A v erage 24.1 23.3 2.0 2.2 7.5 5.9 36.2 31.4
Dairy F arm
China Modern Dairy * 1117 HK HKD 2.53 1,730 11.0 9.1 0.0 0.5 0.7 0.6 8.2 6.9
China Huishan Dairy # 6863 HK HKD 2.17 4,009 17.4 16.1 1.2 1.4 1.7 1.5 9.8 10.7
Yuanshengtai Dairy F arm 1431 HK HKD 0.71 358 4.7 4.0 0.0 0.0 0.5 0.4 8.5 8.3
A v erage 11.0 9.7 0.4 0.6 0.9 0.9 8.9 8.6
# FY15: FY16; FY16: FY17
Source: Thomson Reuters, *DBS Vickers
Page 19
Industry Focus
China Dairy Sector
Peers valuation – F&B

Pric e Rec om Cap F isc al 15F 16F 15F 16F 15F 16F 15F 16F
Company Name Code HK $ HK $m Yr x x % % x x % %
HK list ed
Brew ery Sec t or
Tsingtao Brewery 'H'* 168 HK 44.35 Hold 59,916 Dec 25.1 23.8 1.2 1.3 2.9 2.7 11.9 11.6
China Res.Enterprise 291 HK 24.1 NR 58,638 Dec 103.4 59.2 0.9 0.9 1.2 1.1 2.0 7.1
A v erage 64.3 41.5 1.0 1.1 2.0 1.9 6.9 9.3
Dairy Sec t or
China Mengniu Dairy * 2319 HK 38.35 Buy 75,216 Dec 22.3 19.5 1.0 1.1 2.5 2.3 11.9 12.3
China Modern Dairy * 1117 HK 2.53 Buy 13,421 Dec 11.1 9.1 0.0 0.5 0.7 0.6 8.2 6.9
Biostime Intl.Holdings 1112 HK 21.60 NR 13,162 Dec 12.0 11.3 3.8 4.0 3.1 2.7 28.1 25.2
China Huishan Dairy # 6863 HK 2.17 NR 31,075 Mar 17.4 16.1 1.2 1.4 1.7 1.5 9.8 10.7
Yashili Intl.Holdings 1230 HK 2.27 NR 10,772 Dec 23.6 18.8 1.3 1.9 1.2 1.2 6.8 7.0
Yuanshengtai Dairy 1431 HK 0.71 NR 2,775 Dec 4.7 4.0 0.0 0.0 0.5 0.4 8.5 8.3
A v erage 15.2 13.1 1.2 1.5 1.6 1.4 12.2 11.7
Inst ant Noodle & Bev erage and O t hers

Tingy i* 322 HK 15.60 Hold 87,421 Dec 24.7 22.6 2.0 2.2 3.4 3.2 14.4 14.6
Want Want China* 151 HK 8.37 Buy 109,913 Dec 20.4 18.5 2.7 3.0 5.8 5.1 31.0 29.2
Uni-President China Hdg.* 220 HK 7.00 Hold 30,229 Dec 38.0 31.7 0.8 0.9 2.1 2.0 5.7 6.5
V itasoy Intl.Hdg.*# 345 HK 12.20 Hold 12,685 Mar 29.7 25.4 2.3 2.7 6.0 5.4 21.2 21.2
China F oods* 506 HK 4.07 Hold 11,385 Dec 55.4 35.6 0.0 0.0 1.9 1.8 3.4 5.1
A v erage 33.6 26.8 1.6 1.8 3.9 3.5 15.2 15.3
Slaught er Sec t or
China Yurun* 1068 HK 2.5 Hold 4,557 Dec n.a. 37.0 0.0 0.0 0.3 0.3 (0.1) 0.8
WH Group 288 HK 5.46 NR 77,878 Dec 11.5 10.4 2.7 3.0 1.8 1.6 16.0 16.0
A v erage 11.5 23.7 1.3 1.5 1.0 0.9 8.0 8.4
HK - list ed av erage (ex Y urun,CRE) 22.8 19.0 1.4 1.6 2.4 2.2 12.4 12.4
# FY15: FY16; FY16: FY17
Page 20
Industry Focus
China Dairy Sector
Peers valuation – F&B (continued)

Currenc y Pric e Cap F isc al 15F 16F 15F 16F 15F 16F 15F 16F
Company Name Code L oc al$ US$m Yr x x % % x x % %
A - share list ed
Wine Sec t or
Yantai Changy u Pion.Wine 'B' 200869 CH HKD 27.59 3,266 Dec 13.5 12.1 2.0 2.0 2.0 1.8 15.6 15.3
A v erage 13.5 12.1 2.0 2.0 2.0 1.8 15.6 15.3
Brew ery Sec t or

Beijing Yanjing Brew.'A' 000729 CH CNY 9.04 4,102 Dec 31.4 28.4 1.0 1.0 2.0 1.9 6.3 6.6
Tsingtao Brewery 'A'* 600600 CH CNY 41.38 9,000 Dec 29.3 27.7 1.0 1.1 3.3 3.1 11.9 11.6
A v erage 30.3 28.1 1.0 1.1 2.7 2.5 9.1 9.1
Dairy Sec t or
Inner Mongolia Yili Indl.Gp.'A' 600887 CH CNY 18.63 18,383 Dec 22.6 17.7 2.1 2.6 4.7 4.4 26.4 27.7
Beijing Sany uan F oods 'A' 600429 CH CNY 10.44 2,517 Dec 261.0 261.0 n.a. n.a. 2.8 2.7 1.6 1.1
Bright Dairy & F ood 'A'* 600597 CH CNY 18.08 3,584 Dec 31.4 25.2 1.9 2.4 4.6 4.3 15.2 17.8
Beingmate Baby & Child F ood 'A' 002570 CH CNY 18 2,963 Dec 36.9 37.5 0.5 0.7 4.5 4.9 4.9 7.6
A v erage (ex . Sany uan) 30.3 26.8 1.5 1.9 4.6 4.5 15.5 17.7
Bev erage and O t hers

Hebei Chengde Lolo 'A' 000848 CH CNY 18.01 2,183 Dec 27.8 23.9 1.5 1.6 7.6 6.2 30.6 27.6
Sanquan F ood 'A' 002216 CH CNY 15.6 2,020 Dec 101.3 68.1 0.3 0.3 6.4 6.1 5.6 8.0
A v erage 64.5 46.0 0.9 0.9 7.0 6.1 18.1 17.8
Slaught er Sec t or
Henan Shuanghui Inv .& Dev .'A' 000895 CH CNY 21.86 11,617 Dec 15.4 13.9 4.2 4.9 3.9 3.5 26.2 26.4
A v erage 15.4 13.9 4.2 4.9 3.9 3.5 26.2 26.4
Chinese L iqueor Sec t or
Wuliangy e Yibin 'A' 000858 CH CNY 27.9 17,051 Dec 17.5 15.2 2.1 2.5 2.4 2.2 14.4 15.2
Kweichow Moutai 'A' 600519 CH CNY 219.54 44,401 Dec 16.5 15.0 2.0 2.5 4.2 3.6 27.8 25.8
Luzhou Lao J iao 'A' 000568 CH CNY 25.61 5,782 Dec 21.9 18.3 2.0 2.6 3.3 3.0 15.6 16.7
Xinghuacun F en Wine 'A' 600809 CH CNY 20.15 2,809 Dec 33.4 32.2 0.7 0.8 4.1 3.8 10.4 11.3
J iangsu Yanghe Brew.J st. 'A' 002304 CH CNY 67.5 16,377 Dec 20.6 17.9 2.1 2.5 4.3 3.8 23.1 22.9
A v erage 33.3 24.8 1.8 2.2 3.8 3.4 16.2 16.6
A - share list ed av erage (ex Beijing Sany uan, Roy al G roup,
Sanquan F ood) 29.2 24.0 1.8 2.1 4.0 3.6 16.7 17.1
M ult inat ional Companies

Nestle 'R' NESN V X CHF 72.6 241,525 Dec 21.6 20.3 3.1 3.2 3.3 3.1 15.0 15.6
Unilev er (Uk) ULV R LN GBP 29.05 128,581 Dec 0.2 0.2 293.8 312.3 0.1 0.1 37.7 37.4
Coca Cola KO US USD 40.84 178,009 Dec 20.3 19.2 3.2 3.5 6.2 6.1 27.6 29.1
Pepsico PEP US USD 96.87 142,301 Dec 21.4 19.7 2.8 3.0 8.8 8.6 40.0 44.0
Danone BN F P EUR 62.16 44,528 Dec 21.3 19.4 2.5 2.7 3.0 2.7 14.4 14.7
Mondelez International Cl.A MDLZ US USD 42.12 68,513 Dec 24.5 21.0 1.5 1.6 2.6 2.4 9.9 11.5
Hormel F oods HRL US USD 57.66 15,238 Oct 22.7 20.8 1.7 1.9 3.9 3.6 18.0 17.7
Ty son F oods 'A' TSN US USD 43.13 13,112 Sep 12.5 11.5 0.9 0.9 1.8 1.6 14.7 13.8
A v erage 20.6 18.8 2.3 2.4 4.2 4.0 19.9 20.9
# FY15: FY16; FY16: FY17
Page 21
China / Hong Kong Company Focus
Bright Dairy & Food Co Ltd
Bloomberg: 600597 CH Equity | Reuters: 600597.SS Refer to important disclosures at the end of this report
BUY (Initiating Coverage) TRANSFORMATION IN PROGRESS

Market leader in Shanghai, Bright Dairy is evolving into an integrated
Last Traded Price: RMB18.08 (CSI300 Index : 4,251)
dairy player with an overseas footprint. Bright Dairy is a leading dairy
Price Target: RMB 19.70 (9% upside)
player based in Shanghai. It has cultivated a household name under
Potential Catalyst: Star products to drive profitability; expansion in ‘Bright’ with product offerings including both pasteurised and UHT dairy
distribution network coverage products, milk beverages and infant formula. It recently proposed a new
Where we differ: We are more conservative in our sales estimate for share placement with gross proceeds of c.Rmb9bn in exchange for Tel
Momchilotvsi
Aviv-based Tnuva Foods, the largest food company in Israel, and parent
Analyst Shanghai Dairy’s upstream assets. While the restructuring and integration
Alice HUI CFA, +852 2971 1960 will take time, it will transform Bright Dairy into an integrated dairy player
alice_hui@hk.dbsvickers.com with a solid overseas footprint.
Alison Fok +852 2971 1938 Despite intense competition, Bright's strong product capability would
alison_fok@hk.dbsvickers.com
continue to support product mix enhancement and drive higher-than-
peers earnings growth of 25% in FY14-17. We estimate sales to grow at
Price Relative
RM B R e la t iv e In d e x
FY14-17F CAGR of 13%. We expect Bright Dairy’s organic sales growth
to be driven by cultivation of its core, high margin brands (Momchilovtsi,
338
2 7 .3 UBEST, Changyou) through expansion of its distribution network further
288
2 2 .3 into South and Central China, where its penetration still lags behind
238
1 7 .3
peers. Coupled with a larger scale and a favourable input cost
188
environment, there should be abundant room for margin improvement.
1 2 .3 138
7 .3 88 Premium valuation justified given strong earnings potential. Initiate

J u l-1 1 J u l-1 2 J u l-1 3 J u l-1 4 J u l-1 5
coverage with BUY, TP set at RMB19.7share. We believe Bright Dairy has
B r ig h t D a ir y & F o o d C o L t d ( L H S ) R e la t iv e S H S Z 3 0 0 In d e x ( R H S )
significant potential for growth from new products, distribution network
expansion, as well as being a key beneficiary of the SOE reform initiatives
Forecasts and Valuation underway right now. We expect Bright Dairy will achieve earnings CAGR
FY Dec (RMB m) 2014A 2015F 2016F 2017F
of 25% in FY14-17F, against Mengniu’s 12%, and Yili’s 23% (based on
Turnover 20,385 23,013 26,036 29,151
EBITDA 893 1,132 1,410 1,734 consensus estimates). Initiate with Buy; TP at RMB19.7/sh, pegged to
Pre-tax Profit 714 907 1,132 1,412 27.5x FY16F PE, equivalent to 1.1x PEG, but still below its historical 8-
Net Profit 568 708 883 1,102 year average of 35.5x
EPS (RMB) 0.46 0.58 0.72 0.89
EPS Gth (%) 39.1 24.6 24.8 24.7 Valuation
DPS (RMB) 0.29 0.35 0.43 0.54
BV Per Share (RMB) 3.67 3.90 4.18 4.54 The stock is currently trading at 25.2x FY16F PE, representing a premium
PE (X) 39.2 31.4 25.2 20.2 over Mengniu and Yili. This is likely due to Bright Dairy’s higher than
P/Cash Flow (X) 66.3 27.9 20.8 16.9
P/Free CF (X) nm nm nm nm industry growth rate, and potential earnings re-rating from its recent
EV/EBITDA (X) 26.4 22.0 18.2 15.2 acquisitions.
Net Div Yield (%) 1.6 1.9 2.4 3.0
P/Book Value (X) 4.9 4.6 4.3 4.0 Key Risks to Our View:
Net Debt/Equity (X) 0.1 0.4 0.5 0.5
ROAE (%) 12.9 15.2 17.8 20.5 Food safety, rising penetration. Food safety issues, growing yogurt
competition and raw milk prices could affect Bright Dairy’s profitability.
Earnings Rev (%): New New New
Consensus EPS (RMB) 0.66 0.87 1.06 At A Glance
Other Broker Recs: B: 13 S: 0 H: 4 Issued Capital (m shrs) 1,231
ICB Industry: Consumer Goods Mkt. Cap (RMBm/US$m) 22,250 / 3,581
ICB Sector: Food Producers Major Shareholders
Principal Business: Leading dairy player with the largest market Bright Food (%) 54.4
presence in Shanghai. Free Float (%) 45.6
Source of all data: Company, DBSV, Thomson Reuters, HKEX Avg. Daily Vol.(‘000) 35,687
www.dbsvickers.com
ed- JS / sa- AL
INVESTMENT THESIS
Profile Rationale
Listed on the Shanghai Stock Exchange in 2002, Bright Dairy We estimate Bright Dairy’s sales to grow at FY14-17F CAGR
is one of the largest downstream dairy players in China. As of 13%, with organic growth driven by cultivation of its
of 2014, Bright Dairy held a 22% market share in dairy core, high margin brands, through expansion of its
products in East China, where it has a dominant foothold in distribution network into South and Central China, where its
Shanghai with a market share of 46%. penetration lags behind peers.
We expect Bright Dairy will achieve earnings CAGR of 25%

in FY14-17F, against Mengniu’s 12% and Yili’s 23% (based
on consensus estimates).
Valuation Risks
Our TP is at RMB19.7/sh, pegged to 27.5x FY16F PE, Food safety issue is a key concern to the dairy sector, and
equivalent to 1.1x PEG, but still below its historical 8-year Bright Dairy is subject to policy and regulatory changes. With
average of 35.5x the inclusion of Israeli-based Tnuva Food, currency risks will
become a potential risk. Lastly, fluctuation in raw material
costs such as raw milk prices and milk powder costs may
have an impact on the company’s margins.
Source: DBS Vickers
Page 23
SWOT Analysis
Strengths Weakness
 State-owned background with strong presence in the  Lack of scale against dairy giants such as Mengniu and
Shanghai region, where the company is the top player with Yili
>40% market share in liquid milk products
 The smaller scale also translates into weaker OP
 Established market position and brand reputation in the margins against its bigger peers
pasteurised milk segment
 Weaker market penetration compared with major peers
 Strong product innovation, as demonstrated by its success in with strong nationwide coverage
UHT yogurt Momchilovtsi
 Relatively low ROE
 Comprehensive product mix including liquid milk, yogurt,
milk powder as well as dairy-based products such as butter
 Improving product mix with rising skew towards higher-
margin products. Its five key products are estimated to
account for 60% of its liquid milk sales in FY14, vs 40%
previously
Opportunities Threats
 As the first mover in the UHT yogurt category, Bright’s star  Rising competition from domestic and international
product Momchilovtsi should have more room to grow as it players
expands into other regions and into lower tiered cities
 Profitability could fluctuate on raw milk and milk
powder price volatility
 Extending product offerings by rolling out other high-margin
products into Momchilovtsi’s existing distribution channel  Food safety scares
 Weaker consumer demand due to slower macro
 Huge potential for pasteurised milk segment which Bright environment
already has an strong market position and expertise
Source: DBS Vickers
Page 24
Company background
Dominant market player in East China. Listed on the Shanghai Part of SOE reform initiatives. The acquisition of Tnuva Food
Stock Exchange in 2002, Bright Dairy is one of the largest has been well anticipated by the market as Parent Company
downstream dairy players in China. As of 2014, Bright Dairy Bright Food had already announced its intention for the
held a 22% market share in dairy products in East China, where injection after acquiring Tnuva in Jun-14. This is also part of the
it has a dominant foothold in Shanghai with a market share of SOE reform initiatives that aims to (1) bring in strategic
46%. shareholders and introduce a mixed ownership scheme; (2)
consolidate assets to form a clearer and well defined corporate
Strong SOE backing. Bright Dairy has a strong state-owned structure, i.e. use Bright Dairy as the sole platform for dairy-
background with Shanghai Municipal Government as its related business.
principal shareholder. Bright Dairy is one of the four publicly
listed platforms for Bright Food. Other affiliated companies In addition to acquiring Tnuva Foods, Bright Dairy has been
include Shanghai Jinfeng Wine (600616.SH, alcohol related), consolidating the Group’s upstream assets. In 2014, Bright Dairy
Shanghai Maling Aquarius (600073.SH, canned products & purchased the remaining 20% stake in its upstream subsidiary,
other products), and Shanghai HaiBo (600708.SH, Shanghai Bright Holstan from Parent Company Bright Food. In
transportation & logistics). Feb-14, Bright Dairy formed a 55%/45% JV with PE fund RRJ
Capital to develop its upstream capabilities. As of end-14, Bright
In Jun-15, Bright Dairy announced its intention to place out no Dairy owns 14 farms with approximately 15,000 cows, and is
more than 559m shares for Rmb16.1/share to six strategic looking to expand to 20 farms in the next 3-5 years. With the
shareholders. The gross proceeds of Rmb9bn will be used to potential acquisition from Shanghai Dairy in the pipeline as well,
acquire a 77% stake in Israeli-based Tnuva Food from Parent this should consolidate Bright Dairy’s control on upstream raw
Company, as well as Shanghai Dairy’s upstream assets. As one milk sourcing. Shanghai Dairy holds c.35,000 cows under 24
of the strategic shareholders in the placement, Bright Food’s dairy farms.
effective controlling stake will be lowered to 40.8% (from
54.4%). The new shareholders will be subject to a 3-year
holding period.
Pending shareholder structure (Before & after new share placement)
B ef o re A f t er
Shares (m) % Shares (m) %
Bright F ood 669 54.4% 669 37.4%
Yimin Group (益民集團 )* 0 0.0% 62.1 3.5%
B rig ht F o od 669 5 4.4 % 73 1 4 0.8%
Xin Cheng Inv estments (信晟投資 ) 0 0.0% 217.4 12.1%
Cheng Chuang Inv estments (晟創投資 ) 0 0.0% 186.3 10.4%
Shangqi Inv estments (上汽投資 ) 0 0.0% 31.1 1.7%
Guosheng Inv estments (國盛投資 ) 0 0.0% 31.1 1.7%
Puke Yuanfuday i (浦科源富達壹 ) 0 0.0% 31.1 1.7%
Other inv estors 562 45.7% 562 31.4%
*Owned by Bright Food
Page 25
Growth drivers UBEST, Changyou, AB100, Zhiwuhuoli) to account for 60% of

FY14 liquid milk sales, and this should continue to improve.
Growth to outperform peers. Bright Dairy derives its revenue
from a range of dairy products which includes UHT dairy Momchilotvsi sales
products (plain milk, premium milk, and yogurt), pasteurised
products, milk beverages, infant formula etc. We forecast the RMB m % yoy
company to post FY14-17F earnings CAGR of 25% driven by an 14,000 300
enhanced product mix (skewing towards high-margin products
12,000 250
such as UHT yogurt), favourable raw material cost environment,
and synergies with overseas acquisitions. In the longer term, we 10,000
200
expect the possible spin-off of its upstream assets to be a 8,000
potential re-rating catalyst. 150
6,000
100
Star product offerings 4,000
2,000 50
Pre mium ca te gory Bra nd Es t. la unch
0 0
Pastuerised milk U+ (优倍) Sept-06 2010 2011 2012 2013 2014 2015F2016F2017F
Fresh yogurt; kid's Momchilovtsi % yoy
AB100 (健能) July-10
yogurt
UHT Yogurt Momchilovtsi (莫斯利 Dec'10 Source: Company data
Fresh yogurt 安)
Changyou (畅优) Apr-12
Plant-based bacteria (ii) Market leader in pasteurised milk
Zhiwuhuoli (植物活力) Mar-13
drink
As of FY14, Bright is the market leader in pasteurised milk with
a 53.6% market share, of which it holds a dominant market
share of 84% in East China. Within fresh yogurt, Bright Dairy
holds a nationwide market share of 31.2%, with a 53% market
share in East China. We expect Bright Dairy in a better position
vs. its competitors as further competitions enters into the UHT
segment.
Nationwide & East China market share
Source: Company data

90% 84.0%
(i) Star products to lead profit growth 80%
70%
Bright Dairy is a pioneer in the UHT yogurt market in China, 60% 53.6% 53.1%
with its first UHT yogurt product, Momchilotvsi, launched in 50%
2010. Since inception, Momchilotvsi has achieved tremendous 40% 31.2%
growth, and is now the single largest contributor to topline at 30%
35% of total. Targeting the premium market, we estimate this
20%
product commands a gross margin that exceeds 40%, above 5.7%
10% 1.6%
the average for its other UHT dairy products.
0%
In FY14, sales of Momchilovtsi grew 85% y-o-y to c.Rmb6bn. Pastuerised milk Low-temp yogurt UHT milk
We expect sales to rise further to Rmb8bn in FY15, translating National East China
into y-o-y growth of 35%. This will boost its contribution to
38% of overall sales (FY14: 35%). We also expect its other
higher margin brands including UBest, Changyou and AB100 to
sustain strong double-digit growth in FY15 as penetration
improves. We estimate its top-5 star products (Momchilotvsi,
Page 26
(iii) Deepening penetration. (iii) A beneficiary of the SOE reform
The success of Momchilovtsi, which is a UHT product with Parent Company, Bright Food, has been in the process of
further reach compared to low-temperature or pasteurised dismantling and streamlining existing assets for a number of
products, had enabled Bright Dairy to extend its distribution years through management incentives, inviting strategic
network beyond its traditional stronghold in Eastern China. shareholders and lately acquiring overseas assets. As a key
With POS reaching 650K in FY14, the company plans to expand subsidiary of Bright Food, Bright Dairy should remain under the
it further to 1m POS in FY15. This also opens up opportunities spotlight, given dairy sector’s stronger-than-industry growth
for the company to roll out other products using Momchilovtsi’s and significant overseas acquisitions recently.
existing channel, and provides an established distribution
platform for future product launches. The latest share placement of 559m shares will generate gross
proceeds of Rmb9bn, which will be allocated in exchange for (1)
We expect South and Central China regions to exhibit stronger c.77% controlling stake in Israeli-Tnuva Food, estimated to be
growth, with increasing capacity expansion directed at both worth c. Rmb6.87bn (implying c. 13.3x FY14 PE or 1.89x
regions. As scale picks up, we see room for improvement in P/NAV), and (2) Shanghai Dairy’s upstream dairy operations (no
operating leverage. In fact, Bright Dairy’s SG&A expense to financial details have been released yet).
sales ratio has been on a declining trend in the past two years,
but remains higher than bigger peers, an indication of its With the expected injection of Tnuva Foods, Bright is well
smaller scale but also implies lots of room for improvement. positioned to become a diversified dairy player over the long
term. In addition, we expect Bright Dairy to spin-off its
upstream assets in due time after the consolidation of Shanghai
SG&A expense % to overall sales versus peers
Dairy’s upstream assets. If we include Tnuva’s earnings
assuming flat earnings growth y-o-y, we expect the potential
32% impact on EPS will be milder at 8%/3%/0% in FY15-17F
inclusive of the enlarged share base.
30%
28%
26%
24%
22%
20%
2013 2014 2015F 2016F 2017F
Yili Bright Mengniu
Page 27
Bright Dairy’s earnings – before & acquisition inclusion

Initial thoughts on Tnuva acquisition. Given Tnuva’s strong roots of Tnuva*
in the Israeli community as the largest food manufacturer, we
expect profitability may be limited by government policies 1Q15 2015
(dominant market share in Israel, which could run into anti- (RMB m) Bef ore A fter Before A fter
monopoly trust issues). However, we expect Tnuva’s product Sales 4,991 6,672 23,013 29,810
technology expertise, as well as vast product offerings to be
Net profit 98 162 708 1,135
distributed to China.
Profit margin (%) 2.0 2.4 3.1 3.8
We also highlight that Tnuva owns the franchising rights to Sales % diff 33.7 29.5
Yoplait yogurt in Israel, a brand which Bright Food had Net profit % diff 65.8 60.4
attempted to acquire back in 2011 (but lost out to General
Mills). The acquisition of Tnuva should also be positive to ROE Source: Company data, DBS Vickers
with Bright’s FY14 ROE at 12.6% versus Tnuva’s at 14.2%
*illustration of impact on earnings assuming Tnuva is
consolidated on Jan1st
Tnuva owns 7 of the 10 best known food brands in Israel

formed by farming communities eighty years ago. Tnuva Foods
is the largest food manufacturer in Israel with product offerings
spanning dairy related products (>70% market share in Israel),
pork, frozen vegetables and bakery goods. Besides its domestic
market, Tnuva Food’s products are also sold in the Middle East,
Europe and the US. Tnuva Food was granted the franchising
rights for General Mill’s Yoplait in Dec-01.
Tnuva Food’s product offerings
Brand Produc t desc ript ion
Adom Adom F resh beef

38% whipping cream, 32% mildly sweet whipping cream, 15% cooking cream, 10% reduced-fat cooking cream,
Chef Lav an
excellent Canaan cheese for baking and grated cheese.
Cottage and soft cheeses Cottage cheese and white cheese
Eggs 30% market share in egg market
Hard Cheese and F resh salted
Under Piraeu - salted cheese
cheese
Hard Cheese , processed
Tnuv a’s range of special cheeses includes Brie, Camembert, Mozzarella, Roquefort and other selected cheeses.
cheese and butter
Harduf Organic cow, goat milk and y ogurt
Maadanot F rozen pastries including pizzas, burekas (filled pastry ), Yemenite products and other dough products
Chilled, fresh ready to eat poultry products, the brand also serv es the institutional market with customers such as
Mama Of
McDonalds, Burger Ranch, and leading café chain
Oliv ia Sauces, spread
Soy products Soy products and desserts
Sunfrost Leading frozen v egetables company in Israel
Specialises in the dev elopment, production and marketing of meat delicacies: pastrami, cold cuts, sausages and
Tirat Zv i
others
Tnuv a Chocolate Milk Directed at children
Tnuv a Milk Milk Cartoon, UHT Milk, Milk bags, Milk packs
Yogurts Yogurts and puddings, and franchising rights to Yoplait
Page 28
Financial analysis
Cost of sales breakdown % (FY14)
Revenue breakdown. The bulk of Bright Dairy’s revenue is
derived from Momchilovtsi. The company is now ramping up its
product offerings towards higher margin brands including UHT
Labour Production
yogurt Momchilovtsi, pasteurised products UBEST, and low- costs
3%
temperature yogurt Changyou. Higher margin products account 14%
for approximately 45% of overall sales.
Revenue breakdown % (FY14)
Direct
Others materials
6% 83%
Milk powder
Momchilovtsi
and others
29%
19%
Ubest Cost structure. Bright Dairy’s cost of sales mainly comprises of

6%
Other liquid raw material costs such as raw milk and milk powder (83%),
milk
39% Changyou while labour cost and manufacturing overheads accounted for
1% 3% and 14% respectively in 2014.
Source: Company data Financial health. In 2014, capex was 65% higher y-o-y owing
to completion of processing plant capacity expansion, as well as
Gross margin expansion. Continued improvement in product building of new dairy farms. Capex in 2015 would continue to
mix and a favourable raw material cost environment are the key remain high as Bright Dairy continues to expand its production
drivers to profitability. We expect overall gross margins to edge base and distribution network. After its recent new share
up modestly by 1.1ppt from 2014 to 2017F. Compared to 2010, placement which raised gross proceeds of Rmb9bn in exchange
just before Momchilovtsi was launched, liquid milk gross margin for Tnuva Foods (for no more than Rmb6.87bn) and upstream
had expanded 7ppts up to FY14 on the back of higher margin assets from Parent Company, Bright Dairy should have sufficient
product contribution. capital in the near term. If we exclude recent new share
placement and pending acquisitions, we estimate Bright’s net
Overall gross margin gearing to be 35%.
38.0% Earnings risk. Food safety issue is a key concern to the dairy
sector, and Bright Dairy is subject to policy and regulatory
37.0%
changes. With the inclusion of Israeli-based Tnuva Food,
36.0% currency risk will become a potential risk. Lastly, fluctuation in
raw material costs such as raw milk prices and milk powder
35.0%
costs may have an impact on the company’s margins.
34.0%
33.0%
32.0%
31.0%
30.0%
2013 2014 2015F 2016F 2017F
Page 29
Financial forecast Valuation
1Q15 analysis. In 1Q15, revenue grew 8.1% while net profit The stock is currently trading at 25.2x FY16F PE, representing a
expanded 39.2% y-o-y to Rmb98m. This was on the back of premium over other downstream dairy players such as Mengniu
improvement in product mix as well as a favourable raw and Yili. This is likely due to Bright Dairy’s higher than industry
material environment. Gross margins expanded 0.85ppt to growth rate, and potential earnings re-rating from its recent
34.7%, a decent performance but much slower than Yili’s 1Q15 acquisitions.
GP margin expansion of 3.4ppts. This is likely a reflection of
Bright’s higher-cost milk powder inventory which had yet to be We peg our TP at 27.5x FY16F PE, which is equivalent to 1.1x
fully digested. In terms of seasonality, 1Q is typically a low PEG, but still below its historical 8-year average of 35.5x. This
season for dairy product sales, while 2H normally reports much translates into a fair value of Rmb19.7 per share.
stronger sales.
We forecast UHT plain white milk to grow in the single-digits

over the next few years, given low barriers of entry and weaker
brand loyalty in the low-end price range. As for the higher-
margin products, we expect double-digit growth in topline,
bringing about stronger profitability expansion, thanks to
improving operating leverage. We forecast topline growth of
13%/13%/12% in FY15-17F, and earnings to grow at 25%
CAGR in 2014-17F.
Page 30
Appendix: Overseas assets and partnerships
Synlait Dairy. Synlait Dairy is a New Zealand based raw milk

processor and manufactures milk powders, cream products and
infant formula and nutritional products. Synlait Dairy acts a third
party milk powder provider for customers mainly based in Asia,
the Middle East, Europe and Africa. In 2010, Bright Dairy
invested NZ$82m (Rmb382m) for a 51% stake. Through its IPO
in Jul-13, Bright Dairy subsequently sold down its stake to
39.12%. As of the last traded price, Bright Dairy’s stake is
worth NZ145.4m. (Rmb: 610m)
Synlait Dairy’s customers. Synlait Dairy’s infant formula

customer base includes Bright Dairy, which uses Synlait Dairy to
manufacture its imported infant formula brand “Pure
Canterbury”. In addition to Bright Dairy, Synlait Dairy has been
working with A2 Corporation to develop branded infant
formula.
Strategic cooperation with Pactum Dairy Group. In mid-2014,

Bight Dairy signed a strategic cooperation with Australia-based
Pactum Dairy Group to manufacture “U+ imported “a UHT milk
brand. Bright Dairy initially agreed to take up 25m litres of UHT
milk in the first year, which is less than <1% of FY14 sales.
Pactum Dairy Group is part of Freedom Foods Group (FNP: ASX).
Bright’s imported brands – Pure Canterbury, U+ import
Source: Company, DBS Vickers
Page 31
State-owned; beneficiary of reforms Possible spin-offs with recent overseas privatisations. Bright
Food has highlighted its intention to (1) spin-off its Weetabix
Overseas ambitions. Bright Foods’ Vice-President, Ge Junji, acquisition while retaining a controlling stake, similar to Synlait
announced Bright’s intention to increase the proportion of its Dairy, (2) combination of asset spin-off with existing domestic
overseas assets to 25% (2014:12%) over the next few years. private assets, and lastly (3) the injection of assets into existing
Bright Foods has been one of the most aggressive Chinese listed entities. For example, Bright Foods plans to inject DIVA, a
players embarking on an M&A spree. There were a few bordereau specialised French distributor, into Jinfeng Wine, to
unsuccessful deals (United Biscuits, GNC). Bright Foods is mainly broaden its existing wine operations.
focused on consumer brand names, with similar businesses
relating to its existing assets. In total, we estimate Bright Foods
has spent over Rmb3bn on purchasing overseas assets.
Bright Foods: overseas acquisitions
D at e Co mp an y Co u n t ry Cat eg o ry N o w u n d er: D es c rip t io n
Produces infant formula products under Pure Canterbury brand.

Bright Dairy
J ul-10 Sy nlait New Zealand Dairy -related The Company w as publicly listed in J ul-2013 on NZSE, of w hich
(39%)
Bright Dairy parred dow n its stake to 39%.
Dry groceries, confectionery , biscuits, cakes, perishable, and

A ug-11 M anassen F oods A ustralia Dry grocery Bright F oods
frozen foods and priv ate label
M ay -12 Weetabix UK Cereal Bright F oods Whole-w heat grain breakfast cereal under Weetabix
J un-12 Div a F rance A lcohol Bright F oods Export oriented w ine broker, mainly know n for Bordeaux
Premier dairy company w ith products such as y ogurt, cheese,

J an-14 M undella F oods A ustralia Dairy -related Bright F oods
probiotic y ogurt
Bright F oods; Largest food company in Israel specialising in milk and dairy
M ay -14 Tnuv a Israel Dairy -related pending injection products, Tnuv a accounts for 70% of the dairy market in the
into BrightDairy sale of meat, egg and packaged food.
Oliv e oil maker w hich produces F lippo Berio (leading brand in US

Oct-14 Salov Italy Cooking oil Bright F oods
and UK).
Page 32
Key Management Team
K ey T it le O t h er d irec t o rsh ip s
Mr. Zhuang Guow ei Chairman Bright F oods Group Co. Ltd: party member and v ice president; F ormer Shanghai F arming
(庄國蔚 ) (Group) Co. Ltd: V ice President & F ormer Shanghai Haibo Co.
Mr. Shen Weiping Director Shanghai Milk (Group)'s Director, General Manager; Shanghai A gri-business Inv estment
(沈偉平 ) Company : General Manager
Mr. Dong Zongbo CF O Serv ing since 2006, Mr. Dong used to serv e as a finance manager for its fresh product
(董宗泊 ) business.
Mr. Hu Kaiming Superv isor of F ormer Shanghai Yimin F ood, Party Secretary and Deputy Minister
(胡凱明 ) Company
Mr. Zhang Daming Chairman of Chairman of Superv isory Board, Bright F ood, V ice-Chairman of the Superv isory Board';
(張大鳴 ) Superv isory Board Shanghai Haibo Co. Chairman
Mr. Pan F ei (潘飛 ) INED V ice President & Professor of Shanghai Univ ersity of F inance and A ccounting
Mr. Zhang Guangsheng INED J ilin prov inicial gov ernment economic adv isor; honorary director of Shanghai Institute of
(張廣生 ) Economic Research; former Shanghai Pudong Dev elopment Bank Co. Chairman
Mr. Gu Xiaorong INED Shanghai A cademy of Social Sciences research at the Institute of Law
(顧肖榮 )
Parent Company’s listed entities
Co mp an y T ic k er Cat eg o ry St ak e D es c rip t io n
Dairy -related products w ith primary brands as Bright (光明 ), and

Bright Dairy 600597 Dairy -related 51.25%
Momchilov tsi (莫斯利安 )
Shanghai Maling Canned products including processed meat, seasoning, seafood, v egetable
Processed
A quarius 600073 37.79% as w ell as national brands under " 冠生園 "," 大白兔 "," 蘇食 "," 梅林 ", "
products
(上海梅林正廣和 ) 佛手 "," 華佗 "," 正廣和 ","SF "," 愛森 ","96858"
A lcohol related products; w ell-know n for its y ellow -w ine, of w hich

Shanghai J infeng brands include y ellow w ine - Shikumen (石庫門 ), Hejiu (和酒 ), red-w ine
600616 A lcohol 34.90%
Wine Meishengshijia(美聖世家 ), and rice-w heat alcohol J insenianhua(金色年
華 ) as w ell as cocktails
Three major rev enue segments - Haibo Taxi, Haibo Logistics, and Haibo
Inv estments. Haibo Taxi is one of the four enterprises of Shanghai taxi
Logistics and industry . A s for Haibo Logistics includes facilities such as transportation,
Shanghai Haibo 600708 35.81%
others storage and integrated logistics. Shanghai Solid Stainless Steel Products is a
stainless steel producers of steel v accum flask products under "Solid"
w hich is exported to ov er 40 countries.
Page 33
Bright Dairy products
Bri ght Dai ry
U+, Bright Dairy, Comfort Night

Pure white milk
Milk; High Calcium;
Milk UHT
(76% of Pastuerised Excellent; Ubest; Bright Dairy; High-
FY15F Calcium; Children;
s ales Bright (Peanut; Red-bean; Red Date;
including Fermented milk Chocolate); Morning Series
yogurt )
Children DUDU
Plant-based; Red date; Chang-You;

Yogurt
Abioo; Bright Dairy; Rui-Shi
Low-temp
Yogurt Red date, HI-You, Bright Dairy
yogurt
Children
Children Abioo; 1911
flavoured &
Milk
Infant formula Pure Canterbury; You; Bright Dairy
pow der
(c.18%
of FY15 Adult Bright
l )
Ot hers
(c. 6% of Butter; cheese;
Bright Juice; Little Bright
FY15 juice
s ales )
Page 34
Tnuva Food’s brand offerings

Yoplait Sunfrost Cottage and Soft Tirat Zvi Hard Cheese, Processed

Cheeses Cheese and Butter

Maadanot Hard Cheese and Fresh Mama Of Tnuva Milk Chocolate Milk

Salted Cheese

Chef Lavan Harduf Soy Products Eggs Adom Adom

OIivia

Page 35
Segmental Breakdown (RMB m)

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F
Revenues (RMB m)
Dairy products 9,888 11,620 15,090 17,501 20,182 22,931
Other dairy related
products (milk powder & ice 3,164 3,792 3,983 4,182 4,392 4,611
cream)
Others 579 767 1,156 1,330 1,463 1,609
Total 13,630 16,179 20,230 23,013 26,036 29,151
Gross Profit (RMB m)
Dairy products 4,280 4,983 6,425 7,403 8,577 9,791
Other dairy related
products (milk powder & ice 444 570 493 481 483 507
cream)
Others 40 24 50 53 59 64
Total 4,765 5,576 6,968 7,937 9,119 10,363
Gross Profit Margins (%)
Dairy products 43.3 42.9 42.6 42.3 42.5 42.7
Other dairy related
products (milk powder & ice 14.0 15.0 12.4 11.5 11.0 11.0
cream)
Others 6.9 3.1 4.3 4.0 4.0 4.0
Total 35.0 34.5 34.4 34.5 35.0 35.5
Income Statement (RMB m) Margins Trend

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F 6.0%
Revenue 13,775 16,290 20,385 23,013 26,036 29,151 5.5%
Cost of Goods Sold (9,010) (10,714 (13,417 (15,174 (17,027 (18,911 5.0%
Gross Profit 4,765 5,576 6,968 7,840 9,009 10,240 4.5%
Other Opng (Exp)/Inc (4,409) (4,950) (6,167) (6,934) (7,798) (8,735) 4.0%
Operating Profit 420 679 776 1,003 1,262 1,563 3.5%
Other Non Opg (Exp)/Inc 64 82 16 20 22 24 3.0%
Associates & JV Inc 0 0 0 0 0 0 2.5%
Net Interest (Exp)/Inc (65) (53) (78) (116) (152) (175) 2.0%
Dividend Income 0 0 0 0 0 0 2013A 2014A 2015F 2016F 2017F
Exceptional Gain/(Loss) 0 0 0 0 0 0 Operating Margin % Net Income Margin %
Pre-tax Profit 419 708 714 907 1,132 1,412

Tax (84) (234) (131) (181) (226) (282)
Minority Interest (24) (68) (15) (18) (23) (28)
Preference Dividend 0 0 0 0 0 0
Net Profit 311 406 568 708 883 1,102
EBITDA 568 735 893 1,132 1,410 1,734
Growth
Revenue Gth (%) 16.8 18.3 25.1 12.9 13.1 12.0
EBITDA Gth (%) 74.2 29.5 21.5 26.7 24.6 22.9
Opg Profit Gth (%) 69.8 61.8 14.3 29.3 25.8 23.8
Net Profit Gth (%) 30.9 30.4 39.9 24.6 24.8 24.7
Margins & Ratio
Gross Margins (%) 34.6 34.2 34.2 34.1 34.6 35.1
Opg Profit Margin (%) 3.0 4.2 3.8 4.4 4.8 5.4
Net Profit Margin (%) 2.3 2.5 2.8 3.1 3.4 3.8
ROAE (%) 9.6 9.8 12.9 15.2 17.8 20.5
ROA (%) 3.7 3.9 4.6 5.1 5.6 6.3
ROCE (%) 6.3 7.1 8.6 8.9 9.7 10.8
Div Payout Ratio (%) 80.0 73.9 63.2 60.0 60.0 60.0
Net Interest Cover (x) 6.5 12.8 9.9 8.7 8.3 8.9
Page 36
Interim Income Statement (RMB m) Margins Trend

FY Dec 1H2012 2H2012 1H2013 2H2013 1H2014 2H2014 6%
5%
Revenue 6,461 7,314 7,443 8,847 9,872 10,513 4%

Cost of Goods Sold (4,805) (4,784) (5,930) (6,481) (6,481) (6,936)
3%
Gross Profit 2,256 2,508 2,659 2,917 3,391 3,577
Other Oper. (Exp)/Inc (3,780) (4,750) (3,938) (4,838) (6,480) (6,680) 2%
Operating Profit 132 288 235 445 302 474 1%

Other Non Opg (Exp)/Inc (35) 99 (16) 98 (4) 20
0%
Associates & JV Inc 0 0 0 0 0 0 2
1
2
1
3
1
3
1
4
1
4
1
H H H H H H
Net Interest (Exp)/Inc (45) (19) (33) (21) (16) (62) 1
Operating 2
Margin % 1 2
Net Income 1 %
Margin 2
Exceptional Gain/(Loss) 0 0 0 0 0 0
Pre-tax Profit 52 367 187 522 282 432
Tax 4 (88) (63) (170) (58) (73)
Minority Interest (4) (20) (8) (61) (31) 16
Net Profit 97 215 148 258 209 359
Growth
Revenue Gth (%) 16.5 17.2 15.2 21.0 32.6 18.8
Opg Profit Gth (%) 100.9 58.6 78.1 54.3 28.7 6.7
Net Profit Gth (%) 31.9 30.4 53.0 20.2 41.5 38.9
Margins
Gross Margins (%) 25.6 34.6 20.3 26.7 34.3 34.0
Opg Profit Margins (%) 2.0 3.9 3.2 5.0 3.1 4.5
Net Profit Margins (%) 1.5 2.9 2.0 2.9 2.1 3.4
Page 37
Quarterly Income Statement (RMB m) Margins Trend

FY Dec 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 7%
6%
Revenue 4,618 5,254 5,443 5,070 4,991 5%
Cost of Goods Sold (3,055) (3,426) (3,637) (3,299) (3,259) 4%
Gross Profit 1,563 1,828 1,806 1,771 1,732 3%
Other Oper. (Exp)/Inc (1,422) (1,666) (1,643) (1,459) (1,533) 2%
Operating Profit 141 162 163 312 198 1%
Other Non Opg (Exp)/Inc 11 26 19 (17) (20) 0%

3 3 4 4 4 4 5
1 1 1 1 1 1 1
Associates & JV Inc 0 0 0 0 0 0
2
Q
0
2
Q
0
2
Q
0
2
Q
0
2
Q
0
2
Q
0
2
Q
3 4 1 2 3 4 1
Net Interest (Exp)/Inc (4) (13) (30) (32) (29)
Operating Margin % Net Income Margin %
Exceptional Gain/(Loss) 0 0 0 0 0
Pre-tax Profit 139 159 151 265 173
Tax (39) (19) (26) (47) (50)
Minority Interest (30) (1) 72 (57) (24)
Net Profit 70 139 197 162 98
EBITDA 133 133 132 283 192
Growth
Revenue Gth (%) 35.1 30.6 28.1 10.3 8.1
Net Profit Gth (%) 42.8 40.8 23.3 64.5 39.2
Margins
Gross Margins (%) 33.8 34.8 33.2 34.9 34.7
Opg Profit Margins (%) 3.0 3.1 3.0 6.1 4.0
Net Profit Margins (%) 1.5 2.6 3.6 3.2 2.0
Page 38
Balance Sheet (RMB m) Asset Breakdown

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Net Fixed
Assets -
Debtors - 51.4%
14.9%
Net Fixed Assets 3,391 4,044 5,166 6,612 7,686 8,720
Invts in Associates & JVs 0 0 0 0 0 0
Other LT Assets 986 1,113 1,299 1,334 1,375 1,422
Cash & ST Invts 2,351 2,619 2,002 2,040 2,063 2,109
Inventory 1,016 1,501 2,031 2,297 2,577 2,862 Assocs'/JVs -
0.0%
Debtors 1,310 1,386 1,695 1,914 2,165 2,424 Inventory -
Other Current Assets 386 905 691 691 691 691 17.9%
Bank, Cash
and Liquid
Total Assets 9,440 11,568 12,883 14,889 16,558 18,228 Assets -
15.9%
ST Debt 793 950 1,814 1,814 1,814 1,814

Creditors 2,416 3,507 3,634 4,038 4,531 5,032
Other Current Liab 851 1,491 1,034 1,034 1,034 1,034
LT Debt 708 336 854 2,154 2,954 3,654
Other LT Liabilities 246 260 348 348 348 348
Shareholder’s Equity 4,014 4,278 4,512 4,795 5,148 5,589
Minority Interests 411 746 688 706 729 757
Total Cap. & Liab. 9,440 11,568 12,883 14,889 16,558 18,228
Non-Cash Wkg. Capital (555) (1,206) (252) (171) (133) (90)

Net Cash/(Debt) 849 1,333 (666) (1,927) (2,704) (3,359)
Debtors Turn (avg days) 32.8 30.2 27.6 28.6 28.6 28.7
Creditors Turn (avg days) 88.5 101.4 98.0 93.1 92.7 93.1
Inventory Turn (avg days) 43.6 43.1 48.5 52.5 52.7 53.0
Asset Turnover (x) 1.6 1.6 1.7 1.7 1.7 1.7
Current Ratio (x) 1.2 1.1 1.0 1.0 1.0 1.0
Quick Ratio (x) 0.9 0.7 0.6 0.6 0.6 0.6
Net Debt/Equity (X) CASH CASH 0.1 0.4 0.5 0.5
Net Debt/Equity ex MI (X) (0.2) (0.3) 0.1 0.4 0.5 0.6
Capex to Debt (%) 72.7 92.9 67.3 44.1 30.8 27.2
Z-Score (X) NA NA NA NA NA NA
Page 39
Cash Flow Statement (RMB m) Capital Expenditure

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F RM
2,000.0
1,800.0
Pre-Tax Profit 419 708 714 907 1,132 1,412 1,600.0
Dep. & Amort. 412 352 524 305 395 457 1,400.0
Tax Paid (888) (1,075) (994) (181) (226) (282) 1,200.0

1,000.0
Assoc. & JV Inc/(loss) 0 0 0 0 0 0 800.0
(Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 600.0
Chg in Wkg.Cap. (424) (431) 909 (80) (39) (43) 400.0

200.0
Other Operating CF 1,723 1,751 (817) (152) (194) (223) 0.0
Net Operating CF 1,242 1,305 336 799 1,068 1,321 2013A 2014A 2015F 2016F 2017F
Capital Expenditure (-)

Capital Exp.(net) (1,091) (1,195) (1,796) (1,751) (1,467) (1,489)
Other Invts.(net) 0 0 0 0 0 0
Invts in Assoc. & JV 0 0 0 0 0 0
Div from Assoc & JV 0 0 0 0 0 0
Other Investing CF 182 154 79 116 152 175
Net Investing CF (910) (1,040) (1,717) (1,635) (1,315) (1,314)
Div Paid (249) (300) (359) (425) (530) (661)
Chg in Gross Debt (250) (36) 1,167 1,300 800 700
Capital Issues 1,392 336 81 0 0 0
Other Financing CF 0 (3) (106) 0 0 (1)
Net Financing CF 893 (3) 783 875 270 38
Currency Adjustments 0 0 0 0 0 1
Chg in Cash 1,226 262 (598) 39 23 45
Opg CFPS (RMB) 1.36 1.42 (0.47) 0.71 0.90 1.11
Free CFPS (RMB) 0.12 0.09 (1.19) (0.77) (0.32) (0.14)
Page 40
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Page 41
China / Hong Kong Company Guide
China Mengniu
Edition 1 Version 1 |Bloomberg: 2319 HK EQUITY | Reuters: 2319.HK Refer to important disclosures at the end of this report
BUY GETTING BIGGER AND BETTER

Last Traded Price: HK$38.35 (HSI : 25,399)
Price Target : HK$ 47.1 (23% upside) (Prev. HK$45.8) Maintain BUY on solid performance. We maintain our Buy
rating on China Mengniu as we expect product mix upgrades
and margin expansion would continue drive decent earnings
Potential Catalyst: Stronger than expected margin enhancement
growth in the next 1-2 years. We expect the company to
Where we differ: More conservative on earnings vs consensus
continue gaining market share, with earnings expected to grow
Analyst at 14.2% CAGR for FY14-16. Its JV with Danone, despite
Alice HUI CFA, +852 2971 1960 limited scale but growing fast, could be a more significant driver
alice_hui@hk.dbsvickers.com in the medium term considering the strong know-how of
Alison Fok +852 2971 1938 Danone and Mengniu’s strength in branding and distribution.
Improving product mix to drive sales and margins. We expect
yogurt, representing 15% of FY14 sales, to remain a key
Price Relative growth contributor with sales rising by 25% in FY15 (FY14:
37%), helped by star products including Champion, Yoyi C and
HK$ Relative Index
46.3 203
full-year contribution from Danone’s Bio+ (FY14: Rmb200m).
41.3 183 Coupled with solid momentum in other high-margin products
36.3
163 such as premium milk, we expect Mengniu’s double-digit
31.3
143
growth in top line to be sustainable, with room for margin
expansion given the enhancement in product mix and
123
26.3
103
21.3 83 favourable raw material costs.
16.3 63
Competition in UHT milk remains tough. We expect the mass

Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
China Mengniu (LHS) Relative HSI INDEX (RHS) UHT milk market to face tougher competition. But with its
Forecasts and Valuation strategy to place more promotional efforts on this category,
FY Dec (RMB m) 2014A 2015F 2016F 2017F there could still be some growth with the cheaper raw material
Turnover 50,049 55,784 61,750 67,723 costs (avg. raw milk prices and Fonterra milk powder prices have
EBITDA 4,241 4,372 4,944 5,694 fallen 15% and 40% yoy respectively) providing a cushion on
Pre-tax Profit 3,150 3,469 4,004 4,658 margins.
Net Profit 2,351 2,694 3,066 3,526
EPS (RMB) 1.22 1.38 1.57 1.80 Valuation:
EPS (HK$) 1.52 1.72 1.96 2.25
The stock is currently trading at 19.6x FY16F PE, below its
EPS Gth (%) 35.1 12.9 13.8 15.0
Diluted EPS (HK$) 1.52 1.72 1.96 2.25 historical (24x) as well as sector average valuation (25.5x). Our
DPS (HK$) 0.36 0.39 0.44 0.51 TP is now rolled over to HK$47.1(previously HK$45.8), based on
BV Per Share (HK$) 13.93 15.10 16.67 18.48 24x FY16F PE (prev. c.26x FY15 PE), pegged to its historical
PE (X) 25.2 22.3 19.6 17.0 average.
P/Cash Flow (X) 19.2 13.2 14.2 13.2
P/Free CF (X) 398.5 29.4 35.3 29.4 Key Risks to Our View:
EV/EBITDA (X) 15.9 15.3 13.1 10.8
Demand, cost, competition and food safety the key risks.
Net Div Yield (%) 0.9 1.0 1.1 1.3
P/Book Value (X) 2.8 2.5 2.3 2.1 Slower than expected demand, raw material cost fluctuation,
Net Debt/Equity (X) 0.2 0.1 0.0 CASH rising SG&A on increased A&P efforts, surging competition
ROAE (%) 12.8 11.9 12.3 12.8 (both domestic and global players) and food safety concerns
Earnings Rev (%): Nil Nil New would be key risks.
Consensus EPS (RMB) 1.43 1.69 2.03
Other Broker Recs: B: 22 S: 1 H: 8 At A Glance
Source of all data: Company, DBSV, Thomson Reuters, HKEX Issued Capital (m shrs) 1,961
Mkt. Cap (HK$m/US$m) 75,216 / 9,705
Major Shareholders
COFCO, Arla, Danone (%) 31.5
Commonwealth Bank of Australia 8.0
Free Float (%) 60.4
3m Avg. Daily Val. (US$m) 28.9
ICB Industry : Consumer Goods / Food Producers
ASIAN INSIGHTS VICKERS SECURITIES

www.dbsvickers.com
ed-JS / sa- CW
Company Guide
China Mengniu
FY14 revenue breakdown%

Ice cream Other dairy
5% products
CRITICAL DATA POINTS TO WATCH 1%
Yogurt
Earnings Drivers: 15%
Yogurt – leader in driving stronger product mix. Yogurt accounted
for 15% of FY14 sales. We expect sales growth to reach 25% in UHT milk
Milk 47%
FY15 (FY14: 37%), led by higher margin star products such as beverages
Champion, Yoyi C, and full-year contribution from Danone’s Bio+ 24%
(FY14. RMB200m). Mengniu has launched smaller packaging
formats for Yoyi C with more varieties of flavours, while it
continues to extend the products’ shelf-life to improve profitability. Yogurt sales & % yoy
RMB m
10,000 70%
Recovery in infant formula sales. Despite the tough operating 9,000
60%
environment in the infant formula market, we see potential 8,000
7,000 50%
catalysts coming from (i) a likely recovery in Yashili’s topline 6,000 40%
growth; (ii) injection of the remainder of existing infant formula 5,000
4,000 30%
operations from Mengniu to Yashili; and (iii) potential investment 3,000 20%
into Danone’s Dumex China, which is one of the fastest growing 2,000
10%
1,000
imported brands. Mengniu became a controlling shareholder of 0 0%
Yashili last year. In FY14, Yashili accounted for c.5% of its sales 2009 2010 2011 2012 2013 2014F 2015F
Sales Growth (%)
and net profit. Following the acquisition, Yashili has been
undergoing restructuring and is refining its distribution network. Yashili net profit contribution as % of total sales
%
We expect impact from these efforts to start kicking in gradually. 6.0
5.0
Given the typically higher GP margin for infant formula, a recovery 5.0
in Yashili would enhance Mengniu’s margin in the medium term. 4.0
3.0
Seeking to improve distribution channels. Mengniu will continue 2.0
1.2
to streamline its distribution channels, shifting from distributor- 1.0
0.2
based to direct selling. This will be implemented in 2015 in first
0.0
tier and key provincial cities, where the company aims to switch to 2H13 1H14 2H14
direct selling in modern channels instead of through distributors.

In addition, Mengniu will also proactively seek new channels such Overall profitability
as schools and catering. This should result in improved control of RMB m
44%
its distribution network in the longer run, though in the near term, 3,000 50%
28% 30% 40%
the process would need to be carefully monitored to minimise any 2,500
30%
possible negative impact during transition. 2,000 11% 15%
20%
1,500 10%
1,000 0%
-21% -10%
500 -20%
0 -30%
2009 2010 2011 2012 2013 2014F 2015F
Net profit Growth (%)

Page 43
Company Guide
China Mengniu
Leverage & Asset Turnover (x)

Balance Sheet: 1.5
0.70
Healthy financial position. Mengniu is in a solid financial position 1.5
with net gearing of 24% as of end-FY14, after the injection of 0.60

1.4
Danone and Arla as key shareholders. Given robust operating 0.50

1.4
cash flow (est. >Rmb3bn p.a.), this should be more than 0.40
1.3
sufficient to cover its upcoming capex (est. Rmb2.5bn), with net 0.30 1.3
gearing expected to trend down to 3% by FY16. 0.20 1.2
0.10 1.2
Share Price Drivers: 0.00

2013A 2014A 2015F 2016F 2017F
1.1
Market share gains. We expect one of the key drivers of Mengniu Gross Debt to Equity (LHS) Asset Turnover (RHS)
will be its ability to further expand its distribution network, Capital Expenditure
thereby improve its market share nationwide. RM
3,000.0
2,900.0
Stronger than expected margin expansion. Persistent soft raw 2,800.0
milk prices and milk powder prices could offer further room for 2,700.0
margin improvement. 2,600.0
2,500.0
Key Risks: 2,400.0
Rising domestic and import competition. Competition may 2,300.0

2013A 2014A 2015F 2016F 2017F
continue to intensify, not only from domestic players but also
international brands. This may create more aggressive price
ROE (%)
competition and hurt ASP and thus margins.
12.0%
Food safety issues. Mengniu may be affected by any dairy-related 10.0%
industry news concerning food safety issues. 8.0%
6.0%
Raw material price volatility. Mengniu’s profitability would be
affected by volatility in raw material costs, in particularly raw milk 4.0%
and milk powder which are key materials. 2.0%
0.0%
2013A 2014A 2015F 2016F 2017F
COMPANY BACKGROUND
One of the key leading giants. Mengniu is one of the leading Forward PE Band (x)
(x)
dairy giants in China. China Mengniu, through its subsidiaries,
32.4
manufactures and distributes dairy related products (UHT milk,
30.4
yogurt, and milk beverages), ice cream, and other dairy products, 28.4 +2sd: 28.4x
such as infant formula powder. The company markets its 26.4
+1sd: 25.4x
products under its MENGNIU core brand. 24.4
22.4 Avg: 22.5x
20.4
‐1sd: 19.6x
Key listed companies. China Mengniu has controlling stakes on 18.4
two listed companies - Yashili (51% stake) and China Modern 16.4 ‐2sd: 16.6x
Dairy (25.4% stake) - which secures Mengniu’s upstream supply 14.4

Jul-11 Jul-12 Jul-13 Jul-14
chain as well as improving its infant formula capabilities. It also PB Band (x)
holds minor equity stakes in other upstream players such as 4.2
(x)
Shengmu and YST Dairy. As for downstream operations,
Mengniu holds a 51% stake in Junlebao, a private company, 3.7
+2sd: 3.65x
which is known for its affordable infant formula powder. +1sd: 3.26x
3.2
Avg: 2.87x
Partnerships with international players. Mengniu has formed 2.7
partnerships with its stakeholders such as Danone and Arla; ‐1sd: 2.48x

2.2
Danone holds a 20% stake in Mengniu’s cold-chain business that ‐2sd: 2.1x
includes yogurt offerings. In addition, Mengniu also has formed a 1.7

49%/51% JV with US-based Whitewave Foods, which has
launched a plant-based product online this year. Source: Company, DBS Vickers

Page 44
Company Guide
China Mengniu

FY Dec 2013A 2014A 2015F 2016F 2017F
Revenues (RMB m)
Liquid milk 37,903 43,036 48,218 53,613 59,023
Ice cream 3,023 2,716 2,743 2,771 2,798
Other dairy products 253 336 504 655 786
Infant formula 2,177 3,961 4,320 4,711 5,115
Total 43,357 50,049 55,784 61,750 67,723
Income Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F
Revenue 43,357 50,049 55,784 61,750 67,723
Cost of Goods Sold (31,660) (34,616) (38,195) (42,169) (46,000)
Gross Profit 11,697 15,434 17,589 19,581 21,723
Other Opng (Exp)/Inc (9,846) (12,769) (14,569) (16,104) (17,649)
Operating Profit 1,852 2,665 3,020 3,476 4,074
Other Non Opg (Exp)/Inc 0 0 0 0 0
Associates & JV Inc 154 278 239 308 354
Net Interest (Exp)/Inc 199 208 210 220 230
Dividend Income 0 0 0 0 0
Pre-tax Profit 2,205 3,150 3,469 4,004 4,658
Tax (367) (459) (531) (651) (800)
Minority Interest (231) (340) (245) (287) (331)
Preference Dividend 0 0 0 0 0
Net Profit 1,631 2,351 2,694 3,066 3,526
EBITDA 3,186 4,241 4,372 4,944 5,694
Growth
Revenue Gth (%) 20.2 15.4 11.5 10.7 9.7
EBITDA Gth (%) 27.3 33.1 3.1 13.1 15.2
Opg Profit Gth (%) 23.9 43.9 13.3 15.1 17.2
Net Profit Gth (%) 29.7 44.1 14.6 13.8 15.0
Margins & Ratio
Gross Margins (%) 27.0 30.8 31.5 31.7 32.1
Opg Profit Margin (%) 4.3 5.3 5.4 5.6 6.0
Net Profit Margin (%) 3.8 4.7 4.8 5.0 5.2
ROAE (%) 11.7 12.8 11.9 12.3 12.8
ROA (%) 5.3 5.4 5.5 5.8 6.1
ROCE (%) 6.8 6.7 6.6 7.0 7.4
Div Payout Ratio (%) 22.5 23.3 22.5 22.5 22.5
Net Interest Cover (x) NM NM NM NM NM

Page 45
Company Guide
China Mengniu
Interim Income Statement (RMB m)

FY Dec 2H2012 1H2013 2H2013 1H2014 2H2014
Revenue 17,837 20,668 22,689 25,836 24,213

Gross Profit 4,411 5,519 6,178 8,382 7,052
Other Oper. (Exp)/Inc (3,789) (4,611) (5,210) (7,161) (5,608)
Operating Profit 622 908 968 1,221 1,444
Net Interest (Exp)/Inc 86 99 100 78 130
Pre-tax Profit 782 1,036 1,193 1,481 1,669
Tax (91) (186) (181) (253) (207)
Minority Interest (79) (101) (130) (180) (160)
Net Profit 612 749 881 1,049 1,302
Revenue Gth (%) (5.2) 13.3 27.2 25.0 6.7

Opg Profit Gth (%) (30.9) 4.1 55.5 34.5 49.1
Net Profit Gth (%) (23.4) 16.3 43.9 39.9 47.7
Margins
Gross Margins (%) 24.7 26.7 27.2 32.4 29.1
Balance Sheet (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F
Net Fixed Assets 9,246 9,667 9,874 11,033 12,087

Invts in Associates & JVs 2,843 3,841 3,841 3,841 3,841
Other LT Assets 11,929 13,240 15,732 15,781 15,753
Cash & ST Invts 7,663 4,650 6,209 8,958 12,179
Inventory 2,577 4,342 3,977 4,390 5,041
Debtors 3,595 9,768 9,689 9,804 9,918
Other Current Assets 2,485 1,573 1,620 1,669 1,719
Total Assets 40,339 47,081 50,942 55,476 60,537
ST Debt 8,554 4,479 1,974 1,974 1,974

Creditors 9,116 9,546 10,465 11,553 12,603
Other Current Liab 393 326 397 517 667
LT Debt 3,336 5,464 7,969 7,969 7,969
Other LT Liabilities 929 2,773 3,255 3,833 4,527
Shareholder’s Equity 15,361 21,489 23,635 26,095 28,931
Minority Interests 2,650 3,003 3,248 3,535 3,867
Total Cap. & Liab. 40,339 47,081 50,942 55,476 60,537
Non-Cash Wkg. Capital (851) 5,811 4,425 3,793 3,409

Net Cash/(Debt) (4,227) (5,293) (3,734) (985) 2,236
Debtors Turn (avg days) 18.5 48.7 63.7 57.6 53.1
Creditors Turn (avg days) 92.4 102.2 98.5 98.0 98.5
Inventory Turn (avg days) 23.9 37.9 40.9 37.2 38.5
Asset Turnover (x) 1.4 1.1 1.1 1.2 1.2
Current Ratio (x) 0.9 1.4 1.7 1.8 1.9
Quick Ratio (x) 0.6 1.0 1.2 1.3 1.4
Net Debt/Equity (X) 0.2 0.2 0.1 0.0 CASH
Net Debt/Equity ex MI (X) 0.3 0.2 0.2 0.0 CASH
Capex to Debt (%) 24.1 29.5 25.3 25.3 25.3
Z-Score (X) 3.0 3.4 3.4 3.4 3.4

Page 46
Company Guide
China Mengniu
Cash Flow Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F
Pre-Tax Profit 2,229 3,150 3,469 4,004 4,658

Dep. & Amort. 1,218 1,321 1,187 1,236 1,343
Tax Paid (281) (572) (459) (531) (651)
Assoc. & JV Inc/(loss) 0 0 0 0 0
(Pft)/ Loss on disposal of FAs 0 0 0 0 0
Chg in Wkg.Cap. 517 (478) 1,315 512 234
Other Operating CF (399) (341) (951) (1,000) (1,020)
Net Operating CF 3,284 3,080 4,561 4,222 4,565
Capital Exp.(net) (2,867) (2,931) (2,519) (2,519) (2,519)
Other Invts.(net) 0 0 0 0 0
Invts in Assoc. & JV 0 0 0 0 0
Div from Assoc & JV 0 0 0 0 0
Other Investing CF (12,402) (3,484) (1,122) 1,409 1,592
Net Investing CF (15,269) (6,415) (3,641) (1,111) (927)
Div Paid (290) (391) (548) (606) (690)
Chg in Gross Debt 10,780 (1,460) 0 0 0
Capital Issues 835 3,752 0 0 0
Other Financing CF 1,006 3,910 1,188 244 273
Net Financing CF 12,331 3,619 640 (362) (417)
Currency Adjustments 0 0 0 0 0
Chg in Cash 346 283 1,559 2,749 3,221
Opg CFPS (RMB) 1.53 1.85 1.66 1.90 2.22
Free CFPS (RMB) 0.23 0.08 1.04 0.87 1.05
Target Price & Ratings History
S.No. Dat e Closing T arget Rat ing

HK$
6 Pric e Pric e
47.0 5 1: 28-Aug-14 HK$38.00 HK$38.30 Hold
45.0 1 2 4 2: 31-Oct-14 HK$34.25 HK$37.10 Hold
43.0 3
3: 5-Dec-14 HK$29.75 HK$32.00 Hold
41.0 4: 9-J an-15 HK$33.30 HK$32.80 Hold
39.0 5: 27-Mar-15 HK$38.70 HK$41.30 Hold
37.0 6: 4-May -15 HK$39.25 HK$45.8 Buy
35.0
33.0
31.0
29.0
27.0
Dec-14
May-15
Jul-14
Jul-15
Oct-14
Feb-15
Source: DBS Vickers

Page 47
China / Hong Kong Company Guide
China Modern Dairy
Edition 1 Version 1 |Bloomberg: 1117 HK Equity | Reuters: 1117.HK
Refer to important disclosures at the end of this report
BUY STABLE PROGRESS

Price Target : 12-Month HK$ 3.35 (32% upside) (Prev HK$3.45) Maintain BUY on undemanding valuations. We maintain
our BUY rating on China Modern Dairy (CMD) as we expect raw
Potential Catalyst: Earlier-than-expected rebound in dairy prices milk prices to post a mild rebound in 2016. We believe the
Where we differ: Lower dairy price assumptions for FY15-16
weaker earnings in FY15, a 17% decline under our estimates,
Analyst should have been largely priced in at the current valuation with
Alice HUI CFA, +852 2971 1960 possible resumption of earnings growth in FY16. In the
alice_hui@hk.dbsvickers.com
medium term, we believe leading upstream players like CMD
Alison Fok +852 2971 1938 should continue to benefit from rising demand from
downstream as well as market consolidation.
Price Relative Recent acquisition strengthens leading position. In Jul’15,
CMD announced the placement of 477m new shares (9.9% of
HK$ Relative Index
4.4
212
total) to KKR and CDH with a 3-year lock-up period, in
192
3.9
172
exchange for the remaining 82% stake in its two JV farms
3.4
152 which holds 16,268 cows. Based on the 5M15 net profit of
Rmb44.6m, we estimate the potential earnings enhancement to
2.9
132
2.4 112
1.9 92
be 3-5% in FY15/16.
Downstream operations still sound. Downstream sales is

1.4 72
China Modern Dairy (LHS) Relative HSI INDEX (RHS)

sound as CMD’s UHT milk sales remained relatively healthy
under a highly competitive landscape. We expect CMD to meet
Forecasts and Valuation
FY Dec (RMB m) 2014A 2015F 2016F 2017F its sales target of Rmb1.5bn for its branded business in FY15.
Turnover 5,027 5,467 6,861 7,558 The company's low-temperature products such as yogurt have
EBITDA 1,239 1,417 1,659 1,876 hit the shelves in Beijing, which could become a new driver in
Pre-tax Profit 770 928 1,126 1,332
the longer run.
Core Net Profit 1,064 885 1,081 1,279
EPS (RMB) 0.22 0.18 0.22 0.26 Valuation:
EPS (HK$) 0.28 0.23 0.28 0.33
EPS Gth (%) 89.1 (16.8) 22.1 18.3
We lower our EPS estimates by 5-10% for FY15-16 and
Diluted EPS (HK$) 0.19 0.23 0.28 0.33 introduce FY17 earnings largely on share placement adjustment.
DPS (HK$) 0.01 0.00 0.01 0.01 CMD is now trading at 9.1x FY16 PE, which is lower than its
BV Per Share (HK$) 1.68 3.88 4.18 4.52 1SD below its 3-year historical average of 13x. Maintain our BUY
PE (X) 9.2 11.0 9.1 7.7
P/Cash Flow (X) 6.2 6.5 5.8 5.3 rating with a new TP of HK$3.35 (Prev. HK$3.45).
P/Free CF (X) nm nm 143.2 40.1
EV/EBITDA (X) 11.7 10.5 9.0 8.0
Risks:
Net Div Yield (%) 0.5 0.0 0.5 0.5 Raw milk price volatility. CMD’s earnings are highly affected by
P/Book Value (X) 1.5 0.7 0.6 0.6 raw milk price fluctuations, both domestic and international.
Net Debt/Equity (X) 0.7 0.3 0.3 0.3
ROAE (%) 17.4 8.2 6.9 7.6
At A Glance
Earnings Rev (%): (1) (6) NEW 5,305
Issued Capital (m shrs)
Consensus EPS (RMB) 0.20 0.25
Other Broker Recs: B: 14 S: 5 H: 3 Mkt. Cap (HK$m/US$m) 13,411 / 1,730
Major Shareholders
Source of all data: Company, DBSV, Thomson Reuters, HKEX China Mengniu Dairy Company Limited (%) 25.4
KKR & CDH (%) 9.9
Free Float (%) 21.9
ICB Industry : Consumer Goods / Beverages

www.dbsvickers.com
ed-TH/ sa- AL
Company Guide
China Modern Dairy
CRITICAL DATA POINTS TO WATCH Raw milk price (CMD)

RMB/kg
Earnings Drivers: 5.2
5.0
Production volume to drive upstream sales growth. We 4.8
expect sales volume, driven by improving milk yields and organic
4.6
herd size growth, to be the key drivers to upstream earnings.
4.4
Demand will be mostly absorbed by Mengniu, with a 10-year
offtake agreement until 2018. We maintain our view that large- 4.2
scale dairy farms such as CMD will be the key beneficiaries of the 4.0
market consolidation in the upstream dairy sector, as large-scale 2013 2014 2015F 2016F 2017F
players should have stronger cost competitiveness vs smaller Milk yield (tonne/annum)
players. In the longer run, the increasing popularity of pasteurised RMB/tonne
9.20 9.08
dairy products would further drive the demand for locally
8.99
produced quality milk. In terms of herd size, we expect the 9.00 8.90
company to grow at 9% organically. Inclusive of its two JVs, we
8.80
expect herd size to grow 17% this year.
8.60 8.50
Milk yield to grow. With the inclusion of the two JVs, we expect
8.40
milk yield to be softer this year on average. We estimate milk
yield to grow by 1% to 9 tonnes per annum this year (FY14: 8.20
2013 2014 2015F 2016F
+7% y-o-y). This should improve as the herd matures.
Sales volume ('000 tonnes)
'000 tonne
Point of sales expansion key to downstream growth.
2,000 40%
Downstream sales will be primarily driven by distribution network
expansion to improve CMD’s visibility in the market. CMD’s liquid 1,500 30%
milk products are currently sold in 28 provinces, with decent sales 1,000 20%
coverage at modern trade channels such as large supermarkets
including Carrefour, Walmart, Meetall, Shiji Hualian, C.P Lotus, 500 10%
Yonghui, Auchan, etc. As of Dec’14, CMD had expanded its 0 0%

distribution partners to 463 (FY13: 210), with POS increased to 2013 2014 2015F 2016F 2017F
260k, up c.148% y-o-y (versus downstream sales growth of Sales volume % yoy
159%). We expect downstream sales contribution to grow to Raw milk price
16% of sales (FY14: 9%) to reach 42% in CAGR for FY14-16F.
RMB/kg
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
Mar/12
Mar/13
Mar/14
Mar/15
Sep/11
Sep/12
Sep/13
Sep/14
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
WMP
US$/ton
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
Oct/11
Feb/12
Oct/12
Feb/13
Oct/13
Feb/14
Oct/14
Feb/15
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15

Page 49
Company Guide
China Modern Dairy
Leverage & Asset Turnover (x)

Balance Sheet: 0.4
0.90
Heavy capex input. Owing to heavy capex commitment to build 0.80
0.4
0.4
dairy farms, CMD’s net gearing was at a relatively high level of 0.70
0.3
67%. However, CMD should see improvement, having recently 0.60
0.3
done a new share placement as well as having less capex 0.50 0.3
0.40
commitment with a more mature herd size to grow organically. 0.30
0.3
0.3
0.20 0.2
Share Price Drivers: 0.10 0.2
Rebound on raw milk prices. A rebound in raw milk prices will 0.00
2013A 2014A 2015F 2016F 2017F
0.2
lift upstream sales, as well as margins. As the largest upstream Gross Debt to Equity (LHS) Asset Turnover (RHS)
player in China, we expect CMD to be one of the key Capital Expenditure

beneficiaries should this happen. While we still expect volume to RM
2,500.0
grow 15% in FY15, the decline in raw milk prices (down 12% y-
2,000.0
o-y to Rmb4.4/kg in FY15 under our assumptions, vs 4% q-o-q)
would partly offset the volume growth. Meanwhile, we expect 1,500.0
rd
cost of sales (of which around 2/3 comprise of feed costs) to 1,000.0
post a slight decline as soft commodity and alfalfa prices
500.0
remained largely on the stable/downward trend y-o-y. Under this
backdrop, a potential recovery in raw milk prices from the current 0.0
2013A 2014A 2015F 2016F 2017F
level (a multi-year trough for international prices) should help
margins going forward. ROE (%)
16.0%
Stronger growth at downstream operations. CMD is
14.0%
expanding its product range progressively to lower its reliance on
12.0%
upstream earnings. This year, CMD is entering into low-
10.0%
temperature dairy products initially in Beijing. If well-received, 8.0%
CMD will begin expanding to other regions which should further 6.0%
enhance its product offerings.. 4.0%
2.0%
COMPANY BACKGROUND 0.0%

2013A 2014A 2015F 2016F 2017F
Largest upstream dairy player. Established in 2005 in Maanshan,
Anhui, China Modern Dairy is the largest upstream dairy Forward PE Band (x)
(x)
company in terms of herd size as well as the largest raw milk 35.7
producer in China. As of FY14, CMD had a total of 201k dairy 30.7
cows at 25 operating farms across China, with average milk yield

25.7
+2sd: 25x
at 8.9 ton/annum.
20.7 +1sd: 20.4x
A pioneer in large-scale dairy farming. CMD is among the first to 15.7 Avg: 15.7x
adopt a free-stall dairy farming business model in China to ensure 10.7 ‐1sd: 11x
higher yields and cost efficiency compared with small-scale
5.7 ‐2sd: 6.3x
backyard farmers. CMD previously relied on imported heifers Jul-11 Jul-12 Jul-13 Jul-14
from Australia to ensure higher productivity as well as faster herd PB Band (x)
size growth; this has since been halted as CMD has reached a (x)
3.2
sustainable herd size.
2.7 +2sd: 2.65x
Expand operations downstream. CMD expanded its operations
2.2 +1sd: 2.21x
downstream under the brand Modern Farming, primarily sold in
Shanghai region. In FY15, CMD will expand its product offerings 1.7 Avg: 1.76x
to cover low-temperature dairy products. ‐1sd: 1.32x

1.2
‐2sd: 0.87x
0.7
Jan-12 Jan-13 Jan-14 Jan-15

Page 50
Company Guide
China Modern Dairy

FY Dec 2013A 2014A 2015F 2016F 2017F
Revenues (RMB m)
Upstream dairy 2,968 4,194 4,017 5,161 5,658
UHT Milk 321 833 1,450 1,700 1,900
Total 3,289 5,027 5,467 6,861 7,558
Income Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F
Revenue 3,289 5,027 5,467 6,861 7,558
Gross Profit 1,257 1,865 1,629 1,952 2,213
Other Opng (Exp)/Inc (410) (870) (494) (599) (660)
Operating Profit 847 996 1,136 1,353 1,554
Dividend Income 0 0 0 0 0
Pre-tax Profit 518 770 928 1,126 1,332
Tax (11) (7) (37) (45) (53)
Minority Interest 26 28 5 0 0
Preference Dividend 0 0 0 0 0
Net Profit 560 1,064 885 1,081 1,279
EBITDA 865 1,239 1,417 1,659 1,876
Growth
Revenue Gth (%) 61.2 52.8 8.8 25.5 10.2
EBITDA Gth (%) 42.5 43.2 14.3 17.1 13.1
Opg Profit Gth (%) 64.7 17.5 14.1 19.2 14.8
Net Profit Gth (%) 78.9 90.0 (16.8) 22.1 18.3
Margins & Ratio
Gross Margins (%) 38.2 37.1 29.8 28.5 29.3
Opg Profit Margin (%) 25.7 19.8 20.8 19.7 20.6
Net Profit Margin (%) 17.0 21.2 16.2 15.8 16.9
ROAE (%) 10.2 17.4 8.2 6.9 7.6
ROA (%) 4.9 8.0 4.6 4.3 4.8
ROCE (%) 8.4 8.3 6.2 5.7 6.2
Div Payout Ratio (%) 0.0 6.6 0.0 5.0 5.0
Net Interest Cover (x) 4.7 4.1 5.1 5.5 6.5

Page 51
Company Guide
China Modern Dairy
Interim Income Statement (RMB m)

FY Dec 2H2012 1H2013 2H2013 1H2014 2H2014
Revenue 1,093 1,388 1,901 2,585 2,442

Cost of Goods Sold (756) (900) (1,133) (1,579) (1,582)
Gross Profit 336 489 769 1,005 860
Other Oper. (Exp)/Inc (93) (171) (240) (343) (527)
Operating Profit 243 318 529 662 333
Associates & JV Inc 3 1 (1) 5 (5)
Pre-tax Profit 182 179 339 552 218
Tax (3) (5) (6) (7) (1)
Minority Interest 8 10 16 22 5
Net Profit 143 185 375 608 456
Growth
Revenue Gth (%) N/A 47.4 74.0 86.2 28.5
Opg Profit Gth (%) N/A 19.8 117.5 108.3 (37.0)
Net Profit Gth (%) N/A 8.3 163.4 228.9 21.6
Margins
Gross Margins (%) 30.8 35.2 40.4 38.9 35.2
Balance Sheet (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F
Net Fixed Assets 4,099 4,523 4,855 5,168 5,462

Invts in Associates & JVs 59 114 7,750 7,750 7,750
Other LT Assets 6,299 6,935 7,947 8,959 9,972
Cash & ST Invts 800 1,170 1,885 1,721 1,747
Inventory 691 641 778 995 1,084
Debtors 545 827 899 1,128 1,242
Other Current Assets 2 2 2 2 2
Total Assets 12,494 14,211 24,116 25,723 27,258
ST Debt 2,989 2,958 2,958 2,958 2,958

Creditors 1,386 1,403 1,693 2,165 2,358
Other Current Liab 108 108 108 108 108
LT Debt 1,960 2,829 3,829 3,829 3,829
Other LT Liabilities 190 350 350 350 350
Shareholder’s Equity 5,743 6,510 15,032 16,167 17,509
Minority Interests 118 146 146 146 146
Total Cap. & Liab. 12,494 14,211 24,116 25,723 27,258
Non-Cash Wkg. Capital (257) 52 (122) (148) (138)

Net Cash/(Debt) (4,149) (4,618) (4,903) (5,067) (5,041)
Debtors Turn (avg days) 45.9 49.8 57.6 53.9 57.2
Creditors Turn (avg days) 273.1 173.4 158.3 152.3 163.8
Inventory Turn (avg days) 110.8 82.8 72.5 70.0 75.3
Asset Turnover (x) 0.3 0.4 0.3 0.3 0.3
Current Ratio (x) 0.5 0.6 0.7 0.7 0.8
Quick Ratio (x) 0.3 0.5 0.6 0.5 0.6
Net Debt/Equity (X) 0.7 0.7 0.3 0.3 0.3
Net Debt/Equity ex MI (X) 0.7 0.7 0.3 0.3 0.3
Capex to Debt (%) 19.2 36.9 23.8 23.8 23.8
Z-Score (X) 1.5 1.7 1.6 1.7 1.7

Page 52
Company Guide
China Modern Dairy
Cash Flow Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F
Pre-Tax Profit 518 770 928 1,126 1,332

Dep. & Amort. 169 226 267 287 306
Tax Paid (1) (14) (37) (45) (53)
Assoc. & JV Inc/(loss) 1 0 0 0 0
(Pft)/ Loss on disposal of FAs 0 0 0 0 0
Chg in Wkg.Cap. (387) (187) 80 26 (11)
Other Operating CF (83) 787 266 286 282
Net Operating CF 216 1,581 1,504 1,681 1,856
Capital Exp.(net) (952) (2,136) (1,612) (1,612) (1,612)
Other Invts.(net) 181 281 98 14 74
Invts in Assoc. & JV (33) (56) (7,636) 0 0
Div from Assoc & JV 0 0 0 0 0
Other Investing CF 16 16 44 40 44
Net Investing CF (788) (1,895) (9,106) (1,558) (1,494)
Div Paid (1) 0 7,588 0 (54)
Chg in Gross Debt 170 921 1,000 0 0
Capital Issues 6 0 0 0 0
Other Financing CF 388 (420) (271) (286) (283)
Net Financing CF 563 502 8,317 (286) (337)
Currency Adjustments 0 0 0 0 1
Chg in Cash (9) 188 715 (164) 26
Opg CFPS (RMB) 0.13 0.37 0.29 0.34 0.39
Free CFPS (RMB) (0.15) (0.12) (0.02) 0.01 0.05
Target Price & Ratings History
S.No. Dat e Closing T arget Rat ing

HK$
1 2 Pric e Pric e
5.0 3
6 1: 13-Aug-14 HK$3.56 HK$4.26 Buy
4.5 5 2: 26-Aug-14 HK$3.47 HK$4.41 Buy
4
4.0 3: 3-Oct-14 HK$3.35 HK$4.26 Buy
4: 5-Dec-14 HK$2.25 HK$3.00 Buy
3.5
5: 25-Mar-15 HK$2.46 HK$3.00 Buy
3.0 6: 17-Apr-15 HK$2.99 HK$3.45 Buy
2.5
2.0
1.5
1.0
Dec-14
May-15
Jul-14
Jul-15
Oct-14
Feb-15
Source: DBS Vickers

Page 53
China Dairy Sector
Yashili International Holdings
Bloomberg: 1230 HK EQUITY | Reuters: 1230.HK Refer to important disclosures at the end of this report
NOT RATED On the shoulders of twin giants

Potential Catalyst: Recovery in topline growth  A leading domestic infant formula player in China
 FY15 to be a year of transition on ongoing restructuring
Analyst  Premium valuation justified, given potential synergies with
Alice HUI CFA, +852 2971 1960 Mengniu and Danone
alice_hui@hk.dbsvickers.com
A leading domestic infant formula player. Headquartered in
Alison Fok +852 2971 1938
alison_fok@hk.dbsvickers.com Guangdong, Yashili is one of the leading domestic infant formula
manufacturers. The company manufactures and distributes products
under its own brands, Yashily and Scient, commanding a market share
Price Relative
HK$ Relative Index
of 4.5% in FY14. Yashili also manufactures and distributes nutritional
5.9 315
food such as soymilk powder and cereals.
4.9 265 Consolidating market share with Danone’s Dumex. With Mengniu
3.9 215 and Danone emerging as Yashili’s controlling and second largest
2.9 165 shareholder respectively, Based on a recent MOU between Mengniu,
1.9 115 Yashili and Danone, Danone intends to sell all of its interest in Dumex
0.9 65
China into Yashili, which could propel Mengniu-Yashili’s position to the
top tier infant formula players. Yashili is also undergoing restructuring
Yashili Int’l (LHS) Relative HSI INDEX (RHS) with changes in its marketing strategy (more active face-to-face events,
Forecasts and Valuation nursing promotions, and loyalty membership scheme), upgrading of
FY Dec (RMB m) 2011A 2012A 2013A 2014A technology and infrastructure, and improvements in its distribution
Turnover 2,958 3,655 3,890 2,816 channel, including leveraging on Danone’s existing online resources.
EBITDA 383 636 565 348
Pre-tax Profit 375 646 577 310 We expect Mengniu to inject its remaining infant formula operations
Net Profit 306 468 438 249 into Yashili, turning Yashili into Mengniu’s platform for infant formula.
EPS (RMB) 0.09 0.13 0.12 0.07
EPS (HK$) 0.11 0.17 0.15 0.09 FY15 a year of transition. While we believe Yashili’s 1H15
EPS Gth (%) (47.6) 52.6 (7.3) (43.3) performance should likely remain soft, as the company is still in an
DPS (HK$) 0.07 0.50 0.05 0.03 adjustment period amid a challenging market environment, its effort to
BV Per Share (HK$) 1.35 1.45 1.09 1.11
PE (X) 20.9 13.7 14.7 26.0 expand its penetration in the baby store and online channels as well as
P/Cash Flow (X) 13.9 8.3 45.8 24.5 new product launches could start to show some impact from 2H15
P/Free CF (X) 18.2 11.4 nm nm onwards. Management had earlier guided for positive top line growth
EV/EBITDA (X) 9.5 7.0 9.9 14.8
Net Div Yield (%) 3.1 21.9 2.0 1.2 in FY15. Trading at 19x FY16 PE (based on consensus), Yashili's
P/Book Value (X) 1.7 1.6 2.1 2.0 valuation is at a premium to Biostime, a reflection of the company’s
Net Debt/Equity (X) CASH CASH CASH CASH distortion in earnings from the restructuring, as well as potential strong
ROAE (%) 8.1 11.9 12.2 7.9
synergies with Mengniu and Danone. With the backing of these two
dairy giants, Yashili will be a strong contender in the domestic infant
formula market in the long run. Key risks include rising domestic and
foreign competition through e-commerce, as well as food safety issues.
ICB Industry: Consumer Goods At A Glance
ICB Sector: Food Producers 4,746
Issued Capital (m shrs)
Principal Business: One of the top infant formula companies in
Mkt. Cap (HK$m/US$m) 10,772 / 1,390
China
Major Shareholders
Source of all data: Company, DBSV, Thomson Reuters, HKEX
China Mengniu (%) 51.0
Danone (%) 25.0
Free Float (%) 24.0
Page 4
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ed- JS / sa- AL
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect
additional reports relating to this issuer, unless so decided by DBSV
China Dairy Sector
Company background Growth drivers
One of the top domestic players in China. Yashili is engaged Recovery in topline growth. Since Mengniu became Yashili’s
in the production and sales of paediatric milk formula controlling shareholder, the Group has invested in information
products and nutrition food. It held a market share of 4.5% in platforms to improve its communication access with
China’s infant formula market in 2014. Headquartered in consumers. As at FY14, the Group had 27,000 membership
Guangdong province, Yashili operates plants in Guangdong, stores with 1.1m members. Yashili will place more effort on
Shanxi and Heilongjiang, with a new plant in New Zealand communicating and understanding consumers’ needs through
expected to commence operations in 2015. face-to-face marketing events, increasing promotional events,
upgrading technology and infrastructure, as well as leveraging
In Nov-13, Mengniu made a general offer to become Yashili’s on shareholders’ strength in sales and distribution.
controlling shareholder at HK$3.5/share. Danone
subsequently joined as the second largest shareholder in Feb- Leveraging on key shareholders’ expertise. Based on the MOU
15 through a new share placement at HK$3.7/share. Currently, which has been entered between Mengniu, Yashili and
Mengniu and Danone have 51% and 25% stakes respectively. Danone t o inject Danone’s Dumex China operations into
Yashili, Danone intends to sell all its interest in Dumex China
Yashili has an extensive range of infant formula brands, with to Yashili, of which the proceeds will be used to subscribe for
its two core brands, Yashily and Scient, targeting mid- to Mengniu’s shares through COFCO Dairy Investment (CDI).
high-end consumers. Yashily Super α-Golden series, the Combining Danone’s market share of 2.8% based on
Ambery Golden series and the Arla Merla series (cooperation Euromonitor, Mengniu-Yashili’s infant formula market share
with Arla foods) target high-end consumers, while Yashily will propel to second position with 7%, after Nestle. While no
Newwitt series and Scient’s Ordinary Pack Series focus on mid- financial details are released at this stage, this clearly
end consumers. Lastly, Yashily New Formula focuses on low- strengthens Yashili’s position in the infant formula market.
to mid-end consumers. The Group also sells nutrition food, Synergies include leveraging on Danone’s sales and
such as adult milk powder and nutritious paediatric rice cereal. distribution network as well as product technology to further
improve on its existing product offerings.
FY14 sales breakdown
E-commerce presence to grow. E-commerce is the fastest-
growing sales channel for infant formula, in which
international brands have dominant presence due to their
Yashily
stronger brand reputation. This trend should likely continue.
Nutritions Despite this, Yashili should still be able to benefit, given
19% opportunities to leverage on Danone’s existing online platform,
as well as potential for its imported brands such as Arla Merla.
Yashili will also have dedicated products (Le Pei Jian” [樂培健])
Scient to target its maternity channel.
Formula Yashily
16% Formula
65%
Page 55
China Dairy Sector
Yashili’s sales in infant formula (FY14)
100%
90%
80%
53% 50%
70%
60%
50%
40%
30% 37% 44%
20%
10%
10% 7%
0%
Yashily Scient
1st tier 2nd tier 3rd and lower
Page 56
China Dairy Sector
Income Statement (RMB m) Balance Sheet (RMB m)
FY Dec 2011A 2012A 2013A 2014A FY Dec 2011A 2012A 2013A 2014A
Turnover 2,958 3,655 3,890 2,816 Net Fixed Assets 730 744 803 613
Cost of Goods Sold (1,420) (1,693) (1,810) (1,371) Invts in Assocs & JVs 76 418 985 939
Gross Profit 1,538 1,962 2,080 1,445 Other LT Assets 234 407 342 196
Other Opng (Exp)/Inc (1,234) (1,407) (1,601) (1,191) Cash & ST Invts 2,762 2,273 1,056 2,090
Operating Profit 304 554 479 254 Inventory 578 653 886 718
Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 52 27 32 43
Associates & JV Inc 0 0 0 0 Other Current Assets 212 1,048 413 330
Net Interest (Exp)/Inc 71 92 97 56 Total Assets 4,644 5,570 4,517 4,929
Dividend Income 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 31 331 154 141
Pre-tax Profit 375 646 577 310 Creditors 720 1,029 346 234
Tax (67) (176) (137) (61) Other Current Liab 55 91 834 735
Minority Interest (2) (2) (2) 0 LT Debt 0 0 47 621
Preference Dividend 0 0 0 0 Other LT Liabilities 33 37 25 23
Net Profit 306 468 438 249 Shareholder’s Equity 3,803 4,079 3,110 3,174
Minority Interests 1 3 0 0
EBITDA 383 636 565 348 Total Cap. & Liab. 4,644 5,570 4,517 4,929
Sales Gth (%) 0.1 23.6 6.4 (27.6)
EBITDA Gth (%) (42.1) 66.0 (11.2) (38.4) Non-Cash Wkg. Cap 68 608 150 122
Opg Profit Gth (%) (48.1) 82.2 (13.5) (47.0) Net Cash/(Debt) 2,730 1,942 854 1,327
Net Profit Gth (%) (39.0) 53.0 (6.6) (43.1)
Effective Tax Rate (%) 17.8 27.2 23.8 19.7
Cash Flow Statement (RMB m) Rates & Ratio
Pre-Tax Profit 375 646 577 310 Gross Margins (%) 52.0 53.7 53.5 51.3
Dep. & Amort. 79 82 86 94 Opg Profit Margin (%) 10.3 15.2 12.3 9.0
Tax Paid (82) (127) (196) (78) Net Profit Margin (%) 10.4 12.8 11.2 8.8
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 8.1 11.9 12.2 7.9
(Pft)/ Loss on disposal of FAs 0 0 0 0 ROA (%) 6.7 9.2 8.7 5.3
Chg in Wkg.Cap. 123 242 (257) 75 ROCE (%) 6.4 9.7 9.4 5.6
Other Operating CF (37) (72) (69) (137) Div Payout Ratio (%) 65.3 298.9 30.0 30.0
Net Operating CF 458 772 141 264 Net Interest Cover (x) NM NM NM NM
Capital Exp.(net) (107) (208) (255) (704) Asset Turnover (x) 0.6 0.7 0.8 0.6
Other Invts.(net) (340) (1,283) (222) (832) Debtors Turn (avg days) 15.1 3.9 2.8 4.9
Invts in Assoc. & JV 0 0 0 488 Creditors Turn (avg days) 66.8 75.3 76.4 77.3
Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 124.5 132.6 155.2 213.5
Other Investing CF 217 346 309 (4) Current Ratio (x) 4.5 2.8 1.8 2.9
Net Investing CF (229) (1,145) (168) (1,052) Quick Ratio (x) 3.8 2.3 1.1 2.2
Div Paid (235) (200) (1,408) (131) Net Debt/Equity (X) CASH CASH CASH CASH
Chg in Gross Debt (127) 300 (15) 559 Capex to Debt (%) 339.7 62.9 126.6 92.3
Capital Issues (16) 0 31 0 Z-Score (X) N/A N/A N/A N/A
Other Financing CF (26) (230) (53) (5) N.Cash/(Debt)PS (RMB) 0.97 0.69 0.30 0.47
Net Financing CF (404) (130) (1,445) 423 Opg CFPS (RMB) 0.10 0.15 0.11 0.05
Currency Adjustments (45) (78) 10 (7) Free CFPS (RMB) 0.10 0.16 (0.03) (0.12)
Chg in Cash (220) (581) (1,462) (372)
Interim Income Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions
FY Dec 1H2013 2H2013 1H2014 2H2014 FY Dec 2011A 2012A 2013A 2014A
Turnover 2,153 1,737 1,546 1,271 Revenues (RMB m)
Cost of Goods Sold (961) (849) (726) (646) Yashily Formula 1,826 2,478 2,661 1,833
Gross Profit 1,192 888 820 625 Scient Formula 609 653 661 438
Other Oper. (Exp)/Inc (819) (779) (607) (583) Yashili Nutritions 473 489 546 534
Operating Profit 373 109 212 43 Other 50 34 23 12
Other Non Opg (Exp)/Inc 0 0 0 0
Associates & JV Inc 0 0 0 0 Total 2,958 3,655 3,890 2,816
Net Interest (Exp)/Inc 38 57 26 28
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 410 166 239 71
Tax (115) (22) (29) (32)
Minority Interest (2) 0 0 0
Net Profit 294 144 209 39
Sales Gth (%) 27.5 (11.6) (28.2) (26.8)

Opg Profit Gth (%) 44.0 (63.7) (43.0) (61.0)
Net Profit Gth (%) 34.1 (42.3) (28.7) (72.6)
Gross Margins (%) 55.4 51.1 53.0 49.2
Opg Profit Margins (%) 17.3 6.3 13.7 3.3
Net Profit Margins (%) 13.6 8.3 13.5 3.1
Page 57
China Dairy Sector
Inner Mongolia Yili Industrial-A
Bloomberg: 600887 CH Equity | Reuters: 600887.SS Refer to important disclosures at the end of this report
NOT RATED Rising dominance

Last Traded Price: RMB18.63 (CSI300 Index : 4,251)
Potential Catalyst: Stronger contribution from high margin products  Expect continual market share gains to further boost Yili’s
leading position
Analyst
Alice HUI CFA, +852 2971 1960  Strong portfolio of higher-margin brands to take advantage of
alice_hui@hk.dbsvickers.com growing health awareness among consumers
Alison Fok +852 2971 1938  Valuation undemanding against peers
alison_fok@hk.dbsvickers.com Leader of the herd. Established in 1993 and listed on SSE in 1996,
Inner-Mongolia Yili is the leading dairy player in China, who enjoys
Price Relative
highest profit and margins among its peers. Yili has an extensive
RMB Relative Index
product offering including mainly liquid dairy products (UHT dairy
45.4
40.4
388 products, yogurt, dairy-related and plant-based beverages), milk
35.4 338
powder, and low-temperature dairy products. Its strong product
30.4 288
25.4 238
capability and effective marketing campaign should enable the
20.4
188
company to gain further market share despite its substantial size.
15.4
138
10.4
Improving product mix, effective marketing and deepening
5.4 88
Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 penetration to drive growth. In FY15, higher margin products
such as Satine (UHT drink), QQ Star (kid’s beverage), Ambrosial
Inner Mongolia Yili Industrial-A (LHS)
Relative SHSZ300 Index (RHS)
(UHT yogurt) and Chang Qing (probiotic drinks) will be key

Forecasts and Valuation
FY Dec (RMB m) 2011A 2012A 2013A 2014A profitability drivers. Impact from lower raw material costs remain
Turnover 37,451 41,991 47,779 54,436 favourable, as seen in 1Q15’s net margin expansion of 0.7ppt, but
EBITDA 2,160 2,274 3,324 5,265 this would be partly offset by higher operating expenses on
Pre-tax Profit 2,136 2,087 3,060 4,786
Net Profit 1,809 1,717 3,187 4,144 increasing marketing efforts. Yili is active in mass market
EPS (RMB) 1.13 1.07 1.56 1.35 advertising including sponsorships for popular TV shows such as
EPS Gth (%) 16.4 (5.1) 45.2 (13.3) “Running Man” (奔跑吧兄弟) and ”Where did my father go?” (爸
Diluted EPS (RMB) 1.13 1.07 1.56 1.35
DPS (RMB) 0.25 0.33 0.80 0.80
爸去哪儿?) etc.
BV Per Share (RMB) 3.77 4.59 7.89 6.08 Undemanding valuation. Yili has formed strategic alliances with
PE (X) 16.5 17.3 11.9 13.8
P/Cash Flow (X) 8.1 12.4 7.0 23.4 international players overseas including Sterilgarda Alimenti SpA
P/Free CF (X) nm nm 17.0 nm (Italy’s largest dairy producer) and Dairy Farmers of America (DFA;
EV/EBITDA (X) 13.5 13.4 10.3 9.8 US’ largest dairy farm coop) to secure its upstream sourcing
Net Div Yield (%) 1.3 1.8 4.3 4.3
P/Book Value (X) 4.9 4.1 2.4 3.1
capabilities. It has also set up plants in Kansas and in New Zealand
Net Debt/Equity (X) CASH 0.1 CASH CASH to leverage on local upstream supply. Based on the company’s
ROAE (%) 35.3 25.7 27.2 23.8 guidance of 12% and 15% growth on FY15 sales and profit
respectively, a target likely to be exceeded. The counter is trading
at 17.7x FY16F PE (based on consensus estimates), undemanding
vs sector peers, considering its consistent topline and profitability
ICB Industry: Consumer Goods outperformance, as well as superior ROE generation.
ICB Sector: Food Producers At A Glance
Principal Business: Leading dairy player in China Issued Capital (m shrs) 6,129
Mkt. Cap (RMBm/US$m) 114,178 / 18,383
Source of all data: Company, DBSV, Thomson Reuters, HKEX Major Shareholders
Hohhot Investment Co Ltd 9.3
(%) China Asset Management 3.9
Gang Pan 3.9
Free Float (%) 82.9
Page 58
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China Dairy Sector
through TV, radio, promoters, celebrities and large exhibitions
Growth drivers (Olympic, World Expo)
Star products to drive profitability. Yili derives 78% of its sales SG&A expenses comparison
from liquid milk (UHT milk, yogurt & milk beverages), while
milk powder and ice-cream account for 11% and 8% %
respectively. In FY14, Yili’s liquid milk posted over 14% 40
growth y-o-y, helped by ASP hike in 2H14, as well as success 35
in its star products such as Satine, Ambrosial and Chang Qing, 30
leading to an improvement in product mix towards the
25
higher-margin products. Milk powder sales also grew 9.1%
mainly from product mix upgrade from Pro-Kido brand and 20
imported milk powder brand, Tofer. Going forward, star 15
products, which command higher margins than its original 10
brands, will continue to be the key driver for profitability.
5
0
FY14 sales mix
2009 2010 2011 2012 2013 2014
Mengniu Bright Yili

Mixed feeds
Milk 1%
powder &
dairy
related Moving onto a global platform. In the past 1-2 years, Yili has
Ice-cream 11% been actively securing upstream milk powder sources globally
8%
to ensure an integrated dairy supply chain. In FY14, Yili
initiated a partnership with DFA for upstream dairy sourcing
as well as building an infant formula processing plant in
Liquid milk
Kansas. It has so far committed US$30m (Rmb186m) for a
78% 30% stake in the plant. In Nov-14, Yili announced that it is
investing in a diversified dairy base in New Zealand for
Rmb2bn, its second investment there following its Rmb1bn
infant formula processing plant investment in 2012. In 2012,
Yili purchased Oceania Dairy to build a milk processing plant
Source: Company data, DBS Vickers in New Zealand.
Further M&As under discussion. In May-15, Yili sold Shihezi

Strong gross margin. By product, GP margin for milk powder
Company to Western Xinjiang Animal Husbandry Co. for
was the highest at 45.6% in FY14, which is better than
Rmb90.5m. The subsidiary is mainly used as an infant powder
domestic peers. Liquid milk and ice-cream posted GP margins
production base, with revenue and net profit of Rmb230m
of 30.8% and 35.1% respectively. In FY14, Yili’s overall GP
and Rmb0.8m. Recently, Yili started discussions with Guizhou
margin was around 1.2ppt higher than closest peer Mengniu,
Triple Dairy (三联乳业), Guizhou’s largest dairy processor. In
partly a reflection of its product mix which has a larger
FY14, Triple Dairy recorded sales of Rmb531m, and net profit
proportion of sales from higher-margin categories such as
of Rmb10.2m.
milk powder.
Strong advertising to generate positive brand equity. Yili has

been driving down its SG&A expenses, which has fallen by
3.8ppts since FY10. Yili holds strong promotional campaigns
Page 59
China Dairy Sector
Turnover 37,451 41,991 47,779 54,436 Net Fixed Assets 8,662 10,419 11,897 14,083
Cost of Goods Sold (26,719) (29,754) (34,317) (36,585) Invts in Assocs & JVs 0 0 0 0
Gross Profit 10,733 12,236 13,462 17,851 Other LT Assets 2,540 3,190 4,513 4,410
Other Opng (Exp)/Inc (9,036) (10,571) (10,836) (13,306) Cash & ST Invts 3,921 2,004 8,173 14,273
Operating Profit 1,697 1,665 2,626 4,545 Inventory 3,310 2,995 3,683 5,008
Other Non Opg (Exp)/Inc 390 471 401 396 Debtors 1,116 937 670 903
Associates & JV Inc 0 0 0 0 Other Current Assets 381 271 3,941 817
Net Interest (Exp)/Inc 49 (49) 33 (155) Total Assets 19,930 19,815 32,877 39,494
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 2,985 2,578 4,086 8,072
Pre-tax Profit 2,136 2,087 3,060 4,786 Creditors 7,431 6,960 8,539 7,444
Tax (304) (351) 141 (619) Other Current Liab 2,449 1,940 2,892 3,241
Minority Interest (23) (19) (14) (22) LT Debt 7 5 0 704
Preference Dividend 0 0 0 0 Other LT Liabilities 751 808 1,047 1,212
Net Profit 1,809 1,717 3,187 4,144 Shareholder’s Equity 6,024 7,335 16,125 18,634
EBITDA 2,160 2,274 3,324 5,265 Total Cap. & Liab. 19,930 19,815 32,877 39,494
Sales Gth (%) 26.2 12.1 13.8 13.9
EBITDA Gth (%) 113.3 5.2 46.2 58.4 Non-Cash Wkg. Cap (5,074) (4,697) (3,137) (3,956)
Opg Profit Gth (%) 190.1 (1.9) 57.7 73.1 Net Cash/(Debt) 929 (578) 4,087 5,497
Net Profit Gth (%) 132.8 (5.1) 85.6 30.0
Effective Tax Rate (%) 14.2 16.8 N/A 12.9
Pre-Tax Profit 2,136 2,087 3,060 4,786 Gross Margins (%) 28.7 29.1 28.2 32.8
Dep. & Amort. 731 915 1,143 1,479 Opg Profit Margin (%) 4.5 4.0 5.5 8.3
Tax Paid (100) 0 (458) 139 Net Profit Margin (%) 4.8 4.1 6.7 7.6
Chg in Wkg.Cap. 1,321 (350) 1,539 (3,714) ROCE (%) 16.3 13.2 16.2 15.7
Other Operating CF (418) (243) 190 (253) Div Payout Ratio (%) 22.1 30.5 51.3 59.2
Net Operating CF 3,670 2,409 5,475 2,436 Net Interest Cover (x) NM 33.9 NM 29.3
Capital Exp.(net) (3,789) (3,102) (3,241) (3,946) Asset Turnover (x) 2.1 2.1 1.8 1.5
Other Invts.(net) 260 25 (178) 33 Debtors Turn (avg days) 12.7 8.9 6.1 5.3
Other Investing CF 52 20 (2,841) 2,915 Current Ratio (x) 0.7 0.5 1.1 1.1
Net Investing CF (3,476) (3,057) (6,260) (999) Quick Ratio (x) 0.4 0.3 0.6 0.8
Div Paid (88) (530) (606) (1,807) Net Debt/Equity (X) CASH 0.1 CASH CASH
Chg in Gross Debt 194 (411) 1,496 4,690 Capex to Debt (%) 126.6 120.1 79.3 45.0
Capital Issues 1 0 6,118 0 Z-Score (X) N/A N/A N/A N/A
Other Financing CF (238) 37 242 0 N.Cash/(Debt)PS (RMB) 0.58 (0.36) 2.00 1.79
Net Financing CF (131) (905) 7,251 2,883 Opg CFPS (RMB) 1.47 1.73 1.93 2.01
Currency Adjustments (1) 0 (5) 0 Free CFPS (RMB) (0.07) (0.43) 1.09 (0.49)
Chg in Cash 63 (1,553) 6,460 4,320
Interim Income Statement (RMB m) Segmental Breakdown (RMB m)
Cost of Goods Sold (16,761) (17,556) (18,379) (18,206) Liquid milk 26,933 32,271 37,116 42,406
Gross Profit 7,260 6,202 9,092 8,759 Ice-cream 4,222 4,294 4,243 4,284
Other Oper. (Exp)/Inc (5,955) (4,882) (6,640) (6,666) Milk powder & dairy related 5,642 4,484 5,512 6,013
Operating Profit 1,306 1,320 2,451 2,093 Others 469 687 583 1,733
Net Interest (Exp)/Inc 7 26 52 (207)
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 1,495 1,565 2,684 2,101
Tax 251 (110) (378) (241)
Minority Interest (8) (6) (13) (9)
Net Profit 1,738 1,449 2,293 1,851
Sales Gth (%) 13.4 14.2 14.4 13.5

Opg Profit Gth (%) 86.0 37.1 87.8 58.5
Net Profit Gth (%) 128.2 51.6 31.9 27.7
Gross Margins (%) 30.2 26.1 33.1 32.5
Opg Profit Margins (%) 5.4 5.6 8.9 7.8
Page 60
China Dairy Sector
Page 61
China Dairy Sector
Biostime International Holdings
Bloomberg: 1112 HK Equity | Reuters: 1112.HK Refer to important disclosures at the end of this report
NOT RATED Baby hiccups ahead

Potential Catalyst: Spin-off of e-commerce platform  A major domestic infant formula player in China focusing on
the premium market
Analyst  Despite benefits from lower raw material costs and

Alice HUI CFA, +852 2971 1960 favourable forex, near-term sales growth could be affected
alice_hui@hk.dbsvickers.com by clearance of old stocks
Alison Fok +852 2971 1938  1H15 profit warning; in the medium term, the highly
alison_fok@hk.dbsvickers.com competitive landscape would put pressure on ASP with
downward margin risk
Price Relative Focused on the premium market. Established in 2003,
HK$ Relative Index
Biostime is a major domestic infant formula player in China with
472 a 7.6% market share in FY14. Focusing on the premium market,
69.2
59.2
422
372
the company markets its products under two key brands -
49.2 322 Biostime and Adimil. Apart from infant formula, Biostime is also
39.2
272 involved in other products including probiotic supplements,
29.2
222
dried baby food and baby care products. With baby specialty
172
19.2 122
stores being its key channel, the company generated the
9.2 72 majority of its sales (77% in FY14) from its members of
Biostime International Holdings (LHS)
Jul-15
MaMa100, its loyalty membership program.
Relative HSI INDEX (RHS) Clearing old inventory to pave way for launch of new
Forecasts and Valuation packaging. Since late 2014, Biostime has been clearing its old
FY Dec (RMB m) 2011A 2012A 2013A 2014A infant formula inventory to pave way for the launch of
Turnover 2,189 3,382 4,561 4,732 upgraded products (with new packaging) in end-June. While
EBITDA 710 1,032 1,116 1,154 there have been some market share gains, partly helped by
Pre-tax Profit 714 1,051 1,162 1,121 aggressive promotions (buy-1-get-1-free), 4M15 infant formula
Net Profit 527 743 821 810 sales posted a slight decline. With ASP expected to remain
EPS (RMB) 0.86 1.22 1.60 1.31
EPS (HK$) 1.08 1.52
largely unchanged, there should be some margin benefits in
2.00 1.63
EPS Gth (%) 48.7 40.7 32.0 (18.4) FY15 from lower raw material costs, partly offset by higher
Diluted EPS (HK$) 1.08 1.52 2.00 1.63 marketing expenses associated with the upgraded product
DPS (HK$) 0.95 1.35 1.51 0.84 launches. On the distribution front, Biostime is working to
BV Per Share (HK$) 4.10 4.84 5.21 6.00 expand its MaMa100 platform to cross-sell third-party products
PE (X) 20.0 14.2 10.8 13.2 and offer assistance to parties seeking to enter its offline
Core PE (X) 19.8 13.9 12.7 13.0 distribution channels, with plans to list its e-commerce platform
P/Cash Flow (X) 20.2 10.9 15.8 10.8 in the A-share market in the future.
P/Free CF (X) 21.8 11.4 19.9 12.5
EV/EBITDA (X) 12.1 8.7 8.5 8.3 Challenging competition landscape with rising margin
Net Div Yield (%) 4.4 6.2 7.0 3.9 risk. Biostime issued a profit warning expecting 1H15 sales and
P/Book Value (X) 5.3 4.5 4.1 3.6 profit to decline by 11% and 36% respectively on the back of
Net Debt/Equity (X) CASH CASH CASH CASH heavy promotional activities. In the medium term, pricing risk is
ROAE (%) 29.0 34.6 33.9 29.8 high given rising competition and distribution channel changes,
with premium brands like Biostime likely to face most pricing
pressure. Hence, despite its current valuation, at 11.3x FY16 PE
based on consensus estimates, the share price is already below
both its historical and peers’ average, there are no near-term re-
ICB Industry: Consumer Goods rating catalysts in sight.
ICB Sector: Food Producers
At A Glance
Principal Business: One of the top infant formula companies in
Issued Capital (m shrs) 609
China with products marketed under Biostime and Adimil
brands Mkt. Cap (HK$m/US$m) 13,161 / 1,698
Source of all data: Company, DBSV, Thomson Reuters, HKEX Major Shareholders
Biostime Pharmaceuticals (China) Limited (%) 73.9
Free Float (%) 26.1
Page 62
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China Dairy Sector
Segmental Profit Breakdown FY14
Growth prospects Baby care

Dried baby
products
food
3%
Core brand re-launch in July. Biostime will be launching a 3% Probiotic
product upgrade on its core brand Biostime in July, covering supplements
10%
product series including Supreme, Supreme Care, Golden
Care, and the Premium series. To pave way for this, Biostime
has been undergoing more aggressive price promotions to
clear its older stocks (with old packaging) since end-14. While
we do not expect any ASP changes from the upgrade, sales
volume could see some improvement thereafter. To
encourage distributors to restock, Biostime will bear some of Infant
the A&P costs, such as promoters in supermarkets. formula
84%
By product, 84% of FY14 sales were derived from infant
formula powder. Out of this, Biostime (supreme) accounted
for 69%, while Adimil (premium), launched in Sept-13, made Source: Company data, DBS Vickers
up the remaining 31% of infant formula sales.
Deepening penetration into lower-tier cities. To cater to a
Revenue Breakdown FY14 larger range of audience, Biostime plans to deepen
penetration of its Adimil brand into lower-tier cities. The
Dried baby Baby care Probiotic company targets to increase its number of baby-specialty
food products supplements
4% 9% stores to 30,000 outlets, and VIP Pharmacies to 6,000 outlets
3%
(FY14: 2,824).
Adimil Biostime currently derives 66% of sales from VIP Baby

15% Specialty Stores, 26% from supermarkets and the remainder
from VIP pharmacies from its offline channels. As of FY14,
Biostime had 24,615 VIP baby specialty stores and 2,824 VIP
pharmacies.
Biostime
69% Potential spin-off of e-commerce platform onto A-share
market. MaMa100 initiated a multi-platform online strategy –
B2C through third-party e-commerce platforms, C2C (online
member stores such as TaoBao), and lastly O2O through
MaMa100 proprietary platforms (MaMa and WeChat).
Source: Company data, DBS Vickers Catering primarily for its strong member base of 1.96m users
in Mama100, Biostime plans to begin cross selling
competitors brands as well. The management plans to invite
strategic shareholders and key employees to enter in order to
cultivate MaMa100 as a leading vertical O2O e-commerce
platform for parents and babies. Without any numbers and
with MaMa100 being fully owned by controlling shareholders,
it is difficult to estimate MaMa100’s value and impact on
Biostime at this stage.
Page 63
China Dairy Sector

Turnover 2,189 3,382 4,561 4,732 Net Fixed Assets 59 77 322 478
Cost of Goods Sold (733) (1,153) (1,586) (1,805) Invts in Assocs & JVs 0 0 0 0
Gross Profit 1,456 2,229 2,975 2,927 Other LT Assets 228 1,165 1,432 1,817
Other Opng (Exp)/Inc (742) (1,176) (1,802) (1,720) Cash & ST Invts 1,814 1,682 1,690 3,387
Operating Profit 714 1,053 1,173 1,207 Inventory 297 523 972 797
Other Non Opg (Exp)/Inc (13) (23) (27) (51) Debtors 39 86 127 150
Associates & JV Inc 0 0 0 1 Other Current Assets 0 0 78 3
Net Interest (Exp)/Inc 17 41 72 18 Total Assets 2,438 3,533 4,620 6,631
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 271 751 0
Pre-tax Profit 714 1,051 1,162 1,121 Creditors 332 707 1,081 1,032
Tax (187) (307) (341) (312) Other Current Liab 83 156 213 236
Minority Interest 0 0 0 0 LT Debt 0 0 0 2,411
Net Profit 527 743 821 810 Shareholder’s Equity 1,978 2,323 2,516 2,917
EBITDA 710 1,032 1,116 1,154 Total Cap. & Liab. 2,438 3,533 4,620 6,631
Sales Gth (%) 77.5 54.5 34.9 3.7
EBITDA Gth (%) 109.4 45.4 8.2 3.3 Non-Cash Wkg. Cap (79) (253) (118) (319)
Opg Profit Gth (%) 113.7 47.5 11.4 3.0 Net Cash/(Debt) 1,814 1,411 939 976
Net Profit Gth (%) 98.5 40.9 10.4 (1.3)
Pre-Tax Profit 714 1,051 1,162 1,121 Gross Margins (%) 66.5 65.9 65.2 61.9
Chg in Wkg.Cap. (77) 115 (167) 151 ROCE (%) 28.6 31.7 27.6 20.1
Other Operating CF (10) 4 (14) (12) Div Payout Ratio (%) 70.6 70.9 70.4 39.7
Net Operating CF 516 947 660 972 Net Interest Cover (x) NM NM NM NM
Capital Exp.(net) (39) (39) (136) (135) Asset Turnover (x) NM 1.1 1.1 0.8
Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 15.1 3.9 3.2 4.3
Other Investing CF (490) (1,811) 55 (326) Current Ratio (x) 5.2 2.0 1.4 3.4
Net Investing CF (529) (1,850) (81) (460) Quick Ratio (x) 4.5 1.6 0.9 2.8
Div Paid (180) (404) (622) (493) Net Debt/Equity (X) CASH CASH CASH CASH
Chg in Gross Debt 0 271 480 (751) Capex to Debt (%) N/A 14.5 18.1 5.6
Capital Issues 12 (57) (64) 9 Z-Score (X) N/A N/A N/A N/A
Other Financing CF 56 (7) (8) 2,407 N.Cash/(Debt)PS (RMB) 3.76 2.94 1.95 2.01
Net Financing CF (113) (197) (214) 1,173 Opg CFPS (RMB) 0.99 1.39 1.37 1.35
Currency Adjustments (56) 5 (1) (1) Free CFPS (RMB) 0.79 1.52 0.87 1.38
Chg in Cash (182) (1,095) 365 1,684
Interim Income Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions
Cost of Goods Sold (692) (894) (843) (961) Probiotic supplements 332 379 458 425
Gross Profit 1,370 1,606 1,346 1,581 Infant formulas 1,685 2,715 3,752 3,982
Other Oper. (Exp)/Inc (915) (971) (917) (922) Dried baby food 97 135 199 151
Operating Profit 498 675 474 659 Baby care products 48 106 152 173
Other Non Opg (Exp)/Inc (13) (14) (25) (26) Others 27 47 0 0
Net Interest (Exp)/Inc 39 33 5 13 Gross profit (RMB m)
Exceptional Gain/(Loss) (163) 0 0 0 Probiotic supplements 258 295 360 304
Pre-tax Profit 494 668 433 688 Infant formulas 1,104 1,769 2,422 2,467
Tax (196) (145) (121) (190) Dried baby food 56 77 111 74
Minority Interest 0 0 0 0 Baby care products 19 58 82 82
Net Profit 443 540 312 498
Total 1,456 2,229 2,975 2,927
Gross profit Margins (%)
Probiotic supplements 77.8 77.7 78.6 71.4
Sales Gth (%) 51.3 23.8 6.2 1.7 Infant formulas 65.5 65.1 64.5 62.0
Opg Profit Gth (%) 33.4 (0.7) (4.8) (2.4) Dried baby food 57.3 56.9 55.6 49.1
Net Profit Gth (%) 61.8 15.2 (29.5) (7.9) Baby care products 40.2 54.9 54.2 47.2
Gross Margins (%) 66.4 64.2 61.5 62.2
Opg Profit Margins (%) 24.1 27.0 21.6 25.9 Total 66.5 65.9 65.2 61.9
Page 64
China Dairy Sector
Page 65
China Dairy Sector
China Huishan Dairy Holdings
Bloomberg: 6863 HK Equity | Reuters: 6863.HK Refer to important disclosures at the end of this report
NOT RATED Still some way to go

Last Traded Price: HK$2.17 (HSI : 25,399)  Vertically integrated dairy player in North East China
Potential Catalyst: Successful expansion into East China, faster than  Focus on downstream business through expansion into
expected progress in Friesland partnership new regions
Analyst
Alice HUI CFA, +852 2971 1960  Share price is well supported by controlling shareholders’
alice_hui@hk.dbsvickers.com open market purchases
Alison Fok +852 2971 1938 Grass to glass business model. A vertically integrated dairy
alison_fok@hk.dbsvickers.com player, Huishan is one of China’s leading alfalfa producers
and the second largest upstream player in terms of herd size.
Price Relative Based in Liaoning, Huishan is also involved in the
HK$ Relative Index
manufacture and sales of dairy products under its own
219
3.1
199 Huishan brand. In late 2014, the company formed a 50-50 JV
179
159
with FrieslandCampina to introduce one of
2.6
139 FrieslandCampina’s existing brands (excluding Friso) into
119
2.1
99
China. There is also a commitment from FrieslandCampina to
1.6 79 purchase US$30m worth of shares in the open market after
59
1.1 39 completion of the JV deal.
Sep-13 Feb-14 Jul-14 Dec-14 May-15
Focus on downstream operations. Excluding biological asset
China Huishan Dairy Holdings (LHS) Relative HSI INDEX (RHS)
and other fair value gains, Huishan FYMar15 net profit
Forecasts and Valuation declined 27% yoy, mainly hampered by the decline in raw
FY Mar (RMB m) 2012A 2013A 2014A 2015A milk price, a delay in the ramp up of liquid milk capacity, as
Turnover 1,333 2,552 3,530 3,923
EBITDA 537 1,291 1,664 1,512 well as an increase in A&P costs to expand outside of NE
Pre-tax Profit 397 1,081 1,294 967 China. We expect Huishan will continue to focus on
Net Profit 386 1,014 1,249 908 downstream sales with the expansion of its low-temperature
EPS (RMB) 0.03 0.09 0.10 0.06
yogurt and pasteurised milk products into new regions. This
EPS (HK$) 0.04 0.11 0.12 0.08
EPS Gth (%) N/A 162.7 9.7 (34.4) will be aided by its new factory located in Jiangsu. We also
Diluted EPS (HK$) 0.04 0.11 0.12 0.08 expect its partnership with FrieslandCampina to be a potential
DPS (HK$) 0.00 0.00 0.03 0.02 driver in the longer run.
BV Per Share (HK$) 0.10 0.64 1.27 1.19
PE (X) 52.1 19.8 18.1 27.5 Supporting share price via various methods. We expect
Core PE (X) 52.1 19.8 18.1 27.5 FYMar16 capex to remain high at approximately Rmb2bn,
P/Cash Flow (X) 26.7 13.9 21.8 177.6 owing to commitment on construction of dairy farms, hence
P/Free CF (X) nm 21.1 nm nm
EV/EBITDA (X) 39.6 16.7 13.7 19.1 making it difficult to generate positive free cash flow in the
Net Div Yield (%) 0.0 0.0 1.4 0.9 near term. However, Huishan continues to pay dividends with
P/Book Value (X) 22.8 3.4 1.7 1.8 FYMar15 final dividend at Rmb0.0153/share (FYMar14:
Net Debt/Equity (X) 1.3 0.3 0.0 0.3 Rmb0.0216), implying a dividend payout of 28.3% (FYMar14:
ROAE (%) 60.8 30.0 13.1 6.8
22.4%). Since June, Huishan’s Chairman purchased c.427m
shares in the open market, in addition to Huishan’s own
share buyback of 365m since Aug-14 (implying c.2.6% of
ICB Industry: Consumer Goods share capital prior to share repurchase.)
ICB Sector: Food Producers
At A Glance
Principal Business: Integrated dairy player primarily in Northeast
China Issued Capital (m shrs) 14,320
Source of all data: Company, DBSV, Thomson Reuters, HKEX Mkt. Cap (HK$m/US$m) 31,075 / 4,009
Major Shareholders
Champ Harvest Limited (%) 64.2
Norges Bank 5.9
Free Float (%) 29.8
Page 66
www.dbsvickers.com
ed- JS / sa- AL
China Dairy Sector
thereafter moving into East China as the premium UHT
Growth drivers product market is highly penetrated by dairy giants such as
Mengniu and Yili. As of Mar-15, Huishan has 373 distributors,
Growing its own feed. One of the key attractions of Huishan and 408 direct sales stores in malls and supermarkets. While
Dairy is its feedstock plantation. Huishan currently leases topline is likely to grow strongly, we expect profitability could
480,000mu of land, of which 140,000mu is for alfalfa be partly offset by A&P costs at the initial stages of expansion.
plantation. The remainder leased land will be used to develop
oat and corn silage. This will continue to keep its cost of In Nov-14, Huishan and Alpha Spring (Nantong Zongyi
breeding cows lower than the sector average. For example, Investment Co) agreed to invest up to Rmb650m together in a
Huishan’s feed cost per tonne is c.30% below market leader JV to further replicate its dairy farm operations in East China
CMD. (Shanghai, Jiangsu, Zhejiang, Shandong, Anhui). Nantong
Zongyi Investment is a listed company which specialises in
Improvement in sales volume and milk yields partly offset by software and solar cell production in Jiangsu province.
raw milk price decline. As of end Mar-15, Huishan Dairy has a
herd size of 180,331 cows, of which 74,389 are milkable Expanding into milk powder operations. As of Mar-15,
cows. In total, Huishan has 69 dairy farms in Liaoning Province, Huishan has three milk powder production facilities
and management expects the herd to grow organically by manufacturing infant formula products under its own brand
10%. The company will halt importing dairy cows this year. Gold Queen and Huishan Red. Its other product offerings
While there was a slight improvement in milk yields to include whole milk powder, D90 whey powder, and non-dairy
9.1tonnes/annum (FYMar14: 9tonnes/annum), raw milk prices creamer.
declined by 6% y-o-y to Rmb4.87/kg. We expect the impact
from raw milk price decline to be partly offset by sales volume In Oct-14, Huishan formed a JV with FrieslandCampina to
growth in FYMar16. produce and work together to start a new IMF brand with
FrieslandCampina. Huishan received an Rmb700m investment
from FrieslandCampina in a 50/50 JV inclusive of its Shenyang
Downstream sales volume
plant. In addition, FrieslandCampina will acquire USD30m
worth of shares in the open market within six month of the
Tonnes completion of the JV. Essentially, this JV will be able (1) to
160,000 build on existing partnership in the production of non-dairy
141,374
140,000 creamers, (2) secure more demand for Huishan’s raw milk,
123,707
120,000 and lastly (3) to utilise FreislandCampina’s existing sales and
100,000 91,244 distribution network.
77,097
80,000 66,654 75,257
60,000 Huishan infant formula

40,000
20,000 3,129 2,404
0
Fresh milk UHT Yogurt Milk
beverage
FY15 Volume tonnes FY14 Volume tonnes
Top driving force: low-temperature products. Huishan is

ranked first in market share in NE China in pasteurised milk
(44.3%) and yogurt (28.7%), with an overall market share of
20.9% in liquid milk market, according to Frost and Sullivan. Source: Company data, DBS Vickers
Going forward, Huishan aims to target low-temperature
product sales (pasteurised milk and yogurt) in NE China,
Page 67
China Dairy Sector
FY Mar 2012A 2013A 2014A 2015A FY Mar 2012A 2013A 2014A 2015A
Turnover 1,333 2,552 3,530 3,923 Net Fixed Assets 2,840 3,637 4,317 6,356
Cost of Goods Sold (783) (1,174) (1,326) (1,663) Invts in Assocs & JVs 0 0 0 0
Gross Profit 550 1,378 2,205 2,261 Other LT Assets 2,695 4,733 9,420 10,171
Other Opng (Exp)/Inc (5) (64) (335) (561) Cash & ST Invts 1,094 1,522 6,147 4,149
Operating Profit 500 1,223 1,500 1,289 Inventory 413 447 915 1,582
Other Non Opg (Exp)/Inc 5 42 9 34 Debtors 148 173 220 271
Associates & JV Inc 0 0 0 0 Other Current Assets 0 0 0 1,805
Net Interest (Exp)/Inc (103) (142) (206) (323) Total Assets 7,190 10,511 21,020 24,334
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 362 909 1,641 2,867
Pre-tax Profit 397 1,081 1,294 967 Creditors 524 910 738 1,401
Tax (11) (67) (45) (60) Other Current Liab 3,280 473 540 986
Minority Interest 0 0 0 (1) LT Debt 1,917 2,103 4,679 5,140
Net Profit 386 1,014 1,249 908 Shareholder’s Equity 882 5,883 13,195 13,686
Minority Interests 0 0 0 (1)
EBITDA 537 1,291 1,664 1,512 Total Cap. & Liab. 7,190 10,511 21,020 24,334
Sales Gth (%) 256.3 91.5 38.3 11.1
EBITDA Gth (%) 373.8 140.6 28.8 (9.1) Non-Cash Wkg. Cap (3,244) (764) (142) 1,271
Opg Profit Gth (%) 459.2 144.5 22.7 (14.0) Net Cash/(Debt) (1,185) (1,489) (174) (3,858)
Net Profit Gth (%) N/A 162.7 23.2 (27.4)
FY Mar 2012A 2013A 2014A 2015A FY Mar 2012A 2013A 2014A 2015A
Pre-Tax Profit 460 1,012 1,294 967 Gross Margins (%) 41.2 54.0 62.4 57.6
Chg in Wkg.Cap. 230 228 (537) (2,415) ROCE (%) 15.9 18.3 10.0 5.8
Other Operating CF 34 187 185 1,412 Div Payout Ratio (%) 0.0 0.0 24.9 24.1
Net Operating CF 752 1,442 1,036 141 Net Interest Cover (x) 4.8 8.6 7.3 4.0
Capital Exp.(net) (841) (488) (1,671) (4,279) Asset Turnover (x) 0.2 0.3 0.2 0.2
Other Invts.(net) (84) (50) (2,600) 0 Debtors Turn (avg days) 39.2 22.9 20.3 22.9
Other Investing CF (759) (829) (1,652) 0 Current Ratio (x) 0.4 0.9 2.5 1.5
Net Investing CF (1,685) (1,367) (5,923) (4,279) Quick Ratio (x) 0.3 0.7 2.2 0.8
Div Paid 0 0 0 0 Net Debt/Equity (X) 1.3 0.3 0.0 0.3
Chg in Gross Debt 149 386 3,315 1,687 Capex to Debt (%) 36.9 16.2 26.4 53.4
Capital Issues 0 0 5,976 0 Z-Score (X) N/A N/A N/A N/A
Other Financing CF 1,276 (124) (195) 0 N.Cash/(Debt)PS (RMB) (0.13) (0.16) (0.02) (0.34)
Net Financing CF 1,425 262 9,096 1,687 Opg CFPS (RMB) 0.05 0.11 0.12 0.18
Currency Adjustments (13) (12) (44) 0 Free CFPS (RMB) (0.01) 0.08 (0.05) (0.29)
Chg in Cash 479 325 4,166 (2,452)
Interim Income Statement (RMB m) Segmental Breakdown (RMB m)
FY Mar 1H2014 2H2014 1H2015 2H2015 FY Mar 2012A 2013A 2014A 2015A
Cost of Goods Sold (644) (682) (857) (806) Raw milk 672 681 989 1,028
Gross Profit 890 1,314 1,138 1,123 Liquid milk 564 1,707 2,288 2,422
Other Oper. (Exp)/Inc (301) (404) (467) (518) Milk powder 0 88 254 473
Operating Profit 590 911 671 618 Grain products 97 77 0 0
Net Interest (Exp)/Inc (107) (98) (156) (167) Gross profit (RMB m)
Exceptional Gain/(Loss) 0 0 0 0 Raw milk 326 399 614 614
Pre-tax Profit 482 812 516 451 Liquid milk 217 922 1,499 1,499
Tax (16) (29) (32) (28) Milk powder 0 53 92 92
Minority Interest 0 0 0 (1) Grain products 7 3 0 0
Net Profit 467 783 484 424
Total 550 1,378 2,205 2,205
Gross profit Margins (%)
Raw milk 48.5 58.7 62.0 59.7
Sales Gth (%) N/A N/A 30.0 (3.4) Liquid milk 38.4 54.0 65.5 61.9
Opg Profit Gth (%) N/A N/A 13.9 (32.1) Milk powder N/A 60.6 36.2 19.4
Net Profit Gth (%) N/A N/A 3.6 (45.8) Grain products 7.2 4.2 N/A N/A
Gross Margins (%) 58.0 65.8 57.1 58.2
Opg Profit Margins (%) 38.4 45.6 33.7 32.0 Total 41.2 54.0 62.4 56.2
Page 68
China Dairy Sector
Page 69
Industry Focus
China Dairy Sector
Appendix
M&A relating to F&B sector
Co u n t ry o f
D at e A c q u irer T arg et Cat . T y pe
T arg et
J ul-15 China M odern Dairy 2 J V farms Dairy M &A China
J un-15 A lfa Campofrio Pork M &A EU
J un-15 F osun KTG A griculture M &A EU
A pr-15 CRH CRE Beer M &A China
China Culiangw ang

A pr-15 Coke Bev erages M &A China
Bev erages
J an-15 Consortium of Taiw anese inv estments A usnutria Dairy Dairy M &A China
Dairy F arm of
Nov -14 Yili Dairy Strategic USA
A merica
Nov -14 Danone Yashili Dairy New share China
Nov -14 New Hope Group F reedom F oods Dairy Strategic A ustralia
Oct-14 Bright F ood Salov Oliv e oil M &A Italy
Sep-14 Roy al F rieslandCampina Huishan Dairy Dairy Strategic China
Sep-14 F onterra Beingmate Dairy M &A China
Sep-14 Chongqing General Trading Group Bega Dairy JV A ustralia
J ul-14 Yunfeng Capital Yili Industrial Group Dairy JV China
J un-14 KKR COF CO-M eat Pork Inv estment CHina
M ay -14 Bright F ood Tnuv a Mixed M &A Israel
A pr-14 COF CO Noble-A gri A griculture M &A Global
F eb-14 Danone Mengniu Dairy New share China
F eb-14 COF CO Nidera A griculture M &A Global
J an-14 Bright F ood Mundella F oods Dairy M &A A ustralia
J an-14 M engniu Whitew av e F oods Mixed JV USA
Page 70
Industry Focus
China Dairy Sector
Infant formula description
Company Y ashili M engniu Biost ime Y ili Bright Beingmat e Nest le Mead F rieland Danone A bbot t
(M engniu) J ohnson Campina
Code 1230 HK 2319 HK 1112 HK 600887 CH 600597 CH 002570 CH Nestle MJ N US DANONE ABBOTT
Origin China China China China China China Swissland USA Netherlands France USA
Mark et 5.4 7.6 6.4 0.6 9.4 12.4 11 4.7 5.8 4.2
share (2014)
Domest ic Scient, Milex Oushi Biostime, Yili Xinhuo; Bright, Yao+ Beingmate Nestle-NAN, Enfamil F riso; Friso- Dumex Similac
Yashili, Series Adimil Pro-Kido (Love +) S-26 Gold
A SP
Domest ic Guangdong, IM Guangdong Inner Shanghai, Heilongjiang, Shuangcheng, Guangdong Shenyang Shanghai Zhejiang;
product ion Shanxi, (Mengniu) Mongolia, Heilongjiang, Zhejiang Tianjin, (Huishan J V ) J iaxing
base Heilongjiang, Xinjiang, Inner Suzhou (nutrition
Heilongjiang Mongolia plant)
Import Arla-Merla Baby&Me Biostime Pure Annum Nestle-NAN Enfamil, F risolac- Aptammil Similac,
Canterbury (Fonterra) HA, Illuma, S- Enfagrow, Gold, Hero- Eleva,
26 Gold Enfakid Baby Pediasure
A SP
Int l base New Zealand Holland France, New New Zealand Kerry Ireland Ireland, Netherlands, Holland Germany EU
Denmark Zealand, US collaboration Germany Singapore
, as well as
Fonterra
Part nerships Mengniu Danone, None Dairy Farmers Synlait Dairy Fonterra None Huishan Fonterra
IM F Arla of America Dairy
Milk 55% Sy nlait, 20% incl. Isigny Partnership Self-owned Contracted Holland,
pow der Fonterra, 7% OCD; (10-20%), with DFA, milk farms in farmers in New
sourcing Imported from Europe for Laiterie de NZ plants, Shanghai Heilongjiang Zealand,
infant formula; Montaigu own farms and & Expanding Australia and
(60-70%), & Heilongjiang, dairy sources Netherlands
Arla (10- Synlait Dairy in China
20%)
Page 71
Industry Focus
China Dairy Sector
Market size - Dairy Market size – Drinking milk products
RMB m % RMB m %
700,000 20 450,000 25
18 400,000
600,000
16 350,000 20
500,000 14 300,000
400,000 12 15
250,000
10
300,000 200,000
8 10
6 150,000
200,000
4 100,000 5
100,000 50,000
2
0 0 0 0
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2016F
2017F
2018F
2016F
2017F
2018F
Dairy (LHS) YoY growth (RHS) Drinking Milk Products (LHS)
Market size – Yoghurt and sour milk products Market size – Milk formula
RMB m % RMB m %
160,000 30 250,000 25
140,000
25 200,000 20
120,000
20
100,000 150,000 15
80,000 15
60,000 100,000 10
10
40,000
5 50,000 5
20,000
0 0 0 0
2010
2011
2012
2013
2014
2015
2010
2011
2012
2013
2014
2015
2016F
2017F
2018F
2016F
2017F
2018F
Yoghurt and Sour Milk Products (LHS) Milk Formula (LHS) YoY growth (RHS)
Dairy sector – Geographical breakdown
Southwest
China
13%
East China
28%
South
China
22%
Mid China
14%
North and
Northwest Northeast
China China
7% 16%
Source: Euromonitor
Page 72
Industry Focus
China Dairy Sector
Market share - Dairy Market share – Drinking milk products
Nestlé SA
Wahaha Yili 5%
Yili Bright 6% 20% Mengniu Wahaha
Nestlé SA 18%
18% 7% 4% 5%
Mengniu Yangyuan Yangyuan
19% Zhihui Zhihui
4% 5%
Want Want Want
Want 5%
4%
Coca-Cola
3%
Coca-
Cola
Others 2%
Others
37% 37% Bright
2%
Market share – Yoghurt and sour milk products Market share – Infant formula
Yakult Jinan Beingmate

6% Jiabao 7%
Yili Wahaha
14% 9%
Dairy Nestlé SA Mead Danone
3% 14% Johnson 8%
9% Royal
Shenyang Yili
Dairy 6% FrieslandCa
2% mpina
6%
Bright
23% Sichuan
Others New Hope
17% 2% Biostime
Mengniu 5%
24%
Others Mengniu
36% Abbott 5%
4%
Source: Euromonitor
Page 73
Industry Focus
China Dairy Sector
Market share - Beverages Market share - Beer
Wahaha
7%
Tingyi
Coca Cola
12%
14%
Yangshengtang
5%
CRE
5%
Others
53% UPC
4%
Market share – Instant noodles Market share -Wine
Yantai Weilong ,
Henan COFCO , 3.0 0.9
Changyu, 3.0
Nanjiecun , Citic Guoan , 0.9 Vats, 0.9
1.5
Others, 19.0 Castel Group,
Nisson 0.7
Foods , 2.0
Tingyi, 39.4
Henan Si Mei Macrolink, 0.6
Te, 4.1
Baixiang
Food,
10.0
UPC , 13.2 Others, 90.0

Jinmailang
Food, 10.8
Source: Euromonitor, AC Nielson, DBS Vickers
Page 74
Industry Focus
China Dairy Sector
Dairy: raw milk prices (China) Dairy: WMP Fonterra
RMB/kg US$/ton
4.4 5,500
5,000
4.2
4,500
4.0 4,000
3.8 3,500
3,000
3.6
2,500
3.4 2,000
3.2 1,500
1,000
3.0
Oct/11
Feb/12
Oct/12
Feb/13
Oct/13
Feb/14
Oct/14
Feb/15
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Mar/12
Mar/13
Mar/14
Mar/15
Sep/11
Sep/12
Sep/13
Sep/14
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
White sugar (China) Packaging – PET China
RMB/ton RMB/ton
8,000 13,000
12,500
7,000 12,000
11,500
6,000 11,000
10,500
5,000 10,000
9,500
4,000 9,000
8,500
3,000 8,000
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Source: CEIC, Euromonitor Jun/15
Page 75
Industry Focus
China Dairy Sector
Feedstuff – soybean meal Grain: Corn (China)
US$/ton Rmb/ton
550 2,600
500 2,500
450 2,400
400 2,300
350 2,200
300 2,100
250 2,000
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Dec/11
Dec/12
Dec/13
Dec/14
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Grain: Alfalfa (US)
US$/ton
360
340
320
300
280
260
240
220
200
Dec/12
Dec/13
Dec/14
Jun/12
Jun/13
Jun/14
Jun/15
Source: CEIC, Euromonitor
Page 76
Industry Focus
China Dairy Sector
China dairy industry chain
Growing forage Dairy Farming Dairy product processing Sales & Distribution

Background Feed is a mix of forage (corn, silage, Dairy cows are imported from NZ, AUS and US between Processing facilities are typically built with raw milk sources nearby. Infant formula’s fast growing retail
alfalfa) & concentrated feed (corn, 10-14 months. Most choose Holstein breed for its higher Since 08 infant formula scandal, downstream players have formed channel is e-commerce, thereafter
soybean meal, cottonseed meals), yield. integrated vertically to ensure a safe and secure supply chain specialty channels.
with the majority demand being
satisfied by import
Market Largest exporters to China By herd size Latest Market sh Dairy market share breakdown by RSP % (by comp) Distribution channel breakdown (%)
players Alfalfa 90% of volume ‐ USA China Modern Dairy 201,507 1.4% Mengniu Yili Bright Wahaha
100% 4.1
Overall 19 18 7 6 6.6
Corn USA Huishan Dairy 180,331 1.2% 90%
5.7
22
Soybean Argentina Shengmu 103,252 0.7% Yogurt 16 12 21 12
Drinking Dairy 22 25 3 8 80%
J apfa 57,000 0.4% 34.3
Typical feed mix Infant formula market share RSP % (by comp) 70%
Bright Dairy-related 50,000 0.3%
60%
Fontera 49,000 0.3% Mead Johnson 10.1 42.7
50%
Conce YST Dairy 44,623 0.3% Wyeth 10.0 90.2
ntrate 40%
d feed Zhongdi Dairy 21,433 0.1% Beingmate 8.7
30% 59.1
40% Top ten 707,146 4.9% Biostime 7.2
High 20%
A s of 2014 (China) 14,500,000 Yili 5.9 35.3
Fibre
10%
60% Royal Friesland 4.3

0%
Yashili 4.2 Yogurt Infant Dairy

Abbott 3.9 formula
%
Modern Traditional
0.0 2.0 4.0 6.0 8.0 10.0 12.0 Internet retailing

Recent Alfalfa import volume & ASP Date Upstream expansion plans Date Overseas partnerships
events '000 ton US$ per ton Feb'14 Bright Dairy joined hands with RRJ Capital to Feb?4 Danone increases its stake to 9.9% in Mengniu to build up its cold‐chain business , of which Danone's Bio+
100 420 develop its upstream capabilities and plans to list has since been launched.
80 in 3‐5 years. Oct'14 Danone joins as a 2nd largest shareholder with Yashili with plans to work together in infant formula
400
Nov'14 Yili pans to partner with Dairy Farmers of
60 Oct?4 Friesland Campina invests in a 50/50 JV with Huishan to jointly develop a new infant formula brand and co‐
380 America, in addition to announcing its NZ milk
40 invest in a production plant in Shenyang for RMB692m. Friesland will also purchase US$30m via open
powder plant expansion
20 360 market purchase.
2015 Both CMD & Huishan Dairy guide its overall herd
Feb'15 Fonterra buys c.18% stake in Beingmate and plans to distribute its premium IMF brand Annum through
0 340 size to grow 10% organically
Beingmate's channels
May
Sep
Jan
Jul
Mar
Nov
Jun'15 Bright Dairy plans to purchase its Parent Mar'15 Want Want develops cold‐chain products with Japan‐Morinaga Milk Industry to be launched in 3Q15

2014 Import Volume (LHS) Shanghai Dairy's upstream assets.
2015 Import Volume (LHS)
Jun'15 Bright Dairy plans to purchase Israel‐Tnuva Food from Parent Company. Tnuva has >70% market share in
2014 Import Value (RHS) Israel.
2015 Import Value (RHS)
Source: Euromonitor, Company data, DBS Vickers
Page 77
Industry Focus
China Dairy Sector
PE & PB band charts
PE band chart PB band chart
Biostime (1112 HK) Biostime (1112 HK)

Share Price (HK$) Share Price (HK$)
90 120
80 12.6x
44x
100
70
10.0x
60 35x 80
50 7.4x
26x 60
40
17x
30 40 4.8x
20 7x
20 2.1x
10
0 0
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Bright Dairy (600597 CH) Bright Dairy (600597 CH)
Share Price (RMB) Share Price (RMB)
45 57x 35
40 7.9x
30
35 48x
25 6.4x
30
39x
25 20 4.8x
20 30x 15
15 3.2x
21x 10
10 1.6x
5 5
0 0
Jan-06
Jan-06
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
China Mengniu (2319 HK) China Mengniu (2319 HK)
Share Price (HK$) 31x Share Price (HK$) 3.6x

50 27x 50 3.2x
45
24x 2.7x
40 40
20x 2.3x
35
30 30 1.8x
16x
25
20 20
15
10 10
2010
2011
2011
2012
2013
2013
2014
2015
2010
2011
2011
2012
2013
2013
2014
2015
Source: Thomson Reuters, DBS Vickers
Page 78
Industry Focus
China Dairy Sector
China Modern Dairy (1117 HK) China Modern Dairy (1117 HK)

6.0 12.0
2.6x
5.0 20x 10.0
2.1x
17x
4.0 8.0
1.6x
14x
3.0 6.0 1.1x
11x
2.0 9x 4.0 0.5x
1.0 2.0
0.0 0.0
Jun-12
Jul-13
Jul-14
Jul-15
Oct-13
Oct-14
Mar-12
Sep-12
Mar-13
Apr-14
Apr-15
Jan-14
Jan-15
Mar-13
Dec-12
Aug-12
Dec-14
Jul-15
Oct-13
May-14
China Huishan Dairy (6863 HK) China Huishan Dairy (6863 HK)
Share Price (HK$) 35x Share Price (HK$)

4 4.0
29x 2.7x
3 23x
3.0 2.3x
17x
2 1.8x
11x 2.0
1 1.4x
1.0x
0 1.0
Jun-14
Jun-14
Jul-15
Jul-15
Feb-14
Oct-14
Feb-14
Oct-14
Sep-13
Sep-13
Mar-15
Mar-15
Inner Mongolia Yili (600887 CH) Inner Mongolia Yili (600887 CH)
Share Price (RMB) Share Price (RMB)

35 35
30 30
24x
25 25
5.4x
20 19x 20
4.2x
15 14x 15
3.0x
10 10
8x 1.8x
5 5
3x 0.5x
0 0
Jan-06
Jan-06
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Page 79
Industry Focus
China Dairy Sector
Yashili International (1230 HK) Yashili International (1230 HK)

10 10 4.9x
9 9
8 8
3.9x
7 57x 7
6 6
45x 2.8x
5 5
4 32x 4
3 3 1.8x
2 20x 2
0.7x
1 7x 1
0 0
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Page 80
Industry Focus
China Dairy Sector
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China / Hong Kong Industry Focus

China Dairy Sector

DBS Group Research . Equity 24 July 2015

Awakening of the rising giants HSI: 25,399

Dairy growth to outperform overall F&B sector 3

Liquid milk and milk beverages – product upgrades are keys 5

Infant formula – plagued by price wars and channel evolution 14

Stock recommendation 18

Stock Profiles 22

China Mengniu Dairy (2319 HK) 42

China Modern Dairy (1117 HK) 48

Yashili International (1230 HK) 54

Inner Mongolia Yili (600887 CH) 58

Biostime International (1112 HK) 62

China Huishan Dairy (6863 HK) 66

PE & PB band charts 78

Juice Milk - Per capita consumption (2014)

Carbonates kg per capita

(ii) Continual urbanisation

UPC One driver to boost demand growth ahead would be China’s

Source: Company data, DBS Vickers

We are positive on the dairy sector in the medium to long run,

consumers are becoming more sophisticated and demanding

Source: National Geographics, DBS Vickers

(iv) Consumption upgrading

Another trend which is becoming more prominent is trading

Mengniu Source: Euromonitor, DBS Vickers

Source: Euromonitor, DBS Vickers

Market share: Top 3 players vs. other sectors

Source: Euromonitor, DBS Vickers

Source: Euromonitor, DBS Vickers

For the downstream liquid milk and dairy beverages market,

Source: YHD.com, DBS Vickers

China raw milk cost Breakdown of current dairy retail sales %

Source: CEIC, DBS Vickers Source: Euromonitor, DBS Vickers

Operating margins – Mengniu, Yili, Bright Dairy

Mengniu Bright Yili

Source: CEIC, DBS Vickers

Is fresh the next big trend?

Pasteurised milk definitely has strong potential and despite

2010 2011 2012 2013 2014

Source: Company data, DBS Vickers

Ice cream Other dairy

Bright Dairy – FY14 sales breakdown (%)

Source: Company data, DBS Vickers

Upstream dairy farms – Margin pressure from raw milk

*imported milk powder inclusive of VAT, import tax & transportation

While China raw milk prices appear to have stabilised in recent

We expect dairy demand in China will continue to be satisfied

We believe the upstream segment requires the most funding

Net gearing (%)

Huishan YST CMD

Source: CEIC, DBS Vickers

In summary, we believe the raw milk price decline remains the

Upstream sector - Peer comparison

2011 2012 2013 2014

Source: Company data, DBS Vickers

Infant formula – plagued by price wars and channel

IMF product – price comparison

F rance Aptamil 900 115.4 149.0 29%

Source: Tesco UK, JD.com, DBS Vickers

(iii) Rapid changes in distribution dynamics. It is well

any other F&B products. The online platform, in 35.0

IMF – distribution channels

Dairy -related products w ith primary brands as Bright (光明 ), and