Broker: China Galaxy International Securities (Hong Kong) Co., Limited
Date of Report: June 24, 2025

China Modern Dairy Holdings Faces Short-Term Turbulence but Signals Recovery Ahead: In-Depth Financial Analysis and Outlook

Overview: Challenging First Half 2025, Optimistic Long-Term Prospects

China Modern Dairy Holdings (CMD), a leading dairy enterprise listed in Hong Kong, has issued a profit warning for the first half of 2025, forecasting a significant net loss. The company cites a steep decline in raw milk prices and substantial fair value losses in its biological assets as primary contributors. Despite these headwinds, management anticipates a rebound in raw milk prices from the third quarter of 2025 and expects year-on-year growth resumption in 2026. This analysis unpacks CMD’s recent performance, operational strategies, and financial outlook in granular detail.

1H25 Performance: Deepening Net Losses and Key Drivers

CMD projects a net loss of RMB 800 million to RMB 1 billion in 1H25, a notable deterioration compared to RMB 207 million and RMB 1.2 billion losses in 1H24 and 2H24, respectively. Key factors driving this shortfall include:

• Raw Milk Price Decline: Industry-wide raw milk prices fell 12% year-on-year in 1H25, with CMD’s decline slightly less severe than the industry average.
• Loss in Biological Asset Value: CMD anticipates RMB 1.65–1.8 billion in fair value losses for its dairy cattle, broken down as follows:
  • Depreciation of lactating cows: RMB 0.6 billion
  • Loss from culling cows: RMB 0.5 billion
  • Impairment losses for the herd: RMB 0.5 billion

Management expects that the loss in fair value of biological assets will decrease in 2H25, supported by lower herd impairment losses and improving beef prices. Revenue for 1H25 is forecasted to decline 2% year-on-year. However, efficient cost controls, including a reduction in raw milk output costs by RMB 0.22 per kg and a 10% increase in raw milk sales volume, have enabled EBITDA to remain flat year-on-year at approximately RMB 1.5 billion.

Raw Milk Price Recovery & Market Dynamics

Looking forward, CMD’s management forecasts a tightening of supply-demand for raw milk from 3Q25, with further improvements expected in 2026. Notable market dynamics include:

• Supply Side: With 90% of Chinese ranches facing losses, a wave of small farm exits is anticipated, accelerated by limited bank financing for feed purchases and rising beef prices that incentivize cow culling.
• Demand Side: Domestic industrial milk powder prices have improved due to costlier imported substitutes. CMD reports a 1.8% year-on-year decrease in China’s raw milk production in the first five months of 2025, a trend expected to persist in the second half.
• Feed Costs: Corn and alfalfa prices are forecasted to rise, while soybean meal prices are expected to remain stable. Management guides for feed costs below RMB 1.8/kg in FY25, down from RMB 1.95/kg in FY24, achieved through strategic cargo locking and direct procurement.

Cost Controls, Capex Strategy, and Business Diversification

CMD has revised down its 2025 capital expenditure guidance to below RMB 3 billion, from an earlier target of RMB 3.2 billion. This reduction stems from:

• A stable or slightly reduced scale for replacement heifer rearing
• Improving beef prices
• No significant M&A capex planned

Additional cost control measures include:

• Reducing the number of dairy cattle, with a slight decrease in inventory expected in FY25
• Raising the proportion of milkable cows to 53% by end-June 2025
• Increasing average milk yield per cow (targeting over 13 tons in 1H25, up from around 13 tons in 1H24)

CMD is also actively expanding into processed raw milk segments such as milk powder and cheese, further diversifying its customer base.

Valuation, Earnings Revisions, and Analyst Recommendation

Despite short-term performance pressure, the broker reiterates an “Add” rating for CMD, with a lowered DCF-based target price of HK$1.25 (from HK$1.31). The reduction reflects weaker raw milk prices and higher-than-expected fair value losses on biological assets.

Key Financial Forecasts and Revisions

Earnings Revisions:

• FY25F EPS cut by 685%
• FY26F EPS reduced by 17%
• FY27F EPS reduced by 8%

Valuation Metrics:

• Current Price: HK\$1.04
• Target Price: HK\$1.25
• Market Cap: HK\$8,232m (US\$1,049m)
• Consensus Ratings: 11 Buy, 0 Hold, 0 Sell
• Free Float: 39.0%

Shareholder Structure and Trading Performance

• Major Shareholder: China Mengniu (52.4%)
• Other Key Holders: Xinmu (4.3%), Yinmu (4.3%)

Price performance:

• 1 month: +1.0%
• 3 months: -8.0%
• 12 months: +50.7%

Key Financial Ratios and Operational Drivers

• Net Gearing: Expected to rise to 84.3% in FY25, then fall to 61.8% by FY27
• Average Milk Yield Per Milking Cow: Rising from 12.6 tons (2023) to an estimated 13.3 tons (2027)
• External Raw Milk ASP: RMB 3.3/kg (2024–2027 forecast)
• Number of Dairy Cows: Projected to grow from 419,898 in 2023 to 511,597 in 2027

Cash Flow and Balance Sheet Highlights

Strategic Outlook: Risks and Catalysts

CMD’s management remains focused on cost discipline, asset optimization, and diversification. The outlook for a raw milk price rebound from 3Q25 and into 2026 is a key potential catalyst for margin improvement. Key upside triggers include:

• Lower feed costs and margin enhancement in 2H25
• Rising raw milk prices on tighter supply and firmer demand

However, investors should be mindful of downside risks including:

• Persistent weakness in raw milk selling prices that could further erode margins
• Unexpected increases in feed costs impacting net profits

Conclusion: Navigating Short-Term Pain for Long-Term Gain

China Modern Dairy Holdings is enduring a difficult 2025 amid industry-wide price and cost pressures, but management’s cost controls, strategic capex adjustments, and a positive outlook for raw milk pricing set the stage for medium-term recovery. Investors are advised to monitor upcoming quarters closely, especially the anticipated turnaround in raw milk prices and CMD’s continued operational execution.

Stock Ratings Framework & Analyst Certification

• Add: Total return expected to reach 15% or higher over the next 12 months
• Hold: Total return between -10% and +15%
• Reduce: Total return expected to fall below -10%

The analyst certifies the independence and accuracy of this report and confirms there are no conflicts of interest related to the covered companies.

About the Broker

China Galaxy International Securities (Hong Kong) Co., Limited and its affiliates are leading financial service providers in the Asia-Pacific, offering in-depth equity research and strategic market insights to institutional investors globally.