CH MODERN D Reverse Roadshow: CH MODERN D tells the new story of organic milk.

On September 11th and 12th, 2024, CH MODERN D (01117) held a unique reverse roadshow event, leading investors to visit an organic pasture and its forage production base on the edge of the Ulan Buh and Desert. The event attracted many well-known institutions, including CITIC SEC, CICC, and Haitong. By witnessing the vitality of CH MODERN D's organic pasture and forage production base, CH MODERN D hoped to tell investors a story about the organic milk industry. CH MODERN D's CFO, Zhu Xiaohui, personally revealed the strategic blueprint for the company's layout in the organic milk industry to the participants. He said that since July this year, four organic pastures in Ulat Front Banner have successfully joined the CH MODERN D family, making a total of five organic pastures jointly focused on the production of high-quality organic milk. The organic milk produced by these pastures sells for at least 1 yuan/kg more than regular high-end raw milk, bringing a significant increase in gross profit margin to the company. The gross profit margin of organic milk has reached more than 35%, far exceeding the 30.3% level of regular milk in the first half of 2023. CH MODERN D's layout in the organic milk industry can be traced back to 2022. After two years of steady development, the company achieved a daily output of 500 tons of fresh milk. According to the plan, in 2024, CH MODERN D's organic milk will account for 6% of the total milk volume (assuming four organic pastures have been consolidated since the beginning of the year), and this proportion will further increase to 10% by 2027, becoming a new profit growth point for the company. At this critical moment when the domestic dairy industry is facing severe challenges, CH MODERN D is strengthening its competitive advantage through increased investment in the organic milk industry. Zhu Xiaohui also predicted that a turning point in the dairy industry is imminent. In the context of stable milk acquisition prices and decreasing feed prices, combined with the increasing proportion of organic milk revenue, CH MODERN D's gross profit margin in the second half of the year will continue to expand. CH MODERN D's pasture layout and dairy cow advantages were fully showcased in this reverse roadshow. Zhu Xiaohui personally led investors to visit the Ulan Buh and Sun Milk Ranch located in the Ulat Front Banner. The ranch covers an area of 1,703 acres, with a total floor area of 320,000 square meters, designed to hold 18,000 dairy cows, currently actually stocking 10,000 cows, and producing 109 tons of fresh milk per day. In the entire Ulat Front Banner, relying on cooperation, mergers, and expansions, CH MODERN D has rapidly expanded its organic milk production capacity. So far, the company has five organic pastures that have been certified triple by the EU, national standards, and Mengniu system, with a total area of 13,000 acres, designed to accommodate 60,000 head of cattle, currently actually stocking 45,000 cattle, and producing 500 tons of fresh milk per day. The organic milk produced by these pastures not only has excellent quality but also enjoys a high market premium. It is worth mentioning that as one of the domestic leading dairy cattle breeding enterprises, CH MODERN D has equipped the park with a 150,000-acre organic forage planting base, achieving self-sufficiency in green silage, effectively controlling production costs, ensuring the quality of organic milk, and achieving closed-loop management from planting to production. Zhu Xiaohui emphasized that high-quality feed is the basis for producing quality organic milk. Alfalfa, oats, corn, and straw are managed through a combination of self-cultivation and import, strictly following EU and national dual organic standards. Currently, Mengniu is the largest customer of CH MODERN D, with over 90% of its raw milk supply going to Mengniu. Zhu Xiaohui said that CH MODERN D actively optimizes its product structure and expands its organic milk business, which also reflects its synergistic development with customers such as Mengniu. In terms of domestic demand for raw milk, the country has actively promoted consumption growth through various policy measures, including the Student Milk Program, which has benefited over 30 million students in 31 provinces, municipalities, and autonomous regions nationwide. "Student milk is of better quality and can increase the milk price by 5 cents/kg. The higher the proportion of student milk in revenue, the higher the gross margin will be," Zhu Xiaohui said, adding that there are currently eight certified student milk delivery ranches, and another five will receive the certification in the future, bringing the total number of certified student milk delivery ranches to 13, providing higher quality dairy products to students. Financial analysis and future outlook Despite 2024 being considered one of the toughest years for the industry, CH MODERN D has achieved production growth by optimizing herd structure and increasing yield. In the first half of 2024, the company's raw milk production reached 1.45 million tons, an increase of 16.1% year-on-year. Behind this achievement is the result of the company's continuous investment over the years. Starting in 2013, CH MODERN D has been committed to reducing costs and has achieved a decrease in sales costs for multiple years. In 2024, the company is confident in reducing raw milk sales costs to 2.54 yuan/kg or lower. "Next year will be an important turning point for profit," Zhu Xiaohui reminded. The company's feed costs are expected to be at 1.98 yuan/kg or below this year, with an additional drop of 0.1 yuan/kg in feed costs expected in 2025. If the acquisition milk price remains stable, it will be a profit-scissor gap. Increasing yield is a major weapon for CH MODERN D to reduce costs. CH MODERN D has a good record of increasing yield, achieving a steady increase year by year since the group went public, with an expected level of 13 tons this year. Through increasing yield, the company effectively dilutes breeding costs, giving it a cost advantage in fierce market competition. According to data from the Ministry of Agriculture and Rural Affairs, the average price of fresh milk in China's main dairy production areas was 3.49 yuan/kg in the first half of 2024, a decrease of about 11.9% from the first half of 2023. The average selling price of raw milk from CH MODERN D decreased by 10.5% to 3.66 yuan/Kilograms, the decline is less than the decline in the market original milk selling price.Zhu Xiaohui reminded that the domestic sow inventory has been steadily increasing since 2020, but is expected to start declining this year. Currently, the effect of reducing overcapacity in the dairy industry is starting to show. As an example, the price of bulk milk on the market has increased from less than 1 yuan to 3 yuan per kilogram. "The dairy industry is undergoing a period of adjustment, and next year is expected to reach a turning point." It is noted that from April to present, CH MODERN D has received a total of 27 research reports with "buy/hold" ratings. Zhongxin Lian believes that based on the optimistic expectations for the long-term development prospects of CH MODERN D, a target price of 1 Hong Kong dollar is given, which is 33% higher than the closing price on September 19th. Data from the Hong Kong Stock Connect also shows that since the beginning of the year, southbound funds have been increasing their holdings in CH MODERN D. The proportion of southbound funds has increased from 7.04% at the beginning of 2024 to 7.54% on September 19th. Zhu Xiaohui also admitted that with the group reducing the expansion of new projects, it is expected that the group's leverage ratio will start to decline from 2025.