Overview:

Relationship between supply and demand, prices, policies are the most important factors affecting development of the industry, changes in supply and demand will direct affect the price, sales and profits in the industry.

This industry prosperity index is weighted by the extraction factors from supply and demand aspects, integrated with market factors, such as sales, increase rate, and total profit. The index represents the quality of the industry development. We can forecast industry development trends according to the relativity between supply and demand factors and market factors, so to provide investment reference to all kinds of investors.

I. Consumer Confidence Index for Dairy Products   7
1. Consumer Confidence Index of Dairy Industry to See a Rally in 2009 after Touching the Bottom  7
2. Research of Dairy Demand    . 9
Driving factors behind dairy demand: population, urban per capita disposable income, rural per capita net income and export    9
Per capita disposable income of urban residents: 10.2% growth in Q1 of 2009, the growth continued to slow down  10
Per capita net income of rural residents: 8.6% growth in Q1 of 2009, a big rally  . 10
Population: a growth rate of 5‰ is projected in 2009, with a slowing pace    11
3. Research of the Supply of Dairy Products   11
Driving force of dairy supply: dairy cattle inventory and price ratio between milk and feed  11
Dairy cattle inventory: 12% decline of dairy cattle inventory in Q1 of 2009, and Q2 is foreseen to see steady inventory     12
Price ratio between milk and feed: raw milk price was sluggish from the latter half of 2008, and the price ratio between milk and feed lingered around a low level     13
4. Growth of Dairy Production     14
Liquid milk production: lowest level in Q4 of 2008, 7.1% growth in Q1 of 2009 than Q1 of 2008, bouncing back 14
Output of solid milk: 27% less in Q1 of 2009 over Q1 of 2008, Q3 is foreseen to be steady  14
5. Sales Revenue of Scaled Dairy Companies and Growth      15
Sales revenue: 3.2% more sales revenue in Q1 of 2009 over Q1 of 2008    15
6. Gross Profit Margin of Dairy Products    15
Price changes of fresh milk and powder closely relate to CPI, whereas yogurt price is not much related to CPI. 16
Dairy price: steady in Q4 of 2008, rally in Q1 of 2009   16
7. Total Profit of Dairy Products: Q1 of 2009 Similar as in Same Period 2008  . 17
8. Forecast of Dairy Industry    . 18
The per capita dairy consumption of urban residents was 22.26kg in 2008 and 3.04kg for rural residents.   18
The per capita dairy consumption volume in China is much lower than the world average, and the there is a huge market potential in the future     19
Sales revenue in 2009 is hopefully to see 10.6% growth   19
Raw milk supply shall become the bottleneck of dairy industrial development from 2010-2011  19
 
II. Dairy Industrial Chain     20
The average cost of raw milk in the nation is 2.31 yuan/kg, feed cost makes up around 70% of total dairy farming cost    . 21
15kg of daily milk yield of dairy cattle on average, and the yearly amount was 4.5 tons  . 21
Raw milk is mainly produced in the Northeast, North China and the Northwest   22
Shift from smallholder dairy farming to scaled farming   23
Procurement link of milk stations: processing companies pay by quality and decide raw milk price. 23
Profit margin of different link: raw milk makes up around 75% of the cost of dairy processing companies, and the profit margin is noticeably squeezed by dealers   . 24
Core factors for the success of a dairy processing company are capability in controlling raw milk, capability in quality control and capability in market promotion   . 25
 
III. Competition of Dairy Market     25
75 billion yuan of sales revenue of liquid milk in 2008, slightly higher from 2007  . 25
Output of liquid milk: production and sales volume in 2008 was the same as in 2007  26
UHT milk output saw negative growth for first time in 2008  27
The growth of the output of pasteurized milk slowed down in 2008, but still 3% growth    28
The output of yogurt grew by 4% in 2008, still enjoying the fastest growth among dairy products  28
Production and sales of main liquid milk producers   29
17.6% less production of solid milk (including powder, condensed milk, milk fat and cheese) in 2008 29
65 billion yuan of sales of powder in 2008, a recovery growth is likely in the 3rd quarter of 2009  30
Update of production and sales of powder of key companies     31
Analysis of advantages and disadvantages of dairy companies   . 32
 
IV. Import and Export from 2006-2008     34
Dairy import is mainly powder, condensed milk and whey, powder import accounts for around 8% of the national production   . 34
Source of powder import: New Zealand, Australia and the US are the three main suppliers of milk powder to China. 35
Source of import of whey: the US, France, the Netherlands and Finland are the main suppliers of whey to China.    36
The export of dairy products is mainly powder, condensed milk and fresh milk, the export of fresh milk is less than 1% of the national production    . 36
Venezuela is the largest importer of milk powder from China, and Hong Kong is the largest importer of fresh milk.    38
 
V. Yili: Fill up the Blankness of Sanlu and Becomes New Leading Player of Milk Powder  38
12% growth of sales of liquid milk in 2009 is projected    38
To become new leading player of milk powder by filling up the blankness of Sanlu  . 39
Forecast of Yili     39
Listed dairy companies    . 40
 
VI. Interpretation of Dairy Policy    41
Raw milk procurement stations for the first time are included in the range of subsidy for agro-machinery.     41
“Technical Norms of Standardized Management of Raw Milk Procurement Stations” ensures safety at procurement link of dairy products    41
Planning of competitive dairy farming regions shall further heighten the concentration level of raw milk production.  42
Implementation of the “Food Safety Law” further regulates the quality and safety of dairy products. 43
 
VII. Impacts from Melamine Incident on Dairy Industry     44
Raw milk production converges towards mechanized and scaled production    44
Dairy processing companies tend to extend industrial chain so as to guarantee quality and safety of milk from the source    . 45
Import and export: decline of export but enlargement of import    45