(extracted from Annual Report 2009)
Dear Shareholders,
For the full year ended 31 March 2009, our Group posted a relatively healthy performance, boosted by the strong, double-digit sales performance of our raw milk, pedigree bull semen and pedigree dairy cow embryos. Sales of our raw milk business jumped 45.4% to RMB152.1 million yearon- year, while that of pedigree bull semen grew by 11.7% to RMB423.5 million and cow embryos rose 14.3% to RMB72.1 million.
Despite the negative consumer reaction from the melamine scandal last September, China Milk emerged unscathed as a result of the strict quality production standards that we adhere to.
However, China's dairy industry is going through a season of change. Poor public confidence in some local brands had given opportunities for foreign brands to enter the market as they are perceived to be safer. Stricter government controls on raw milk quality has given rise to higher operating costs for farmers. As a result, farmers may scale down herdsize expansion, which may affect demand for our pedigree bull semen and cow embryos.
Switching from OEM to Own Brand
In spite of these challenges, we are still cautiously optimistic that the industry will continue to reward dairy farms that produce high-quality, contaminantfree raw milk such as ours.
However, the outbreak of the melamine incident last September has also made it more arduous for China Milk to tap into the OEM processing business as most of the milk brands, especially those having their products tainted by melamine, have reduced their own production of milk products. As such, we have accelerated our strategy to build our own Yinluo brand instead of relying on the OEMs for our milk processing business segment. Detailed market research is now being carried out to help the Group develop our marketing strategies.
Herd Expansion Strategy
Cattle genetics remain the long-term solution to encourage the growth of China's dairy industry which is still plagued by inefficiencies in quality milk production. The Group's overall improvement across all three product segments can be attributed to the Group's expanded herd size and improvement in its herd structure. As at 31 March 2009, our total herd size grew by a commendable 18.7% to 21,820, comprising 342 pedigree bull sires, 162 young sires, 21,218 dairy cows and 98 other males.
Of the dairy cows, the Australian breed recorded the highest growth, from 2,962 previously to 5,867 as the Group took delivery of 3,000 Australian Holsteins sourced in Heilongjiang in July 2008. The move was to counter the import ban of Canadian dairy cows as Australian Holsteins are known to have the second highest milk yield, after the Canadian breed. Going forward, China Milk will continue to expand its herd size through acquisitions and internal breeding.
Moving Ahead
As milk is a basic commodity that we can never live without, it would be reasonable to expect demand for raw milk to continue to remain stable, particularly since we have established ourselves as a reputable dairy company that supplies melamine-free raw milk.
This, we feel, is a very strong competitive advantage even as the entire dairy industry adjusts to more stringent quality controls from the PRC Government in the aftermath of the melamine scandal. This has led to higher costs of raising dairy cattle which is exacerbated by rising feed costs, forcing farmers to scale down or reduce the rate of increase in their herd size.
This may lead to some pricing pressure on the Group's pedigree bull semen and dairy cow embryo business. However, we believe that the demand for these two products will remain stable in the long-term given the shortage of good quality cows in China. With the increased focus on cattle genetics improvement to raise milk yield, our bull semen and cow embryos, which are of Canadian breed, will continue to be a vital part of breed improvement programmes in China.
Acknowledgments
We would like to take this opportunity to welcome our Independent Director, Mr Xie Xiaolai who joined the Board on 2 June 2008. Mr Xie is an associate professor in the Animal Science & Technology College at Northeast Agricultural University in the PRC and his experience in animal husbandry will add much value to the Board.
This has been a very challenging year for China Milk and we would like to record our appreciation to all of our fellow directors on the Board for their advice and commitment.
We would also like to thank all of you, our valued shareholders, for your continued support of China Milk.
Liu Shuqing
Executive Chairman
Liu Hailong
Chief Executive Officer