China Modern Dairy Holdings Ltd - Recovery in sight
- FY25 results below expectations due to higher-than-expected fair value adjustment on dairy cows
- Raw milk price is bottoming out; expect price recovery towards 2H26
- Further cost reduction to support gross margin expansion
- Maintain BUY on sequential margin recovery. TP revised to HKD1.70
FY25 Results highlights. FY25 results were broadly in line with the company’s operating trends across 2025, showing top-line pressure and continued biological asset headwinds. Group revenue declined 4.9% to RMB12.6bn, given softness in non-raw milk segments and lower raw milk prices offsetting volume expansion. Gross margin improved by 1.4ppts to 27.4%, with improved margins in the non-raw milk segment. Total attributable loss narrowed to RMB1.2bn (FY24: RMB1.5bn), worse than expected, mainly due to larger-than-expected fair value loss of dairy cows. However, cash EBITDA improved 2.6% to RMB3,063mn as raw milk segment gross margin remained intact, slightly better than expectations. No final dividend was declared for FY25 (FY24: RMB0.0122 per share).
By segment, raw milk: Total raw milk volume grew 8.5% to 3.139mn tonnes with flat revenue. Average milk yield per cow improved 0.8% to 12.9 tonnes/head. Herd size declined ~7% to ~457k heads, while the proportion of milkable cows increased to 58.2% (up 7.1ppts). Gross margin was steady y/y despite revenue decline, with efficiency gains mitigating ASP pressure. Non-raw milk businesses: Feed & farm supplies, breeding products, and platform services saw softer demand compared with prior year, in part due to the company’s strategic focus on higher-quality client segments and efficiency – gross margin improved by 2.1ppts.
Raw milk price outlook improving on tightening supply dynamics. Industry consolidation is underway, with China’s dairy herd size declining for two consecutive years amid sustained sector losses. On the demand side, structural changes are emerging, including a shift in imports of whole milk powder to imports of higher value-added products (e.g. cheese, butter and whey), driven by bakery and beverage channels. At the same time, domestic raw milk prices remain below the reconstituted cost of imported powder, supporting continued substitution. Industry raw milk prices have stabilised at ~RMB3.03/kg since 3Q25, and continued to see stable trend post Chinese New Year, despite typical seasonal weakness - seen as a positive signal, with a more meaningful recovery likely towards 2H26. We expect the full year average raw milk prices to be largely flat vs. 2025. Coupled with slowing domestic and global supply growth and supportive policies (e.g. restrictions on use of reconstituted milk in UHT pure milk), the industry appears to be moving towards a tighter balance.
Fair value losses to normalise. The FY25 fair value loss of RMB3.1bn includes (1) fair value adjustment of ~RMB0.84bn due to raw milk price decline; and (2) cull cow losses of ~RMB1.07bn, within which, RMB0.3bn of the cull loss was due to above-plan culling and is one-off in nature. Management believes that recurring fair value adjustment would mainly comprise depreciation and normal culling losses, amounting to c.RMB2.0bn. Looking ahead, stabilising and potentially recovering raw milk prices should further reduce fair value losses, while stronger cull cow prices may provide additional support to biological asset valuations.
Herd optimisation continues, positioning for future supply tightening. CMD’s herd reduction in FY25 was an active optimisation rather than demand-driven contraction. As a result, the proportion of milkable cows increased from 51% to 58%, and management expects this ratio to remain stable in 2026, supporting a mid-single digit sales volume growth this year. While looking beyond 2026, there could be industry-wide shortage of replacement heifers, with some farms operating at high portions of milkable cows (70–80%), which may lead to accelerated herd declines in the industry in 2027/28. CMD is proactively adjusting its breeding and retention strategy to prepare for this potential supply change. Capex discipline remains in place, with a planned RMB400–500mn reduction in 2026, supporting positive free cash flow (excluding the planned Shengmu acquisition).
Efficiency gains and new growth drivers to support margins. The company continues to focus on cost leadership, targeting further reductions in feed cost per kg of milk (from RMB1.77 to <RMB1.75 in 2026), supported by hedging strategies and ongoing operational optimisation (average milk yield to edge up from 12.9kg to >13kg this year). We expect raw milk gross margin to improve to 32% this year (FY25: 31.2%), with further upside towards an ideal level of 35–36%. Beyond cost control, CMD is advancing multiple strategic initiatives, including digital transformation, energy efficiency upgrades, and expansion of its capital-light trusteeship model, which is gaining traction domestically and in Southeast Asia. Meanwhile, increasing exposure to deep-processing customers (e.g. cheese and butter manufacturers) and a more diversified customer base should support more stable demand and enhance long-term value creation. The planned acquisition of Shengmu should also provide future synergy, as Shengmu brings in high-end organic milk contribution, while supporting a more integrated and efficient production and distribution network.
Maintain BUY; TP HKD1.70. We cut FY26F earnings by 67% as we revised down the raw milk price assumption, while expecting raw milk price recovery towards 2H26 and 2027. However, our TP was lifted to HKD1.70 (previously HKD1.56), as we rolled forward the valuation and incorporated higher long term margins with improved efficiency. Our TP is based on a DCF valuation with WACC at 9% and terminal growth of 1.5%.
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