Key investment points The share of liquid milk revenue increased, and the company's transformation from a raw milk supplier to an organic dairy producer was initially completed: the company achieved sales revenue of 1.62 billion yuan in the first half of the year, an increase of 16.9% over the previous year. The number of dairy cows kept by upstream companies was 122,000, of which the number of organic cows kept increased by 15,301 to 83,816. In the first half of the year, the company's raw milk production increased 12% year on year to 293,000 tons, of which 69% was organic raw milk. The total sales revenue of 1H16's raw milk increased 3.9% year-on-year to 1.32 billion yuan, and the share of raw milk produced by supplying its own brand of liquid milk increased to 67%. The private label liquid milk business benefited from the increase in raw milk production and the expansion of downstream channels in third- and fourth-tier cities and community stores. Sales revenue increased 56.9% year-on-year to 1.06 billion yuan, and its share of total revenue increased from 48.8% in the same period last year to 65.5%, of which organic liquid milk accounted for 98% of the company's total liquid milk revenue. Liquid milk has good profitability, and net profit increased by 20.6% year on year: due to the company's reduction in procurement costs and breeding costs in the industrial chain, and the significant increase in the share of sales revenue of its own brand organic liquid milk with high margin, the company's gross profit increased 21.3% year on year to 770 million yuan, and gross margin increased 1.7 ppts to 47.8% year on year. Although the scale of the company's sales and distribution expenses increased, its share of revenue decreased by 0.5 ppts to 8.2% year on year. The share of administrative expenses in revenue after excluding share option expenses increased slightly by 0.3 ppts to 2.8% over the same period last year. As a result, profit attributable to owners of the parent company increased by 20.6% year-on-year to $402 million. Our view: The company positions organic raw milk with differentiation. The price of upstream organic raw milk has declined less compared to the average market price, and the company's overall profitability can be enhanced through the expansion of the scale of its own downstream products. The company's new liquid milk production plant and production line are expected to be put into use by the end of the year. At the same time, Fuyou Shengmu was jointly established with Food Union to purchase the company's organic raw milk to produce high-end children's dairy products and other organic products. In terms of channels, the company plans to continue to build 6,500 super community flagship stores. According to Bloomberg's market unanimous expectations, the company's revenue and net profit will increase by 30.2%/20.4% year on year in 2016. Currently, the company's stock price corresponding to the 2016 P/E is 9.5 times, so investors are advised to pay attention. Risk warning: food safety; raw milk prices have fallen more than expected; cost payments have greatly exceeded expectations