Main points of investment

Raw milk sales rose and prices fell: the company's milk sales revenue fell 5.0% year-on-year to 514 million yuan in the first half of the year, but the deceleration slowed down. As the average selling price of raw milk fell 12.9% to 4005 yuan / ton compared with the same period last year, and sales increased 9% to 10600 tons compared with the same period last year, the decrease in sales revenue was mainly due to the decline in domestic raw milk prices. The company produces an average of 10.2 tons of milk per cow per year, an increase of 6.3% over the same period last year. The number of dairy cows on the farm increased by 1382 to 51000 compared with the same period last year, and the number of adult cows increased.

The fair value change loss of dairy cattle increased by 110 million yuan: due to the decrease in sales revenue and the increase in sales cost, the company's gross profit in the first half of the year fell to 176 million yuan, and the gross profit margin decreased to 34.3% compared with the same period last year. Due to the above reasons, coupled with the decline in domestic raw milk prices, the change in the fair value of biological assets less the cost of sales during the reporting period expanded from a loss of 146 million yuan in the same period last year to a loss of 256 million yuan. The company's performance changed from a profit of 10.9 million yuan in the same period last year to a loss of 136 million yuan, with a basic loss of 3.50 cents per share.

Our view: in the future, while ensuring the supply of high-quality raw milk, the company will continue to carry out beef cattle breeding business, timely carry out whole-fat powder processing business, and expect to start dairy cattle breeding in Keshan Farm before the end of 2016. We judge that due to the impact of imported milk powder and the problem of oversupply of raw milk, the price of raw milk will remain low in the future, and the sales of raw milk will be under pressure. The company's performance may continue to be under pressure in the short term. According to market consensus expectations, the company's revenue fell 3.19% in 2016 compared with the same period last year, and the company's share price is now 5.5 times the price of 2016 Phammer E, so investors are advised to pay careful attention.

Risk tips: food safety; raw milk prices continue to fall more than expected; fees paid much more than expected