Net profit for the first half of 2015 is in line with our expectations. In the first half of 2015, Shengmu's revenue increased 53% year on year, mainly benefiting from a 6% increase in the overall average price (-8%/-24% up/downstream due to oversupply) and a 44% increase in sales volume (up/downstream +16%/+263%). Downstream sales revenue increased sharply by 177% year over year, while the self-use rate reached 24% (first half of 2014:11%). Despite falling feed costs and improved downstream economies of scale, overall gross margin declined by 2.9 percentage points, mainly due to lower average sales prices. Trends The average upper/downstream sales price for the second half of 2015 is likely to continue to be under pressure, mainly due to the current oversupply, but there is limited room for decline. We expect that the average sales price of the company's raw milk will decline slightly in the 3rd quarter of 2015. Among them, the average sales price of organic raw milk will drop slightly, and downstream products are expected to remain at competitive prices to support rapid sales growth. According to the company's management and our channel data, Shengmu's downstream sales growth was strong from May to August, mainly due to the completion of the layout of the country's seven major business regions and timely adjustments to the company's price and promotion strategy in the first half of 2015. Therefore, we maintain our downstream sales forecast of 1.6 billion to 1.7 billion yuan in 2015, which will promote a slight increase in net interest rates in the second half of the year. Strategic cooperation with global brands is expected from the fourth quarter of 2015, focusing mainly on downstream products (milk, infant formula, yogurt, cheese, etc.). Such projects are expected to increase the company's internal usage rate, profitability, and cash flow. Valuation and recommendations Shengmu is the largest organic dairy company in China, and its share of downstream profit in 2015/16 is expected to rise to 42%/46%, while the company's current stock price corresponds to 9.9 times/7.5 times the 2015/16 price-earnings ratio. The 2015 profit forecast was maintained, but the 2016 net profit forecast was lowered by 7% to reflect the precautionary principle. At the same time, the target price for the end of 2015 was lowered by 8% to HK$2.75 (cash flow discount method). Maintain recommendations. The average risk price declined further; total output fell short of expectations.