Sales revenue for the first half of 2015 is expected to increase 70% year over year, and net profit increased 19% year over year; the average price of liquid milk fell to cope with increasingly fierce competition. In the first half of 2015, the domestic dairy industry still faced the challenge of oversupply, but China's Shengmu's performance was superior to most upstream peers, mainly because the company's organic raw milk prices were strong (down 4% year on year) and the expansion of downstream business scale (self-use rate reached 26%, but average price of liquid milk fell 20%). The main point of concern is that the domestic price of raw milk is at the level of 3.4 yuan/kg, and the downside risk is limited, but the price rebound will still take 1 to 2 quarters until the domestic bulk powder inventory falls back to normal levels (currently the international dairy price index is temporarily out of effect). Looking ahead to the second half of the year, the price/profit margin pressure on the company's upstream business is limited. Profit margins are expected to recover starting in the second half of the year, mainly due to the rapid expansion of downstream business (target sales: 1.6 billion yuan), but its ex-factory price and advertising and promotion expense ratio are likely to remain at the level of the first half of the year to drive downstream business growth. Shengmu completed the layout of 7 business regions across the country in the first half of the year, and its products also expanded from organic UHT milk to organic children's milk (20% downstream sales) and organic yogurt (room temperature yogurt and ready-made yogurt). Strategic cooperation with global brands is expected to begin in the near future. Cooperation may involve setting up joint ventures or brand franchises. The main areas of cooperation may include organic dairy products for children, such as milk, infant formula, yogurt, cheese, etc. Such strategic partnerships will help companies increase the internal use of raw milk, improve profitability and cash flow. Valuation and recommendations Shengmu is the largest organic dairy company in China, and the downstream business is expected to account for 33%/40% of profit in 2015/16. We lowered our 2015/16 profit forecast by 19%/22%, and lowered our target price for the end of 2015 by 22% from HK$3.8 to HK$3.0 (based on a cash flow discount model). Currently, the company's trading profit per share is 11.6 times /8.2 times, corresponding to 2015/16, which is far lower than that of A-share peers, making it attractive for capital going south. Maintain recommendations. Risky raw milk price adjustments; downstream competition intensifies.