Proposal for Dairy Investment Research Quarterly Report

Content

I. Consumer Confidence Index for Dairy Products

1. Consumer Confidence Index of Dairy Industry to See a Rally in 2009 after Touching the Bottom

2. Research of Dairy Demand
Driving factors behind dairy demand: population, urban per capita disposable income, rural per capita net income and export
Per capita disposable income of urban residents: 10.2% growth in Q1 of 2009, the growth continued to slow down
Per capita net income of rural residents: 8.6% growth in Q1 of 2009, a big rally
Population: a growth rate of 5‰ is projected in 2009, with a slowing pace

3. Research of the Supply of Dairy Products
Driving force of dairy supply: dairy cattle inventory and price ratio between milk and feed
Dairy cattle inventory: 12% decline of dairy cattle inventory in Q1 of 2009, and Q2 is foreseen to see steady inventory
Price ratio between milk and feed: raw milk price was sluggish from the latter half of 2008, and the price ratio between milk and feed lingered around a low level

4. Growth of Dairy Production
Liquid milk production: lowest level in Q4 of 2008, 7.1% growth in Q1 of 2009 than Q1 of 2008, bouncing back
Output of solid milk: 27% less in Q1 of 2009 over Q1 of 2008, Q3 is foreseen to be steady

5. Sales Revenue of Scaled Dairy Companies and Growth
Sales revenue: 3.2% more sales revenue in Q1 of 2009 over Q1 of 2008

6. Gross Profit Margin of Dairy Products
Price changes of fresh milk and powder closely relate to CPI, whereas yogurt price is not much related to CPI
Dairy price: steady in Q4 of 2008, rally in Q1 of 2009

7. Total Profit of Dairy Products: Q1 of 2009 Similar as in Same Period 2008

8. Forecast of Dairy Industry
The per capita dairy consumption of urban residents was 22.26kg in 2008 and 3.04kg for rural residents
The per capita dairy consumption volume in China is much lower than the world average, and the there is a huge market potential in the future
Sales revenue in 2009 is hopefully to see 10.6% growth
Raw milk supply shall become the bottleneck of dairy industrial development from 2010-2011

II. Dairy Industrial Chain
The average cost of raw milk in the nation is 2.31 yuan/kg, feed cost makes up around 70% of total dairy farming cost
15kg of daily milk yield of dairy cattle on average, and the yearly amount was 4.5 tons
Raw milk is mainly produced in the Northeast, North China and the Northwest
Shift from smallholder dairy farming to scaled farming
Procurement link of milk stations: processing companies pay by quality and decide raw milk price
Profit margin of different link: raw milk makes up around 75% of the cost of dairy processing companies, and the profit margin is noticeably squeezed by dealers
Core factors for the success of a dairy processing company are capability in controlling raw milk, capability in quality control and capability in market promotion

III. Competition of Dairy Market
75 billion yuan of sales revenue of liquid milk in 2008, slightly higher from 2007
Output of liquid milk: production and sales volume in 2008 was the same as in 2007
UHT milk output saw negative growth for first time in 2008
The growth of the output of pasteurized milk slowed down in 2008, but still 3% growth
The output of yogurt grew by 4% in 2008, still enjoying the fastest growth among dairy products
Production and sales of main liquid milk producers
17.6% less production of solid milk (including powder, condensed milk, milk fat and cheese) in 2008
65 billion yuan of sales of powder in 2008, a recovery growth is likely in the 3rd quarter of 2009
Update of production and sales of powder of key companies
Analysis of advantages and disadvantages of dairy companies

IV. Import and Export from 2006-2008
Dairy import is mainly powder, condensed milk and whey, powder import accounts for around 8% of the national production
Source of powder import: New Zealand, Australia and the US are the three main suppliers of milk powder to China
Source of import of whey: the US, France, the Netherlands and Finland are the main suppliers of whey to China
The export of dairy products is mainly powder, condensed milk and fresh milk, the export of fresh milk is less than 1% of the national production
Venezuela is the largest importer of milk powder from China, and Hong Kong is the largest importer of fresh milk

V. Yili: Fill up the Blankness of Sanlu and Becomes New Leading Player of Milk Powder
12% growth of sales of liquid milk in 2009 is projected
To become new leading player of milk powder by filling up the blankness of Sanlu
Forecast of Yili
Listed dairy companies

VI. Interpretation of Dairy Policy
Raw milk procurement stations for the first time are included in the range of subsidy for agro-machinery
"Technical Norms of Standardized Management of Raw Milk Procurement Stations" ensures safety at procurement link of dairy products
Planning of competitive dairy farming regions shall further heighten the concentration level of raw milk production
Implementation of the "Food Safety Law" further regulates the quality and safety of dairy products

VII Impacts from Melamine Incident on Dairy Industry
Raw milk production converges towards mechanized and scaled production
Dairy processing companies tend to extend industrial chain so as to guarantee quality and safety of milk from the source
Import and export: decline of export but enlargement of import