2016 Annual Report (PDF)

Table of Contents 2 Corporate Information 3 CEO’s Statement 6 Management Discussion and Analysis 23 Biographies of Directors and Senior Management 27 Corporate Governance Report 39 Report of the Directors 59 Independent Auditor’s Report 64 Consolidated Statement of Profit or Loss and Other Comprehensive Income 65 Consolidated Statement of Financial Position 67 Consolidated Statement of Changes in Equity 68 Consolidated Statement of Cash Flows 70 Notes to the Consolidated Financial Statements 166 Five-year Financial Summary Corporate Information BOARD OF DIRECTORS REGISTERED OFFICE Executive Directors Maples Corporate Services Limited PO Box 309 Ms. GAO Lina (Deputy Chairman and Chief Executive Officer) Ugland House Mr. HAN Chunlin (Chief Operation Officer) Grand Cayman, KY1-1104, Cayman Islands Non-Executive Directors HONG KONG OFFICE Mr. YU Xubo (Chairman) Unit 2402, 24/F, Mr. WOLHARDT Julian Juul Alliance Building 130-136 Mr. HUI Chi Kin, Max Connaught Road Central Sheung Wan Mr. ZHANG Ping Hong Kong Mr. SUN Yugang PRINCIPAL SHARE REGISTRAR AND Independent Non-Executive Directors TRANSFER OFFICE Mr. LI Shengli Maples Finance Limited Mr. LEE Kong Wai, Conway PO Box 1093, Mr. KANG Yan Queensgate House Mr. ZOU Fei Grand Cayman, KY1-1102 Cayman Islands AUDIT COMMITTEE HONG KONG BRANCH SHARE REGISTRAR Mr. LEE Kong Wai, Conway (Chairman) AND TRANSFER OFFICE Mr. HUI Chi Kin, Max Mr. ZOU Fei Computershare Hong Kong Investor Services Limited Rooms 1712-1716, 17/F, Hopewell Centre REMUNERATION COMMITTEE 183 Queen’s Road East Wanchai Hong Kong Mr. LI Shengli (Chairman) Mr. WOLHARDT Julian Juul LEGAL ADVISORS Mr. ZOU Fei NOMINATION COMMITTEE As to Hong Kong Law Mr. KANG Yan (Chairman) Cleary Gottlieb Steen & Hamilton (Hong Kong) Mr. LI Shengli Mr. LEE Kong Wai, Conway As to PRC Law STRATEGY AND DEVELOPMENT Commerce & Finance Law Offices COMMITTEE As to Cayman Islands Law Mr. LI Shengli (Chairman) Maples and Calder Ms. GAO Lina Mr. WOLHARDT Julian Juul AUDITOR Mr. ZOU Fei Deloitte Touche Tohmatsu AUTHORISED REPRESENTATIVES Certified Public Accountants Ms. GAO Lina PRINCIPAL BANKERS Mr. LI Kwok Fat Agricultural Development Bank of China Maanshan Branch COMPANY SECRETARY China Construction Bank Maanshan Branch Bank of Communication Maanshan Branch Mr. LI Kwok Fat Citibank N.A. Hong Kong HEADQUARTERS STOCK CODE Economic and Technological Development Zone The Stock Exchange of Hong Kong Limited: 1117 Maanshan City, Anhui Province, PRC WEBSITE http://www.moderndairyir.com 2 CHINA MODERN DAIRY HOLDINGS LTD. ANNUAL REPORT 2016 CEO’s Statement Dear Shareholders, On behalf of the board of directors (the “Board”) of China Modern Dairy Holdings Ltd. (“Modern Dairy” or the “Company”) and its subsidiaries (collectively, the “Group”), I am pleased to present the annual results of Modern Dairy for the year ended 31 December 2016 (the “year under review”) to each of our shareholders (the “Shareholders”). BUSINESS REVIEW For the year ended 31 December 2016, the Group recorded a total revenue of RMB4,862.3 million. For the year ended 31 December 2016, dairy farming business remained the backbone business of the Group and accounted for 69.59% of the total revenue of the Group. We are the largest dairy farming company and the largest producer of raw milk in China in terms of herd size. During the year ended 31 December 2016, the Group has operated 26 farms in China with approximately 229,200 dairy cows in total. Our farms are spread across seven provinces in China, each being close to renowned downstream dairy product processing plants and with adequate feed supply. Total external sales volume of raw milk for the Group amounted to 855,353 tons for the year ended 31 December 2016. Leveraging on its distinct edge of scale, the Group produces high quality raw milk in line with standards of safety and quality, and proactively develops downstream market and its own brands. For the year ended 31 December 2016, total sales of the Group’s liquid milk under its own brands amounted to RMB1.48 billion, representing 30.41% of the share of total revenue of the Group. For the year ended 31 December 2016, the proportion of raw milk used in the production of the Group’s liquid milk under its own brands over our total internal and external sales volume of raw milk amounted to 14.95%. The continual growth of liquid milk under the Group’s own brands has contributed to the diversification and flexibility of the Group’s business. For the year ended 31 December 2016, Cash EBITDA of the Group was RMB829.4 million. For the year ended 31 December 2016, Cash EBITDA margin of the Group was 17.06%. CHINA MODERN DAIRY HOLDINGS LTD. ANNUAL REPORT 2016 3 CEO’s Statement On the backdrop of challenges ahead in respect of the current transformation of dairy farming industry in China, the Group, as a pioneer in domestic large-scale farming and who initiated the cutting-edge business model of “integration of forage grass planting, dairy farming and milk processing”, has won a widespread recognition both at domestic and abroad. At the Monde Selection 2016 held by the International Institute for Quality Selections in Budapest, Hungary, in the afternoon on May 30, 2016, the Company was awarded the Gold Prize in Food Category by Monde Selection for the third consecutive year. Moreover, the Company was also awarded a special trophy, the International High Quality Trophy, and became a big winner at the conference of this year. The International High Quality Trophy received by the Company was a special trophy from Monde Selection, which was only awarded to products winning Special Gold Prize or Gold Prize for three consecutive years. The winning products must have fulfilled stringent quality standards and have long-term, stable and reliable quality assurance. The trophy represents a recognition of the enterprise’s long-term persistent efforts in pursuit of quality, the winning products will be authorized to use the trophy for promotional publicity free-of-charge for a term of three years. The award of this honor to the Company indicates that the quality of milk products in China has already reached international top-notch level. On 12 July, Institutional Investor issued the “Institutional Investor 2016 Asian Management Team Survey (機構投資者 • 2016年全亞洲管理團隊調查報告)”, which was a comprehensive reflection of opinions of 1394 professional investors, and Modern Dairy won a number of high ranks in the category of consumer products and necessities shares and won the honor of “Most Respected Asian Enterprise”. On 22 October 2016, furosine contents in the Group’s “pasteurized milk and UHT sterilized milk” remained below12mg/100g protein and 190mg/100g protein, respectively, and passed acceptance of “quality milk project (優質乳工程)”. The Group was honored to be the first enterprise that passed double acceptance of pasteurized milk and UHT sterilized milk. On 8 November, Modern Dairy participated in the Fourteenth China International Agricultural Products Fair and the Twelfth International Agriculture Expo (第十四屆中國國際農產品交易會暨第十二屆國際農業博覽會) jointly organized by the Ministry of Agriculture and the People’s Government of Yunnan Province, and was awarded “Agricultural Product Gold Prize of China International Agricultural Products Fair (中國國際農產品交易會農產品金獎)”. On 19 November, National Dairy Industry Technology Innovation Union (國家奶業科技創新聯盟) was established, and Modern Dairy was invited to participate in and become one of the first batch of 75 council members of the Union. On 26 December, Modern Dairy was licensed by National Dairy Industry Technology Innovation Union to become a vice-director unit. Modern Dairy will insist on undertaking its mission of “revitalizing national dairy industry, making Chinese family healthy and benefiting future generations”. On January 25, 2017, the Group completed the acquisition of the remaining 45% of the shares of Modern Farm (Anhui) Dairy Product Sales Co. Ltd.. The acquisition will help us sort out the downstream business structure of the Company and lay an important foundation for the effective management of sales channels and distribution network. At the beginning of 2017, China Mengniu Dairy Company Limited (“Mengniu”) acquired additional equity interests of the Company and up to the date of this report, Mengniu and its concert party owned 61.3% of the issued share capital of the Company. Mengniu is a leading enterprise in Chinese dairy industry and establishing a closer connection with Mengniu can provide a healthy and stable output channel of high quality raw milk for the Group. Meanwhile, the Group can also use Mengniu’s strong sales network to deliver our high-quality milk of “purity, genuineness, freshness and vitality” to more consumers. 4 CHINA MODERN DAIRY HOLDINGS LTD. ANNUAL REPORT 2016 CEO’s Statement PROSPECTS As the prospect of economy in China looks good, and per-capita consumption level keeps rising resulting from increasing demand in the market, Chinese dairy industry has gradually moved to a healthy and sustainable development track, and the modern dairy industry pattern has taken initial shape. The Ministry of Agriculture, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Commerce and the Food and Drug Administration have jointly organized and established National Dairy Industry Development Plan (2016-2020) 《( 全國奶業發展規劃(2016-2020)》), which has been officially released as a five-year development planning outline for the dairy industry and it is a great boost to the Chinese dairy industry. In the Plan, “four key points” have been established as the development principles, i.e. planting good forage grass, raise good diary cows, producing good milk and promoting integration, and the development goals of achieving a milk self-sufficiency rate of not lower than 70% and the proportion of large-scale livestock farming of not lower than 70% in China by 2020 have been established. The green development and circular economy model of “zero-distance integration of forage grass planting, cow breeding and milk processing within two hours (零距離2小時,種養加一體化)” first created by Modern Dairy has a high degree of consistency with the core guiding philosophy of the “Thirteenth Five-year” Plan for the dairy industry.

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