China Modern Agricultural Information Inc. (OTCMKTS:CMCI) is listed on OTC Markets Group ("OTC") (OTCMKTS:OTCM) in the US and through its wholly owned subsidiary, Hope Diary Holdings Ltd., is the majority shareholder in CDC.
CMCI's results have been adjusted to represent the financial position of CDC for the previous corresponding period from 1 July 2015 to 31 December 2015. The financial information presented has been prepared under US GAAP and has been reviewed by Wei, Wei & Co., LLP, the Company's independent registered public accounting firm.
The Company is primarily engaged in the production and wholesale of raw milk and the rearing, breeding and sale of dairy cows in Heilongjiang province, China.
The Company generates revenue through two primary business models;
- the sale of raw milk from cows that are owned by the company ("company-owned cows"); and
- milk sale commissions on the sale of raw milk from cows the company has sold to farmers ("sales commission cows").
Review of operations
The table below presents key financial data for the half year ended 31 December 2016 ("1H FY17") and the half year ended 31 December 2015 ("1H FY16").
Milk sales revenue
Milk sales revenue is generated from the sale of milk from CDC's company-owned cows. Over 1H FY17, milk sales revenue increased by 46.6% (US$16.3 million) to US$51.3 million when compared to 1H FY16. This large increase was due to a number of reasons as outlined below:
- Increase in contracted milk prices
The Company's raw milk is currently sold to 4 customers under contracts which set the price of milk over the term of the contract, enabling CDC to avoid the volatility of market milk prices. Near the end of 1H FY16 (in November 2015), the Company replaced 4 out of 5 of its previous customers with 3 new customers that entered into 2 year agreements to purchase raw milk from CDC at RMB 3.80 per kilogram. This was higher than the 4 outgoing customers who purchased raw milk from the Company at RMB 3.50 per kilogram. This has led, in part, to a large increase in revenues for 1H FY17.
- Increase in number of company-owned cows
The number of company-owned cows saw an increase over 1H FY17 when compared to 1H FY16. As presented in the tables below, the total number of company-owned cows increased from 29,274 heads as at 31 December 2015 to 31,877 heads as at 31 December 2016, an increase of 8.9%. Of these, the number of milkable cows increased from 15,537 heads as at 31 December 2015, to 19,520 heads as at 31 December 2016, an increase of 25.6%.
Milk sales commission revenue
Milk sales commission revenue is generated through the sale of milk from cows the Company has sold to external farmers. The farmers pay a commission on the milk sales generated from these cows in exchange for CDC arranging the sale of milk to its customers.
Previously, cows were sold on repayment periods of between 1-8 years (representing the useful life of the cow) and over this repayment period, the external farmers would pay a 30% commission on the milk sold. However, as noted in the Company's 2016 annual report, CDC was exploring reducing this commission while increasing the repayment period as this would result in a larger number of cows sold and a larger and longer production quantity from these sales commission cows.
Recently, the Company has implemented a new sales commission structure whereby they have sold cows with a useful life of 4-8 years with a right to milk sales commissions of 20%. The principal payments for the cows are deducted from these commissions with any outstanding principal attracting a 5% interest payment.
The number of sales commission cows owned by external farmers from which the company earns a milk sales commission is presented in the table below.
Revenue generated through milks sales commission from the company's sales commission cows decreased by 18.4% (US$1.9 million) over 1H FY17 to US$8.3 million. The revenue decrease is due primarily to two reasons:
- CDC sold 8,447 in November and December 2016 under the new sales commission structure of 20%, as opposed to the 30% commission for all sales commission cows during 1H FY16; and
- While the average number of sales commission cows remained relatively flat (decreasing by 4.2%), the sale of the 8,447 sales commission cows in November and December 2016 contributed to only 30% of the total average quantity of cows over 1H FY17.
Gross profit remained relatively flat for 1H FY17 when compared to 1H FY16. However, there was a decrease in gross profit margins from 48.7% over 1H FY16 to 37.0% over 1H FY17. The decrease in gross profit margins can be attributed to a number of cost factors that have changed for the company over the period. These include ongoing production costs as well as costs brought on due to investment in the Company's operations. The key items behind the increase in the cost of goods sold are described below.
- Cow feed and entrusted farmer fees
CDC has strict requirements on feeding its cows. As a large part of its company-owned cows are entrusted to local farmers to feed, milk and rear, the Company utilises a consistent feeding methodology to ensure that the milk produced from these cows is consistent in yield and quality across its entrusted local farmers.
This means that these farmers must feed the cows using a feed that has the composition as dictated by the Company. As CDC is responsible for providing the fees for the farmers to purchase the feed, the Company has incurred large cost increases due to many of the feed components increasing in price at the end of 1H FY16. As such, these increased costs are fully accounted for over 1H FY17, while only being partially accounted for over 1H FY16.
The table below presents a comparison of the Old Fees and the New Fees paid to entrusted farmers based on the type of cows they are entrusted to rear and feed.
Costs related to feeding the cows reared by the Company and its entrusted farmers accounted for 74.1% of cost of goods sold over 1H FY16 and 80.9% of cost of goods sold over 1H FY17. The total increase in inputs and feeding fees over 1H FY17, when compared to 1H FY16, was approximately US$13.2 million.
- Depreciation on increased capital investments
Depreciation accounted for in cost of goods sold increased by $US1.5 million over 1H FY17 to US$3.2 million when compared to 1H FY16. This was due to increased investment by the Company in the two new farms it established in mid 2015. To prepare and equip these farmlands, a number of investments were made covering vehicles, farming equipment and machinery, farm infrastructure and buildings which have led to an increase in depreciation expenses.
In addition, the depreciation on biological assets has also increased due to the increased feeding fees, as well as the increase in the number of company-owned cows.
To view the full Half Year Results announcement, please visit:
About China Dairy Corp Ltd
China Dairy Corporation Limited (ASX:CDC) is a company primarily engaged in the production and wholesale of raw milk and the rearing, breeding and sale of dairy cows in Heilongjiang province, China.
CDC generates revenue through two primary business models:
- the sale of raw milk from cows that are owned by the company; and
- milk sale commissions on the sale of raw milk from cows the company has sold to farmers.
As at 31 December 2016, CDC owned 31,877 cows and partnered with farmers with an additional 21,617 cows from which CDC makes a sales commission on the milk sold.
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