China Mengniu Dairy Company Limited...liquid milk market, excluding milk beverages and yogurt,...

China Mengniu Dairy Company Limited中國蒙牛乳業有限公司

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二零零五年中期報告 Interim Report 2005

China Mengniu Dairy Company Limited(incorporated in the Cayman Islands with limited liability)

＊僅供識別

Contents

Financial Highlights 01

Management Discussion & Analysis 02

Report of the Directors 07

Condensed Consolidated Income Statement 11

Condensed Consolidated Balance Sheet 12

Condensed Consolidated Statement of Changes in Equity 14

Condensed Consolidated Statement of Cash Flows 15

Notes to Condensed Financial Statements 16

Independent Review Report 29

Corporate Information 30

Unaudited

For the six months ended 30 June

2005 2004 Change

RMB’000 RMB’000 %

Revenue 4,754,042 3,472,671 +36.9%

Net profit attributable to equity holders of the

Company 246,527 184,080 +33.9%

Earnings per share (RMB)

— Basic 0.22 0.24 -8.3%

— Diluted 0.18 0.16 +12.5%

. Revenue increased by 36.9% to RMB4,754.0 million as a result of rising market share and new

product introduction. According to ACNielsen survey, the Group’s market share in the China

liquid milk market, excluding milk beverages and yogurt, increased by 3.6 percentage points from

22.0% in December 2004 to 25.6% in June 2005.

. Net profit attributable to equity holders of the Company was up by 33.9% to RMB246.5 million.

. Net cash inflow from operating activities surged by 309.0% to RMB703.5 million.

Revenue by Product Product Mix in Liquid Milk Segment

Financial Highlights

01Interim Report 2005

Financial Review

The Group recorded impressive sustainable growth in the first half of 2005. Revenue for the six months

ended 30 June 2005 was RMB4,754.0 million, an increase of 36.9% over that of the same period last

year. Net profit attributable to the equity holders of the Company for the period reached RMB246.5

million, up 33.9%. Basic earnings per share were RMB0.22, against RMB0.24 in the first half of 2004;

diluted earnings per share were RMB0.18, against RMB0.16 in the first half of 2004.

Gross Profit

Remarkable sales growth pushed gross profit up by 28.9% to RMB1,066.3 million. The introduction of

new high value-added products and the gradual rebound of the lower average selling price of UHT

milk due to the severe competition last year has resulted in an improved overall gross margin of 22.4%

in the first half of 2005 over that of the second half of 2004. The 22.4% gross margin is 1.4 percentage

points lower when compared with the first half of 2004.

Operating Expenses

The Group’s stringent cost control measures proved to be successful. Attributable to greater

economies of scale, total operating expenses as a percentage of revenue during the period

decreased to 15.3%, from 16.6% in the same period last year.

Profit from Operating Activities

EBITDA during the period increased by 46.1% to RMB470.2 million and EBITDA margin rose to 9.9%

from 9.3% in the corresponding period in 2004. This indicated that the cost control measures enforced

during the period had been effective.

Net Profit

Net profit attributable to the equity holders of the Company grew 33.9% to RMB246.5 million in the first

half of 2005 from RMB184.1 million in the same period in 2004.

The two-year tax holiday enjoyed by a subsidiary of the Group, which is a sino-foreign joint venture,

expired during the period. Nevertheless, the Group still enjoyed a relatively low effective tax rate of

8.1%, only 3.8 percentage points higher than that in the corresponding period last year.

Capital Structure, Liquidity and Financial Resources

The Group’s cash and cash equivalents amounted to RMB1,191.2 million as at 30 June 2005. Net cash

from operating activities amounted to RMB703.5 million, representing a surge of 309.0% as compared

with the same period in 2004.

Management Discussion & Analysis

02 China Mengniu Dairy Company Limited

As at 30 June 2005, the Group had outstanding bank loans amounting to RMB720.5 million, a slight

increase from RMB710.0 million as at 31 December 2004. Of the outstanding bank loans, RMB650.5

million is repayable within one year and RMB70 million is repayable beyond one year. The total debt to

equity ratio (total debts divided by total equity) of the Group was reduced to 30.3% as at 30 June 2005

from 32.6% as at 31 December 2004.

Total equity of the Group increased from RMB2,303.1 million as at 31 December 2004 to RMB2,508.0

million as at 30 June 2005.

Net finance cost for the period decreased by 5.4% to RMB12.9 million when compared with the same

period in 2004 as the Group effectively consolidated the use of capital and reduced the amount of

interest bearing loans.

Market Review

Despite the negative effects caused by the outbreak of contagious disease among milk cows in some

localities and media reports of questionable milk quality in parts of the country, benefiting from the

improving living standards of the country and the increasing awareness among consumers of the

nutritional value of liquid milk, the dairy industry experienced strong growth in the first half of 2005.

According to a survey conducted by ACNielsen in June 2005, the annualized growth rate of the liquid

milk market in China, excluding milk beverages and yogurt, by volume was approximately 20%. As the

per capita consumption of liquid milk in China is still relatively low when compared to other Asian

countries, the Chinese dairy industry has room for further sustainable growth.

Business Review

Branding and Marketing

According to ACNielsen, the Group had 25.6% share of the liquid milk market by volume, excluding

milk beverages and yogurt, in June 2005, as compared with 22.0% in December 2004. Brand equity

and strong consumer loyalty have been the key success drivers for the Group. The liquid milk market in

China continued to be dominated by key local dairy players, with the top three accounting for 59.8%

market share in June 2005, as compared with 55.5% in December 2004.

The Group has built and maintained a nationwide sales and distribution network comprising

predominantly of over 1,000 exclusive distributors across China. It will continue to enhance

cooperation and communication with these distributors.

The advertising and promotions budget was expended more effectively during the first half of 2005,

mostly on advertising campaigns on national television. Leveraging greater economies of scale, the

advertising and promotion expenses during the period amounted to RMB248.7 million, which

accounted for 5.2% of the Group’s total revenue, against 6.9% in the same period of 2004.



Products

The Group offers a comprehensive array of choices to consumers with a product portfolio comprising

over 250 varieties of liquid milk, ice cream and other dairy products.

Liquid milk

The liquid milk segment remained as the Group’s primary revenue contributor. Accounting for 83.1% of

the Group’s revenue, revenue from liquid milk grew to RMB3,951.5 million, up 44.3% from the

corresponding period last year. The increase was attributable to the Group’s continuous efforts to build

its brands and develop new products of higher value to cater to different consumer preferences.

UHT milk, being the core product of the Group, accounted for 73.3% of the revenue from the liquid milk

segment. Apart from offering traditional UHT milk, the Group also offered a variety of functional UHT

milk products such as fortified milk with calcium and low fat and low lactose milk. The newly launched

breakfast milk targeting busy city dwellers contributed to the Group’s profit growth during the period.

A variety of milk beverages and yogurt products, targeting consumers who go for healthy and

flavoursome products, were launched in the first half of 2005. These products accounted for 19.8% and

6.9% of the segmental revenue respectively, and their revenue grew 88.7% and 58.4% over that of the

same period in 2004 respectively, pointing to ample room for market development for milk beverages

and yogurt products.

Ice cream

Revenue from the ice cream segment rose by 42.4% to RMB694.1 million, accounting for 14.6% of the

Group’s total revenue, despite that the peak season for sales of ice cream did not fall fully within the

period.

In light of the seasonal characteristics of ice cream products, the Group has striven to set consumption

trend by rolling out quickly products of various flavours to capture different seasonal demands across

the nation.

Other dairy products

Revenue from other dairy products decreased by 56.1% to RMB108.5 million in the first half of 2005,

contributing 2.3% of the Group’s total revenue. The decrease in sales revenue was mainly attributable

to the fact that milk tablets were exceptionally well-accepted by the market when they were first

launched last year, and its sales retreated in the first half of 2005. The continuous efforts invested to

develop the baby milk powder market brought encouraging results, indicating promising prospects for

the segment.



Raw Milk Supply

The Group established exclusive supply contracts with over 2,000 milk collection centers and raw milk

suppliers. A stable supply of quality and safe raw milk is maintained to support the growth of the

Group.

Production

The Group operated 14 production bases with a combined annual production capacity of 2.54 million

tons in the first half of 2005.

Prospects

The continuous market competition in the dairy industry and a series of unfavourable reports on milk

quality or the industry itself in the first half of 2005 has brought about challenges to industry players.

Nevertheless, healthy development of the dairy industry is still expected in the long run. To capture

greater market share, the Group will continue to optimize its product mix, as well as enhance its

investment portfolio, financial management processes and operational management structure so as to

boost its operational capability in accordance with its market strategies.

Product Quality

Applying stringent measures on milk source management to ensure the quality of raw milk supply is a

priority to the Group. Mengniu-Australia International Model Ranch was established as a role model to

promote the application of scientific technology. Besides, the Group’s state-of-the-art milk inspection

facilities boasting sophistication also help to deliver a stable supply of raw milk and enhance product

quality.

Meanwhile, the Group will further strengthen the management systems in the quality control process to

ensure all production procedures meet high standards.

New Product Introduction

The Group will invest more resources to further enhance the product portfolio and provide quality,

nutritious and delicious products that meet the sophisticated tastes and needs of consumers, thereby

enables the Group to capture opportunities for further growth.

By evaluating market receptiveness of the newly launched products, the Group is able to identify and

re-launch some of the popular new products in a larger scale to gain better economies of scale.

In the second half of 2005, the Group will ride on the supply of quality raw milk from the Mengniu-

Australia International Model Ranch to introduce a range of premium milk products.



Penetration of New Markets

The Group will seek to further boost the economies of scale of its sales and distribution network by

consolidating its leading position in first-tier markets while expanding into second and third-tier

markets. The Group is also set to further raise its brand awareness through effective budgeting for its

nationwide promotion and advertising campaigns.

Capacity Expansion

The Group added 54 new production lines in its factory premises in the first half of 2005. To keep up

with projected sales growth, the Group will expand its production capacity to 2.75 million tons by the

end of 2005.

Partnership

Aiming at securing stable and safe supply of raw milk to support business growth, the Group is

committed to fostering closer relationship with milk collection centers and raw milk suppliers by

providing them advice and assistance.

Management Incentives

To encourage successful implementation of its growth strategies, the Group will continue to build

employee excellence by strengthening its management system. In addition to offering promotion and

compensation systems to boost employee initiatives and work place excellence, the Group adopted a

share option scheme in June 2005 to acknowledge and reward employees’ loyalty and contributions.



The Board of Directors (the ‘‘Directors’’) takes pleasure in submitting their interim report together with

the unaudited financial statements of the Company and the Group for the six months ended 30 June

2005.

Interim Dividend

The Directors do not recommend the payment of an interim dividend for the six months ended 30 June

2005 (2004 : nil).

Share Capital

On 16 June 2005, 257,891,532 ordinary shares of HK$0.10 each were issued as a result of conversion

of convertible instruments amounting to US$24,663,679 (equivalent to approximately RMB204,636,000).

Directors’ Interests, Long and Short Positions in Shares, Underlying Shares and Debentures

As at 30 June 2005, the interests, long and short positions of the Directors and chief executives of the

Company in the shares of the Company and associated corporation as recorded in the register

required to be kept under Section 352 of the Securities and Futures Ordinance (‘‘SFO’’) or as otherwise

notified to the Company and the Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’)

pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (the ‘‘Model

Code’’) were as follows:

Name of Director

Company/Name

of Associated

Corporation Nature of Interest

Total Number

of Ordinary

Shares

Percentage of

the Company’s

Issued Share

Capital

Niu Gensheng The Company Personal Interest 45,505,172(L) 3.33%

The Company Corporate Interest (Note 1) 253,292,187(L) 18.51%

Mengniu Personal Interest 21,862,810(L) 8.18%

Mengniu Personal Interest (Note 2) 7,325,670(S) 2.74%

Lu Jun Mengniu Personal Interest 804,646(L) 0.30%

Yang Wenjun Mengniu Personal Interest 1,068,646(L) 0.40%

Sun Yubin Mengniu Personal Interest 1,772,646(L) 0.66%

Notes:

(1) These shares are held by Yinniu Milk Industry Limited (‘‘Yinniu’’), a substantial shareholder of the Company, and Niu

Gensheng by virtue of the Xie Trust has been delegated voting rights to the shares in Yinniu in the Xie Trust. The Xie Trust

has been in effect since September 2002 and is a trust declared by Xie Qiuxu in respect of Shares in Yinniu held on trust by

him for a selected group of individuals comprising employees and business associates of Mengniu. Xie Qiuxu has similarly

delegated the voting rights of his own shares in Yinniu to Niu Gensheng. Together with his personal interest in Yinniu, Niu

Gensheng controls 81.7% of the voting rights of Yinniu.

Report of the Directors


(2) Out of his share interests in a subsidiary of the Group, Inner Mongolia Mengniu Milk Industry (Group) Co., Ltd. (‘‘Mengniu’’),

Niu Gensheng granted an option of over 7,325,670 shares in total representing approximately 2.7% of the issued capital of

Mengniu to CDH China Fund. L.P., Actis China Investment Company Limited and MS Dairy Holdings (‘‘Financial Investors’’) on

23 March 2004. Such options can be exercised in one or more tranches by each Financial Investor and are exercisable within

10 years. None of the options have been exercised.

(L) Indicates a long position.

(S) Indicates a short position.

Saved as disclosed above, as at 30 June 2005, none of the Directors or their associates had any

interests and short positions in the shares, underlying shares and debentures of the Company or any of

its associated corporations (within the meaning of Part XV of the SFO).

Substantial Shareholders’ Interests

As at 30 June 2005, the interests or short positions of substantial shareholders, other than the Directors

of the Company whose interests, long and short positions in the shares of the Company are set out

above, in the shares and underlying shares of the Company as recorded in the register maintained

under section 336 of the SFO were as follows:

Name of substantial shareholder

Number of shares

issued

Percentage

of share

capital

Xie Qiuxu (Note 1) 253,292,187(L) 18.51(L)

Yinniu (Note 2) 253,292,187(L) 18.51(L)

Jinniu Milk Industry Limited (‘‘Jinniu’’) (Note 2) 181,997,979(L) 13.30(L)

The Capital Group Companies, Inc. 101,975,000(L) 7.45(L)

Government of Singapore Investment Corporation Pte Ltd 74,364,000(L) 5.43(L)

Notes:

(1) Xie Qiuxu legally owned 62.7% of the issued share capital of Yinniu, which directly owned 18.5% of the Company.

Accordingly, the 253,292,187 shares attributable to Xie Qiuxu above represent his indirect effective interest in the Company

via his legal shareholding interest in Yinniu.

(2) 10 founding individuals, namely Niu Gensheng, Deng Jiuqiang, Hou Jiangbin, Sun Yunbin, Qiu Lianjun, Yang Wenjun, Pang

Kaitai, Lu Jun, Sun Xianhong and Xie Qiuxu, have been acting as a controlling group over the business since its inception in

1999. Therefore, they as a group are controlling shareholders of the Company. As at 30 June 2005, Niu Gensheng, Deng

Jiuqiang, Lu Jun, Sun Yubin, Yang Wenjun, Sun Xianhong and Qiu Lianjun who are shareholders of Jinniu together control

approximately 81.2% of Jinniu. Niu Gensheng, Xie Qiuxu, Pang Kaitai, Hou Jiangbin and Deng Jiuqiang who are shareholders

of Yinniu together control approximately 87.7% of Yinniu. Jinniu and Yinniu in aggregate control approximately 31.8% of the

voting power at the general meeting of the Company.

(L) Indicates a long position.

Saved as disclosed above, as at 30 June 2005, no other interests or short positions in the shares or

underlying shares of the Company were recorded in the register maintained under section 336 of the

SFO.



Share Option Scheme

The Company adopted a share option scheme to provide incentives to the employees of the Group in

June 2005. As at 30 June 2005, no options has been granted.

Purchase, Sale or Redemption of the Company’s Listed Shares

During the six months ended 30 June 2005, neither the Company nor any of its subsidiaries purchased,

sold or redeemed any of the Company’s listed securities.

Public Float

As at the date of this report, the Company has maintained the prescribed public float under the Rules

Governing the Listing of Securities on the Stock Exchange (the ‘‘Listing Rules’’), based on information

that is publicly available to the Company and to the knowledge of the Directors.

Human Resources and Remuneration of Employees

As at 30 June 2005, the Group employed a total of approximately 26,000 employees (30 June 2004 :

16,583 employees) in China and Hong Kong. Total staff costs for the first half of 2005 amounted to

approximately RMB174,625,000, excluding that for the Directors, as compared with approximately

RMB97,903,000 in the corresponding period in 2004.

The Group invests in continuing education and training programs for its management staff and other

employees to constantly improve their skills and knowledge. An internal vocational training centre,

Mengniu Commercial College, has been set up to develop and implement training programs for the

Group’s personnel.

Remuneration is maintained at competitive levels with incentive bonuses payable on a merit basis for

innovations and improvements which is in line with industry practice. Other staff benefits provided by

the Group include a pension contribution plan and insurance schemes.

Foreign Currency Risk

The Group’s businesses are principally located in the PRC and all transactions are conducted in RMB,

except for the purchases of machinery and equipment and sales to Hong Kong and Macau. As at 30

June 2005, all of the Group’s assets and liabilities were denominated in RMB except that cash and

cash equivalents of approximately RMB8,067,000 and RMB84,512,000 were denominated in US dollars

and Hong Kong dollars, respectively and bank loans of approximately RMB165,530,000 were

denominated in US dollars. Management has set up procedures to periodically review and monitor

the foreign currency risk exposure.

Pledge of Assets and Contingent Liabilities

Details of assets pledged and contingent liabilities are set out in Notes 10 and 19 to the condensed

consolidated financial statements respectively.



Subsequent Events and Commitments

There was no significant subsequent event. Details of commitments are set out in Note 20 to the

condensed consolidated financial statements.

Audit Committee

The audit committee comprises three non-executive Directors, two of whom are independent. The

current committee members are Mr Zhang Julin (chairman), Mr Li Jianxin and Mr Jiao Shuge (alias Jiao

Zhen). The audit committee has reviewed with the Company management and the external auditors the

accounting principles and practices adopted by the Company and discussed auditing, internal control

and financial report matters including the review of the unaudited interim financial statements for the

six months ended 30 June 2005.

Investor Relations and Communications

The Company adopts a proactive policy in promoting investor relations and communications. Regular

meetings are held with institutional investors and financial analysts to ensure two-way communications

on the Company’s performance and development.

Compliance with the Code on Corporate Governance Practice

Save and except that one of the resolutions which was passed at the Company’s annual general

meeting held on 28 June 2005 by way of a show of hands rather than by poll as required by the Listing

Rules, details of which had been disclosed in an announcement dated 11 July 2005, none of the

Directors of the Company is aware of any information that would reasonably indicate that the Company

was not at any time during the six months ended 30 June 2005 in compliance with the Code on

Corporate Governance Practice as set out by the Hong Kong Stock Exchange in Appendix 14 to the

Listing Rules.

Compliance with Model Code

The Company has adopted the Model Code set out in Appendix 10 of the Listing Rules as the

Company’s code of conduct and rules governing dealings by all Directors in the securities of the

Company. Having made specific enquiry of all Directors of the Company, during this reporting period,

the Directors of the Company had strictly complied with the Model Code.

By order of the Board of Directors

Niu Gensheng

Chief Executive Officer

Hong Kong, 23 August 2005



Unaudited

For the six months ended 30 Jun

2005 2004

Notes RMB’000 RMB’000

Revenue 4 4,754,042 3,472,671

Cost of sales (3,687,747) (2,645,737)

Gross profit 1,066,295 826,934

Other income 4 5,836 2,768

Selling and distribution costs (615,919) (513,464)

Administrative expenses (110,219) (58,266)

Other operating expenses (1,894) (4,223)

Profit from operating activities 5 344,099 253,749

Finance costs, net 6 (12,892) (13,622)

Share of (loss)/profit of associates (4,710) 415

Profit before tax 326,497 240,542

Income tax expense 7 (26,445) (10,339)

Net profit for the period 300,052 230,203

Attributable to:

Equity holders of the Company 246,527 184,080

Minority interests 53,525 46,123

300,052 230,203

Earnings per share 8

— Basic (RMB) 0.22 0.24

— Diluted (RMB) 0.18 0.16

Condensed Consolidated Income Statement


Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004


NON-CURRENT ASSETS

Property, plant and equipment, net 10 2,737,340 2,227,528

Construction in progress 11 197,770 292,013

Land use rights 33,535 34,062

Investments in associates 16,368 20,578

Long term investments 6,029 3,409

Goodwill 115,549 115,549

3,106,591 2,693,139

CURRENT ASSETS

Inventories 12 857,376 714,799

Trade receivables 13 210,050 185,299

Prepayments, deposits and other receivables 198,094 129,186

Pledged deposits 45,774 20,763

Cash and cash equivalents 1,191,247 1,018,928

2,502,541 2,068,975

CURRENT LIABILITIES

Trade payables 14 1,102,405 694,597

Accruals and other payables 15 915,192 758,160

Interest bearing bank loans, unsecured 16 650,542 470,542

Other loans, unsecured 22,300 22,600

Income tax payable 4,134 1,436

2,694,573 1,947,335

NET CURRENT (LIABILITIES)/ASSETS (192,032) 121,640

TOTAL ASSETS LESS CURRENT LIABILITIES 2,914,559 2,814,779

Condensed Consolidated Balance Sheet


Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004


NON-CURRENT LIABILITIES

Interest bearing bank loans, unsecured 16 70,000 239,500

Other loans, unsecured 18,000 18,000

Long term payables 17 256,427 189,925

Deferred income 62,154 64,226

406,581 511,651

NET ASSETS 2,507,978 2,303,128

CAPITAL AND RESERVES

Share capital 18 145,573 118,138

Reserves 1,975,379 1,551,647

Convertible instrument — 204,636

Proposed final dividend — 80,053

Equity attributable to equity holders of the Company 2,120,952 1,954,474

Minority interests 387,026 348,654

TOTAL EQUITY 2,507,978 2,303,128

Condensed Consolidated Balance Sheet


Issued

share

capital

Share

premium

Contributed

surplus

Non-voting

convertible

redeemable

preferred

shares

Convertible

instrument

Statutory

reserves

Proposed

final

dividend

Currency

translation

difference

Retained

earnings

Minority

interests Total

Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited

Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

At 1 January 2004 — — — 291,621 — 60,005 61,860 — 275,724 170,511 859,721

Derecognition of negative

goodwill on early

adoption of IFRS3 22 — — — — — — — — 28,182 — 28,182

At 1 January 2004

(As restated) — — — 291,621 — 60,005 61,860 — 303,906 170,511 887,903

Net profit attributable to

equity holders of the

Company — — — — — — — — 184,080 — 184,080


minority interests — — — — — — — — — 46,123 46,123

Dividends paid — — — — — — (61,860) — — (11,166) (73,026)

Issuance of convertible

instrument and shares

for Reorganisation 15 — 214,677 (291,621) 291,621 — — — (214,692) — —

Issuance of shares upon

public listing 26,595 1,017,259 — — — — — — — — 1,043,854

Transfer of share premium

to share capital 79,770 (79,770) — — — — — — — — —

Share issue costs — (62,336) — — — — — — — — (62,336)

Currency translation

difference and net

losses not recognised

in the income statement — — — — — — — (4,743) — — (4,743)

At 30 June 2004 106,380 875,153 214,677 — 291,621 60,005 — (4,743) 273,294 205,468 2,021,855

At 1 January 2005 118,138 950,380 214,677 — 204,636 149,962 80,053 (1,969) 238,597 348,654 2,303,128


equity holders of the

Company — — — — — — — — 246,527 — 246,527


minority interest — — — — — — — — — 53,525 53,525

Dividend paid to minority

shareholders — — — — — — — — — (15,605) (15,605)

Shares issued upon

conversion of

convertible instrument 18 27,435 177,201 — — (204,636) — — — — — —

Currency translation

difference and net

losses not recognised

in the income statement — — — — — — — 4 — 452 456

Transfer to dividend

payable — — — — — — (80,053) — — — (80,053)

At 30 June 2005 145,573 1,127,581 214,677 — — 149,962 — (1,965) 485,124 387,026 2,507,978

Condensed Consolidated Statement of Changes in Equity


Unaudited


2005 2004

RMB’000 RMB’000

Net cash inflow from operating activities 703,531 172,028- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Net cash outflow from investing activities (525,808) (477,774)- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Net cash (outflow)/inflow from financing activities (5,404) 1,586,905- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Net increase in cash and cash equivalents 172,319 1,281,159

Cash and cash equivalents at 1 January 1,018,928 376,598

Cash and cash equivalents at 30 June 1,191,247 1,657,757

Condensed Consolidated Statement of Cash Flows


1. Basis of preparation and accounting policies

The unaudited condensed consolidated financial information has been prepared in accordance

with International Accounting Standard (‘‘IAS’’) 34 ‘‘Interim Financial Reporting’’ issued by the

International Accounting Standards Board (‘‘IASB’’).

The condensed consolidated financial information should be read in conjunction with the 2004

annual financial statements.

The accounting policies and methods of computation used in the preparation of the condensed

consolidated financial information are consistent with those used in the annual financial

statements for the year ended 31 December 2004, except for the changes discussed below

following the adoption of the new/revised International Financial Reporting Standards and

International Accounting Standards (‘‘new IFRSs’’) which are effective for accounting periods

commencing on or after 1 January 2005.

The interim financial information has been prepared in accordance with the IFRSs in issue and

mandatory as at the time of preparing these information (August 2005).

The changes to the Group’s accounting policies and the effect of adopting these new policies are

set out in Note 2 below.

2. Impact of adoption of new IFRSs

(a) Effect of adopting new IFRSs

In 2005, the Group adopted the following new IFRSs, which are relevant to its operations.

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10 Events after the Balance Sheet Date

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 24 Related Party Disclosures

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 32 Financial Instruments: Disclosures and Presentation

IAS 33 Earnings per Share

IAS 39 Financial Instruments: Recognition and Measurement

IFRS 2 Share-based Payments

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

Notes to Condensed Financial Statements


The adoption of the above new IFRSs did not result in substantial changes to the Group’s

accounting policies nor any significant financial impact to the Group. In summary:

— IAS 1 has affected the presentation of minority interests, share of net after-tax results

of associates and other disclosures.

— IAS 2, 8, 10, 16, 17, 24, 27, 28, 32, 33 and 39 had no material effect on the Group’s

accounting policies.

— IAS 21 requires the goodwill to be allocated to foreign operations and carried at that

foreign operation’s functional currency. Goodwill and fair value adjustments are

translated at closing rate. Such change had no material effect on the Group’s

accounting policies.

— IFRS 2 requires the cost of share options and other share-based incentives to be

expensed in the income statement when the Group receives goods or services as

consideration. Although the Company’s share option scheme was approved on 28

June 2005, no share options or other share-based incentives have been granted

during the period. Therefore, IFRS 2 had no material effect on the Group.

— IFRS 5 requires those non-current assets held for sale to be presented separately in

the balance sheet. Such assets are measured at the lower of carrying amount and fair

value less costs to sell and are not depreciated. IFRS 5 had no material effect on the

Group.

(b) New accounting policy

The accounting policies used for the condensed consolidated financial information for the

six months ended 30 June 2005 are the same as those set out in Note 3 to the 2004 annual

financial statements, except that the policy on ‘‘foreign currency translation’’ has been

amended to align with the new wording adopted in the revised IAS 21 :

Foreign currency translation

The Company and each of its subsidiaries determine its functional currency based on the

assessment of each company’s specific facts and circumstances. The Company chooses

Renminbi (‘‘RMB’’) as the presentation currency for the financial statements of the Group and

the Company. Transactions in foreign currencies are initially recorded at the functional

currency rate ruling at the date of the transaction. Monetary assets and liabilities

denominated in foreign currencies are retranslated at the functional currency rate of

exchange ruling at the balance sheet date. All differences are taken to the consolidated

income statement. Non-monetary items that are measured in terms of historical cost in a

foreign currency are translated using the exchange rate as at the date of initial transaction.

Non-monetary items measured at fair value in a foreign currency shall be translated using

the exchange rates at the date when the fair value was determined.



As at the reporting date, the assets and liabilities of companies whose functional currency

differs from the presentation currency are translated into the presentation currency of the

Group at the rate of exchange ruling at the balance sheet date and their income statements

are translated at the weighted average exchange rates for the reporting period. The

exchange differences arising on the retranslation are taken directly to a separate component

of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in

equity relating to that particular foreign operation shall be recognised in the income

statement.

(c) Impact of standards issued but not yet effective

The Group has not early adopted any of the following new or revised standards or

interpretations that have been issued but are not yet effective. The adoption of such

standards or interpretations will not result in substantial changes to the Group’s accounting

policies.

IAS 19 (Amendment) Employee Benefits — Actuarial Gains and Losses, Group Plans

and Disclosures

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRIC 4 Determining whether an Arrangement Contains A Lease

IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration

and Environmental Rehabilitation Funds

3. Segment information

The Group’s operating businesses are organised and managed separately according to the

nature of the products, with each segment representing a strategic business segment that offers

different products in the PRC market. The liquid milk products segment carries out the business

of the manufacture and distribution of UHT milk, milk beverages and yogurt. The ice cream

products segment carries out the business of the manufacture and distribution of ice cream

products. The other dairy products segment carries out the business of the manufacture and

distribution of milk powder and milk tablet products.

The Group’s revenue, expenses, results, assets and liabilities and capital expenditure were

principally generated in the PRC. Accordingly, an analysis of the Group’s revenue, expenses,

assets and liabilities and capital expenditure by geographical segment is not presented in this

report.



The revenue and net profit by products are as follows:

Unaudited


2005 2004

RMB’000 RMB’000

Segment revenue:

Liquid milk 3,951,460 2,737,765

Ice cream 694,101 487,597

Other dairy products 108,481 247,309

Consolidated revenue 4,754,042 3,472,671

Segment net profit:

Liquid milk 306,639 221,654

Ice cream 49,723 27,138


Consolidated net profit 361,982 279,471

Unallocated corporate expenses (17,883) (25,722)

Profit from operating activities 344,099 253,749

Finance costs, net (12,892) (13,622)

Share of (loss)/profit of associates (4,710) 415

Profit before tax 326,497 240,542

Income tax expense (26,445) (10,339)

Net profit for the period 300,052 230,203



Unaudited Audited

At 30 Jun 2005 At 31 Dec 2004

RMB’000 RMB’000

Segment assets:

Liquid milk 3,746,576 3,492,377

Ice cream 884,730 585,881


Unallocated corporate assets 1,060,647 808,970

Eliminations (283,518) (410,775)

Consolidated total assets 5,609,132 4,762,114

Segment liabilities:

Liquid milk 2,244,021 2,229,560

Ice cream 440,119 170,511


Unallocated corporate liabilities 593,224 307,814

Eliminations (283,518) (410,775)

Consolidated total liabilities 3,101,154 2,458,986

Unaudited


2005 2004

RMB’000 RMB’000

Capital expenditure:

Liquid milk 355,276 378,098

Ice cream 149,014 147,610


Others 15,480 8,895

533,844 561,834

Depreciation:

Liquid milk 94,468 52,819

Ice cream 22,976 13,710

Other dairy products 3,692 619

Others 4,465 637

125,601 67,785



4. Revenue

Revenue, being the turnover of the Group, represents the net invoiced value of goods sold, after

allowances for goods returns and trade discounts, and after eliminations of all significant intra-

group transactions.

An analysis of the Group’s revenue and other income is as follows:

Unaudited


2005 2004


Revenue 4,754,042 3,472,671

Other income

Government grants (a) 1,775 1,053

Amortisation of deferred income (b) 2,072 —

Others 1,989 1,715

5,836 2,768

Total revenue 4,759,878 3,475,439

(a) Government grants have been received for the Group’s contribution to the local economy

with respect to the establishment of infrastructure relating to the dairy products industry.

There are no unfulfilled conditions or contingences attaching to these grants.

(b) The Group has received certain government grants in the form of fixed asset donations or

cash donations to purchase fixed assets. The grants are recorded as deferred income and

amortised to match the depreciation charge of the fixed assets in accordance with assets’

useful lives.

5. Profit from operating activities

Profit from operating activities is arrived at after charging:

Unaudited


2005 2004

RMB’000 RMB’000

Staff costs, excluding directors’ remuneration as disclosed

in Note 21 174,625 97,903

Depreciation on property, plant and equipment 125,601 67,785

Amortisation of land use rights 527 442

Write-down of inventories 5,091 —

Cost of inventories sold 3,687,747 2,645,737



6. Finance costs, net

Unaudited


2005 2004

RMB’000 RMB’000

Interest on bank loans

— wholly repayable within 5 years 20,461 16,599

Less: Amounts capitalised (1,506) (1,786)

18,955 14,813

Interest income (6,063) (1,191)

Finance costs, net 12,892 13,622

The amounts capitalised are borrowing costs related to funds borrowed specifically for the

purpose of obtaining qualifying assets. The interest rates on such capitalised borrowings during

the period varied from 2.9% to 5.0% per annum (six months ended 30 June 2004 : 4.8% to 5.3%

per annum).

7. Income tax expense

(a) No provision for Hong Kong profits tax has been made as the Group has no assessable

profits arising in Hong Kong during the period.

(b) The tax charge represents the provision for PRC enterprise income tax for the period at the

prevailing tax rates applicable thereto.

(c) The share of associates’ taxation for the six months ended 30 June 2005 of RMB653,000 (six

months ended 30 June 2004 : RMB901,000) is included in the income statement as share of

profit or loss of associates.

8. Earnings per share

The calculation of the basic earnings per share for the six months ended 30 June 2005 is based

on the net profit from ordinary activities attributable to equity holders of the Company of

RMB246,527,000 (six months ended 30 June 2004 : RMB184,080,000) and the weighted average

number of ordinary shares of 1,131,897,000 (six months ended 30 June 2004 : 781,593,000)

outstanding during the period.

The calculation of the diluted earnings per share for six months ended 30 June 2005 is based on

the net profit from ordinary activities attributable to equity holders of the Company of

RMB246,527,000 (six months ended 30 June 2004 : RMB184,080,000) and the weighted

average number of ordinary shares outstanding during the period (adjusted for the effects of

dilutive potential ordinary shares) of 1,368,416,000 (six months ended 30 June 2004 :

1,150,010,000).



A reconciliation of the weighted average number of shares used in calculating the basic and

diluted earnings per share is as follows:

Unaudited


2005 2004

Number of ’000

shares

Number of ’000

shares

Weighted average number of ordinary shares for the

purpose of basic earnings per share calculation 1,131,897 781,593

Weighted average number of ordinary shares, assuming

issued at conversion of convertible instrument during the

period 236,519 368,417

Weighted average number of ordinary shares for the

purpose of diluted earnings per share calculation 1,368,416 1,150,010

9. Dividend

The Directors do not recommend the payment of an interim dividend for the six months ended 30

June 2005 (six months ended 30 June 2004 : nil).

10. Property, plant and equipment, net

Unaudited

RMB’000

At 1 January 2005 2,227,528

Additions 135,449

Transfers from construction in progress (Note 11) 500,338

Disposals (374)

Depreciation (125,601)

At 30 June 2005 2,737,340

(a) During the period, the Group incurred approximately RMB96 million in purchasing new

machinery, approximately RMB22.7 million in expansion and development of buildings and

approximately RMB12.9 million in purchasing office equipment.

(b) Certain property, plant and equipment of the Group with a carrying value amounting to

approximately RMB474,209,000 (31 December 2004 : RMB430,428,000) has been pledged

to secure the outstanding payable amounts of the Group, as set out under Note 17 ‘‘Long

term payables’’.



11. Construction in progress

Unaudited

RMB’000

At 1 January 2005 292,013

Additions 406,095

Transferred to property, plant and equipment (Note 10) (500,338)

At 30 June 2005 197,770

The Group’s construction in progress is located in the PRC.

12. Inventories

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Raw materials 501,018 465,976

Finished goods 356,358 248,823

857,376 714,799

13. Trade receivables

The Group normally allows a credit period of not more than 30 days to its customers. The Group

closely monitors overdue balances. A provision for doubtful debts is made when it is considered

that amounts due may not be recovered. The aging analysis of the trade receivables of the Group

is as follows:

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Within 3 months 204,965 168,601

Between 4 to 6 months 11,787 21,904

Between 7 to 12 months 1,741 3,513

Over 1 year 340 64

218,833 194,082

Less: Provision for doubtful debts (8,783) (8,783)

210,050 185,299



The amounts due from related parties included in the above can be analysed as follows:

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Associates 19,648 21,582

The balances are unsecured, non-interest bearing and are repayable on demand on credit terms

similar to those offered to other major customers of the Group.

14. Trade payables

An aged analysis of the trade payables of the Group is as follows:

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Within 3 months 905,226 585,208

Between 4 months to 6 months 135,540 81,172

Between 7 months to 12 months 36,092 26,100

Over 1 year 25,547 2,117

1,102,405 694,597

The amounts due to a related party included in the above can be analysed as follows:

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

An associate 3,653 669

The balances are unsecured, non-interest bearing and are repayable on demand.



15. Accruals and other payables

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Advances from customers 171,033 136,870

Salary and welfare payables 50,961 40,220

Other payables 478,067 454,270

Dividend payable 80,053 —

Current portion of long term payables (Note 17) 102,228 102,334

Other accruals 32,850 24,466

915,192 758,160

16. Interest bearing bank loans, unsecured

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Short term bank loans, unsecured 650,542 470,542

Long term bank loans, unsecured 70,000 239,500

720,542 710,042

During the period, the annual interest rates of the short term bank loans and the long term bank

loans varied from 4.8% to 5.8% and from 2.9% to 5.5% (six months ended 30 June 2004 : varied

from 3.7% to 5.3% and from 2.9% to 5.8%), respectively. As at 30 June 2005, the Group’s interest

bearing bank loans were denominated in Renminbi, except for loans of approximately

US$20,000,000 (equivalent to approximately RMB165,530,000) denominated in US dollars.

The repayment schedule of the bank loans is as follows:

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Within 1 year 650,542 470,542

Between 1 to 2 years 70,000 76,500

Between 2 to 5 years — 163,000

Total interest bearing bank loans 720,542 710,042

Less: Amount due within 1 year included in current

liabilities (650,542) (470,542)

70,000 239,500



17. Long term payables

The Group’s long term payables represent outstanding instalments payable for the purchase of

plant and machinery. The balances are interest-free and are repayable as follows:

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Within 1 year 102,228 102,334

Between 1 to 2 years 111,420 86,939

Between 2 to 5 years 145,007 102,986

Total long term payables 358,655 292,259

Less: Amount due within 1 year included in current

liabilities (Note 15) (102,228) (102,334)

256,427 189,925

18. Share capital

On 16 June 2005, convertible instrument of US$24,663,679 (equivalent to approximately

RMB204,636,000) was converted into 257,891,532 ordinary shares of HK$0.10 each, giving rise

to a share premium of RMB177,201,000, being the excess of the value of the convertible

instrument of RMB204,636,000 over the par value of the new shares issued of RMB27,435,000.

19. Contingent liabilities

The Group is contingently liable in respect of four guarantee contracts with a bank in favour of

certain suppliers of raw milk (the ‘‘Suppliers’’) pursuant to which certain bank loans were granted

to those Suppliers. The outstanding bank loans as at 30 June 2005 amounted to RMB83,000,000

(31 December 2004 : RMB83,000,000). The guarantees are solely given by the Group, but the

guarantees are counter-guaranteed by these Suppliers who are independent third parties.

Security under these counter-guarantees included property, dairy cattle and other assets owned

by these Suppliers.



20. Commitments

The Group has the following outstanding capital commitments in respect of the purchase/

construction of plant, machinery and buildings:

Unaudited

At 30 Jun 2005

Audited

At 31 Dec 2004

RMB’000 RMB’000

Contracted, but not provided for 424,772 419,076

Authorised, but not contracted for 210,250 —

635,022 419,076

21. Related party transactions

The Group had the following material transactions with related parties. In the opinion of the

Directors, the above transactions were conducted in the ordinary course of business.

Unaudited


2005 2004


Sale of liquid milk to associates (a) 404,564 199,735

Sale of ice cream and other dairy products to

associates (a) 49,942 14,408

Key management compensation (b)

— directors’ fees 30 30

— salaries and allowances 640 486

— retirement benefits contributions 7 7

(a) The price of the above transactions was determined with reference to the then prevailing

market price/rates and the price charged to third parties.

(b) Key management compensation represented remuneration paid or payable to the

Company’s directors.

22. Comparative figures

Retained earnings as of 1 January 2004 has been restated to reflect the early adoption of

IFRS 3 ‘‘Business Combinations’’ in the second half of 2004. Details were set out in Note 2 to the

2004 annual financial statements.

23. Approval of the interim financial statements

The unaudited condensed consolidated interim financial statements were approved and

authorised for issue by the Board of Directors on 23 August 2005.



To the Board of Directors

China Mengniu Dairy Company Limited

(Incorporated in the Cayman Islands with limited liability)

We have been instructed by the Company to review the interim financial report of the Company and its

subsidiaries (the ‘‘Group’’) for the six-month period ended 30 June 2005 set out on pages 11 to 28.

Respective responsibilities of directors and auditors

The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited require the

preparation of interim financial report to be in compliance with International Accounting Standard 34

‘‘Interim Financial Reporting’’ promulgated by the International Accounting Standards Board and the

relevant provisions thereof. The interim financial report is the responsibility of, and has been approved

by, the directors.

It is our responsibility to form an independent conclusion, based on our review, on the interim financial

report and to report our conclusion solely to you, as a body, in accordance with our agreed terms of

engagement, and for no other purpose. We do not assume responsibility towards or accept liability to

any other person for the contents of this report.

Review work performed

We conducted our review in accordance with Statement of Auditing Standards 700 ‘‘Engagements to

review interim financial reports’’ issued by the Hong Kong Institute of Certified Public Accountants. A

review consists principally of making enquiries of Group’s management and applying analytical

procedures to the interim financial report and based thereon, assessing whether the accounting

policies and presentation have been consistently applied unless otherwise disclosed. A review

excludes audit procedures such as tests of controls and verification of assets, liabilities and

transactions. It is substantially less in scope than an audit and therefore provides a lower level of

assurance than an audit. Accordingly, we do not express an audit opinion on the interim financial

report.

Review conclusion

On the basis of our review which does not constitute an audit, we are not aware of any material

modifications that should be made to the interim financial report for the six-month period ended 30

June 2005.

Ernst & Young

Certified Public Accountants

Hong Kong

23 August 2005

Independent Review Report


BOARD OF DIRECTORS

Executive Directors

Mr NIU Gensheng

Ms LU Jun

Mr YANG Wenjun

Mr SUN Yubin

Non-Executive Directors

Mr JIAO Shuge (alias JIAO Zhen)

Mr LIU Haifeng, David

Ms JIN Yujuan, Lily

Independent Non-Executive Directors

Mr WANG Huaibao

Mr ZHANG Julin

Mr LI Jianxin

SENIOR MANAGEMENT

Mr YAO Tongshan

Mr BAI Jun

Mr LEI Yongsheng

Mr DENG Jiuqiang

Ms LO Ka Wai, Claudia (Qualified Accountant

& Company Secretary)

STOCK CODE

Hong Kong Stock Exchange 2319

INVESTOR RELATIONS CONTACT

Ms LO Ka Wai, Claudia

Unit 1001, 10th Floor, Jubilee Centre

18 Fenwick Street, Wanchai

Hong Kong

Email: [email protected]

Website: http://www.mengniuir.com

REGISTERED OFFICE

M&C Corporate Service, P.O. Box 309 GT

Ugland House, South Church Street

George Town, Grand Cayman

Cayman Islands

PLACE OF BUSINESS IN HONG KONG

Unit 1001, 10th Floor, Jubilee Centre

18 Fenwick Street, Wanchai

Hong Kong

PRINCIPAL SHARE REGISTRAR

Bank of Butterfield International (Cayman) Ltd.

Butterfield House

68 Ford Street

P.O. Box 705, George Town

Grand Cayman, Cayman Islands

HONG KONG BRANCH SHARE REGISTRAR

Computershare Hong Kong Investor Services Limited

Shops 1712–16, 17th Floor

Hopewell Centre

183 Queen’s Road East, Wanchai

Hong Kong

LEGAL ADVISORS

As to Hong Kong Law

Norton Rose

As to PRC Law

King & Wood PRC Lawyers

As to Cayman Islands Law

Maples and Calder Asia

PRINCIPAL BANKERS

Agricultural Bank of China

Bank of China

Industrial Commercial Bank of China

AUDITORS

Ernst & Young

Certified Public Accountants

Corporate Information


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