Good News on Listing | Frost & Sullivan Assists Aoy Group Limited to Successfully List on the Hong Kong Stock Exchange (2425.HK)

Aoyang Group Co., Ltd. (hereinafter referred to as 'Aoyang Group') successfully listed on December 30, 2022. The company issued 3,064 million shares at a price of HK$6.4 per share, raising a net amount of HK$101.4 million.

During the process of listing in Hong Kong this time, Frost & Sullivan mainly undertook the following tasks: helping the issuer accurately and objectively understand its positioning in the target market, using objective market data to discover, support, and highlight the issuer's competitive advantages, assisting the issuer, investment banks, and other intermediaries in completing the relevant parts of the prospectus (such as overview, competitive advantages and strategy, industry overview, business, and other important chapters), helping the issuer complete communication with the Hong Kong Stock Exchange and investors, assisting investors in quickly understanding the market ecosystem and competitive landscape, and assisting the issuer in completing feedback on various industry-related issues from the Hong Kong Stock Exchange, etc.

The company is a pioneer in the high-growth dairy industry, benefiting from increased demand and the trend towards high-end development;

The company's profound expertise in operating large-scale ranches and its relentless pursuit of excellent operational efficiency;

The company has a mature and synergistic business model with high growth prospects;

The company has strong and stable financial performance;

The company has an experienced management team with a good track record and strong shareholder support.

According to a report by Frost & Sullivan:

Based on raw milk sales volume, sales revenue, and production, the company ranked third, fourth, and fifth among all dairy cow ranch operators in China in 2021;

Based on the average milk production per adult cow (a key indicator of dairy farm output and efficiency), the company has ranked first in China for seven consecutive years from 2015 to 2021; in 2021, the annual average milk production per adult cow reached 12.7 tons/year, far exceeding the industry average and the average level of the top five dairy farm operators in China;

The company owned 6, 7, and 5 dairy farms in 2019, 2020, and 2021 respectively. Ranked among the top ten large-scale dairy farms with tens of thousands of cows in China based on the average annual milk production per adult cow,

The company owns and operates two large-scale beef cattle farms in China in 2021. In terms of the number of beef cattle, the company is the eleventh largest beef cattle farm enterprise in China.

In recent years, the dairy industry in China has developed rapidly, with great growth potential. This growth is mainly driven by an increase in per capita dairy consumption, which is due to the continuous urbanization process, increased disposable income, and consumption upgrading.

According to a Frost & Sullivan report, China's per capita dairy consumption (in milk equivalents) increased from 34.8 kilograms in 2016 to 46.6 kilograms in 2021, with an annual compound growth rate of 6.0%, which is higher than the growth rate of per capita liquid milk consumption. This is mainly due to the higher growth rate of dry dairy products caused by consumption upgrading. Driven by increased consumer disposable income, enhanced health awareness, and growing demand for dairy products, per capita dairy consumption (in milk equivalents) is expected to reach 65.3 kilograms by 2026, with an annual compound growth rate of 7.0% from 2021 to 2026.

Supply and demand of raw milk in China

From 2016 to 2021, the amount of raw milk required for dairy consumption in China grew steadily. Due to the increasing demand for dairy products from individual consumers, restaurants, cafes, and tea shops, the amount of raw milk needed for dairy consumption in China is expected to continue to grow. In recent years, the domestic supply of raw milk in China has remained relatively stable. Driven by the annual average milk production per adult cow and the increase in the number of dairy cows, the supply of raw milk is expected to grow steadily in the future. For many years, the amount of raw milk required for dairy consumption in China has continuously exceeded the domestic supply. The domestic supply gap continues to widen and is expected to reach about 3.01 million tons by 2026.

From 2016 to 2021, the high-end liquid milk market showed significant growth. The quality standards for raw materials used in high-end liquid milk products are much higher than those for ordinary raw milk. Therefore, consumers' demand for high-end raw milk has grown at a significantly faster rate than for ordinary raw milk. Driven by strong demand for high-end raw milk and the development of large-scale dairy farms, the supply of high-end raw milk has also grown rapidly in the past few years, and it is expected that the supply of high-end raw milk will continue to grow strongly in the future.

China's demand for high-end raw milk, which is used in dairy products, has been in short supply for many years due to the improvement in consumer living standards, consumption upgrading, and the increasing demand for diverse high-end dairy products. The supply gap continues to widen, and it is expected to reach about 1.38 million tons by 2026.

Raw milk price

The price of raw milk in China is mainly determined by market supply and demand dynamics. The price of raw milk is affected by various factors, including the quality of raw milk, the average market price, and feed costs. In recent years, the price of raw milk in China has mainly maintained an upward trend, with the monthly average price of raw milk rising from 3,550 yuan per ton in January 2016 to 4,306 yuan per ton in December 2021.

The upward trend is due to: (i) refined operations by leading dairy ranch participants; (ii) rising feed prices; (iii) increased labor costs; (iv) shortage of raw milk supply; and (v) strong demand for raw milk. During 2021, raw milk prices remained relatively stable at a high level, exceeding RMB 4,000 per ton. It is expected that in the next one to two years, mainly affected by rising feed prices and increased demand for high-end dairy products, the average price of raw milk is estimated to rise slightly or remain stable.

Cattle breeding

Large-scale dairy farms in China refer to those with a cow herd of no less than 100 heads. Compared to small-scale farms, these large-scale farms typically have higher milk production and higher-quality raw milk. Overall, large-scale farms with more than 1,000 cows require significant capital investment, advanced technology, an experienced management team, standardized management procedures, and breeding methods. Large-scale farms are generally more efficient, environmentally friendly, and in line with national sustainable development policies.

The raw milk supply market in China is highly fragmented. Based on the raw milk production in 2021, the top five participants accounted for 15.0% of the total market share. According to the raw milk production in 2021, Aoyang Group is the fifth-largest dairy cattle ranch operator.

Based on raw milk sales in 2021, the top five participants in China accounted for 14.1% of the total market share. Based on raw milk sales in 2021, Aoyang Group is the third-largest dairy farm operator, with a market share of 1.6%.

According to a Frost & Sullivan report, ranked first in China for seven consecutive years from 2015 to 2021 based on the average milk production per cow (a key indicator of dairy farm output and efficiency), Aoyang Group achieved an average annual milk production of 12.7 tons per cow in 2021, far exceeding the industry average and the average level of China's top five dairy farm operators, which is 11.5 tons per year.

The concentrate feed for dairy cows mainly includes corn, soybean meal, and alfalfa. The price of concentrate feed may be affected by various external factors, including (i) climate and environmental conditions (such as pest infestations); (ii) commodity market prices; and (iii) government policies.

With the rapid economic development and the increase in per capita disposable income, Chinese consumers' willingness to purchase healthy proteins is expanding, driving up retail sales of beef products. The improvement in health awareness and consumption upgrading among Chinese consumers have stimulated downstream market demand for high-protein, low-fat meat. Beef consumption and unit price have been showing significant growth, and it is expected that China's per capita beef consumption will increase year by year with the rise in disposable income in the future.

China's beef supply and demand

On the demand side, China's beef consumption has grown rapidly in recent years. Due to the increasing demand for beef products from consumers, it is expected that China's beef consumption will continue to rise. On the supply side, beef production in China has been steadily growing. This is due to: (i) government preferential policies; (ii) strong demand from downstream consumers; and (iii) efforts by major beef cattle breeding farms to expand production scale, which are expected to increase beef production. For many years, China's beef consumption market has been in a state of supply falling short of demand. The gap in beef production continues to widen, with an estimated shortfall of about 350 million tons by 2026.

Frost & Sullivan has rich research experience in the entire dairy industry chain and the food and beverage sector. It has assisted many well-known enterprises in successfully listing on the capital market. Successful listings include: Weilong (9985.HK), Youran Animal Husbandry (9858.HK), Jiulongwang (1927.HK), Yumart (9987.HK), Nongfu Spring (9633.HK), Fengxiang Food (9977.HK), China Feihai (6186.HK), China National Tobacco Corporation International (6055.HK), Luckin Coffee (LK.NASDAQ), Youpin 360 (2360.HK), Wugu Milling House (1837.HK), Yiyuan Liquor (8146.HK), Jierong International (2119.HK), Bingshi International (1705.HK), Nissin Foods (1475.HK), Zhouhei Duck (1458.HK), COFCO Meat (1610.HK), Yihai International (1579.HK), Zhongdi Dairy (1492.HK), Dalili Foods (3799.HK), Manor Ranch (1533.HK), Vientiane International (0288.HK), and others.