The year 2011 was a very critical year for the dairy industry in China. As stated by Mr. Wen Jiabao, the Prime Minister of China, when visiting the production plants of Mengniu, “China should raise its own breeds of milk cattle, so as to produce milk and dairy products of high quality and nurture its own brands for milk and dairy products”. The entire industry underwent rationalisation under a more stringent regulatory regime and progressed towards the development of a high quality and branding-oriented base.

On the one hand, we were very pleased to witness a stable and sustainable growth of the dairy industry in China caused by the continuously expanding consumption demand. On the other hand, the Government has reexamined the production permits of dairy product enterprises. Enterprises not complying with the stipulated requirements were eliminated. The industry was restructured and the barrier of competition was increased, which facilitated the development of the dairy market towards a healthy and orderly direction and created development opportunities for large enterprises which are leading the industry. As one of the leaders in the dairy industry, Mengniu actively sought a competitive edge to remain at the forefront of the prosperous development of the industry and further consolidated its market position. Mengniu had ranked as one of the top 20 global dairy enterprises (全球乳業20強) in a list issued by Rabobank, the Netherlands.

In 2011, the total revenue of the Group was RMB37,387.8 million for the year, representing a growth of 23.5%. Profit attributable to owners of the Company increased to RMB1,589.3 million and basic earnings per share were RMB0.908. The Board of Directors of the Company (the “Board of Directors”) recommended a final dividend payment of RMB0.198 per share for the year ended 31 December 2011.

By capitalising on the ongoing healthy growth in the market demand for dairy products as well as the favorable environment arising from the gradually regulated competitive market in the industry, the Group persisted in introducing mid to high-end dairy products with high added value to satisfy the consumption demand and expand its market share. Furthermore, Shijiazhuang Junlebao Dairy Co., Ltd. (石家莊君樂寶乳業有限公司) (“Junlebao”), the largest yogurt manufacturer in northern China, which we successfully acquired in 2010, comprehensively collaborated with us in terms of milk sources, markets, sales channels and production facilities, etc. The ensuing synergies delivered improvements in the sales of products and branding of both parties. Various favorable factors effectively promoted the growth of the Group’s revenue. During the year, the liquid milk segment of the Group continuously enjoyed advantages with revenue increasing by 25.4% to RMB33,701.2 million, representing 90.1% of the Group’s revenue and remained number one in market share within China. The ice cream products of Mengniu also underwent a comprehensive upgrade towards the higher end of the market, creating a new higher-end trend among local ice cream brands in China. The revenue from the ice cream segment increased by 4.7% to RMB3,258.6 million, representing 8.7% of the Group’s revenue. As for other dairy products, Mengniu re-launched its milk powder products with the novel brand of MENGNIU ARLA, which had elicited a satisfactory preliminary market response. The growth in revenue from other dairy products segment totally increased by 51.8% to RMB428 million, representing 1.2% of the Group’s revenue.

With a sustainable growth in revenue, the profitability of the Group was also stabilised and enhanced gradually during recent years and the net profit margin further increased to 4.3%. We believe this favorable performance was due to our advanced strategic planning, enhanced internal control procedures, optimised product portfolio and restructured organisation. Costs and expenses were tightly controlled, thereby enabling the growth in profitability and mitigating the cost pressure brought about by the inflationary environment.

From a strategic expansion perspective, Mengniu continuously extended its deployment of resources throughout China, adding production plants at Qingyuan City in Guangdong Province and Yinchuan City in Ningxia Hui Autonomous Region. The demand from regional markets across China was thus catered for, with an aggregate annual production capacity of 7.05 million tons during the year. Mengniu actively tapped into the international market by leveraging its position as one of the leaders of the dairy industry in China. We embarked on research in the global dairy market, in order to advance towards the integration of resources globally whether within or outside China. Our products were launched again in international markets and distributed in Hong Kong and Macau respectively, which further internationalised the brand of MENGNIU.

The theme of “High Quality for a Green Life” (好品質，綠生活) remained the direction to be further pursued by Mengniu. In order to achieve “High Quality” (好品質), Mengniu carefully managed every aspect of production operations from milk sourcing to research and development (“R&D”) and quality control. Overall control of product quality was thus enhanced. We undertook our best effort to develop safe and reliable milk sources. The proportion of milk sources provided by ranches and scaled farms was increased to nearly 80% during the year, and we also provided comprehensive technical service systems to the suppliers. We have persisted in improving the independent R&D standards for the dairy industry in China, and actively applied for patents. We have also commenced the operation of the post-doctoral scientific research centre and overseas R&D station in Tokyo so as to upgrade our R&D capacity.

In terms of quality control, Mengniu is striving to perfect its “end-to-end”(端到端) comprehensive quality control system throughout the production process. The implementation of the “Electronic Tracking System” (電子追溯系統) is progressively advancing towards the target of tracking our products. The expectation of “High Quality” (好品質) is extended to every facet of the products. All operational departments and branches or processing plants of the Group have successfully passed the inspection by the State General Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”) and obtained production permits of dairy products.

It was announced by the state quality supervision authority of the PRC in December 2011 that a batch of products from Mengniu’s plant at Meishan, Sichuan, was found excessive levels of flavacin M1 upon random inspection. As such batch of products was still in the warehouse at the time of the inspection, that batch of products was sealed immediately and later on destroyed by the Group and had not been released to the market. We deeply recognised from the incident that there was still room for improvement in our internal management. On the basis of the current management system based on the concept of the whole supply chain management system, we forthwith bolstered the control of milk sources, which boosted overall quality. Our internal quality control process flow was strengthened by the division of the quality control system into a raw materials quality control centre and a products quality control centre. The products would thus be cross-checked by two independent departments from production to dispatch. Moreover, the quality and safety administration centre and raw milk quality assurance centre were formed to further monitor the products quality. We shall also voluntarily invite third parties such as authoritative institutions of the Government to carry out random inspection on our products and publish the results. These efforts were intended to assure the credibility and reliability of the results in the quality inspection of products, and evidence the determination of Mengniu in realising “High Quality” (好品質).

Apart from actively expanding its businesses, the Group also continuously exerted considerable effort to build up the “Green Life” (綠生活) brand image of MENGNIU. Highlights included becoming one of the global partners for the International Horticultural Exposition held at Xi’an in China, the organisation of a major ecological community event “Ecological Movement Support China” (生態行動，助力中國), and the participation in the “Earth Hour” (地球一小時) activity initiated by the World Wide Fund for Nature (“WWF”). Through these activities, we successfully turned 2011 into a year of “One Step Closer to Green Life” (走近綠生活). While we were pursuing a green vision in our branding, we also undertook social responsibility initiatives in promoting the ecological protection of the environment. Moreover, through utilising environmentally friendly packaging materials, promoting the recycling of packaging and advocating low carbon and emissions reduction in production, we had laid down the platform for environmental protection and sustainable development from the perspective of corporate social responsibility.

The year 2011 was the first year of Mengniu’s second five-year plan. Mengniu enjoyed success with its vigorous efforts, setting an encouraging prelude with consolidated determination, notwithstanding the intensive competition in the industry. We also became more confident that we could realise our strategic objective. Meanwhile, the fact that we detected the shortcomings in our enterprise management during 2011 enabled us to more clearly recognise how to enhance the quality of internal management in 2012. While steadily pursuing the objectives laid down in the five-year plan, Mengniu also commits itself to laying the groundwork for a more prosperous development in the future.

As a pioneer in the development of the dairy industry in China, as well as a Chinese enterprise with an appealing brand, Mengniu will not only devote efforts to strengthen its competencies but also strive to motivate the industry in its future development, contributing to the public good.

We will conduct our business with a solid foothold in the global dairy industry by establishing a brand image that fulfills immense corporate social responsibilities. We will provide healthy dairy products with high quality to consumers and establish a role model in green sustainable development for the benefit of society, ultimately creating maximum value for our shareholders. On behalf of Mengniu, I would like to take this opportunity to express our heartfelt gratitude to all sectors of society for their concern and support.

Yang Wenjun
Chief Executive Officer
Hong Kong, 27 March 2012