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3 Corporate Profile China Mengniu Dairy Company Limited (Stock Code: 2319) and its subsidiaries (the Group ) manufacture and distribute quality dairy products in China. It is one of the leading dairy product manufacturers in China, with MENGNIU as its core brand. The Group s diversified products range include liquid milk products, such as UHT milk, milk beverages and yogurt, ice cream and other dairy products such as milk powder. In December 2010, the Group s annual production capacity reached 6.50 million tons.

4 Contents China Mengniu Dairy Company Limited Annual Report 2010 Financial Highlights 2 Plant Map 4 Major Awards and Achievements 5 CEO s Statement 6 Management Discussion and Analysis 14 Directors and Senior Management 38 Corporate Governance Report 46 Report of the Directors 56 Corporate Information 67 Independent Auditors Report 69 Consolidated Income Statement 71 Consolidated Statement of Comprehensive Income 72 Consolidated Statement of Financial Position 73 Consolidated Statement of Changes in Equity 75 Consolidated Statement of Cash Flows 77 Statement of Financial Position 80 Notes to Financial Statements 81 Financial Summary 204

5 Financial Highlights RMB 000 RMB 000 For the year ended 31 December Revenue 30,265,415 25,710,460 Net profit attributable to owners of the Company 1,237,273 1,115,799 Net cash flows from operating activities 2,485,117 2,131,571 Net cash balances 5,997,027 5,476,428 Basic earnings per share (RMB) Proposed final dividend per share (RMB) The Group further optimised its product portfolio to consolidate the market share of its high-end products. The revenue during the year increased by 17.7% to RMB30,265.4 million as compared with Net profit attributable to owners of the Company was RMB1,237.3 million % The Group continuously expanded its production capacity and its aggregate annual production capacity reached 6.5 million tons in December In the top 20 global dairy enterprises issued by Rabobank, the Netherlands, Mengniu s ranking jumped to 16th, reflecting that its corporate strengths have been recognised internationally In November 2010, Mengniu successfully acquired Shijiazhuang Junlebao Dairy Co., Ltd. (), the largest yogurt manufacturer in northern China. Through this acquisition, Mengniu created development synergies in terms of milk sources, markets and channels in specific competitive areas, commencing industry consolidation and further reinforcing the leading position of Mengniu in the national yogurt market.

6 Financial Highlights (Continued) Revenue by Product Mix For the year ended 31 December RMB Million 35,000 Product Mix in Liquid Milk Segment For the year ended 31 December RMB Million 30,000 30,000 25, % 10.5% 0.9% 10.3% 25,000 20, % 10.2% 27.3% 20,000 15,000 10, % 88.8% 15,000 10, % 62.4% 62.5% 5,000 5, Liquid Milk Ice Cream Other Dairy Products UHT Milk UHT Milk Beverages Yogurt China Mengniu Dairy Company Limited Annual Report 2010

7 Plant Map 生產基地位置圖 Saibei Plant 塞北生產基地 Chabei Plant 察北生產基地 Shanyin Plant 山陰生產基地 Taiyuan Plant 太原生產基地 Helin (Hi-tech) Plant 和林 高科 生產基地 Helin (Headquarters) Plant 和林 總部 生產基地 Heilongjiang Qiqihaer Plant 黑龍江 齊齊哈爾生產基地 Baotou Plant Shangzhi Plant 尚志生產基地 包頭生產基地 Wulanhaote Plant 烏蘭浩特生產基地 Inner Mongolia Bameng Plant 巴盟生產基地 Tongliao (Keerqin) Plant 通遼 科爾沁 生產基地 內蒙古 Shenyang Plant Beijing 瀋陽生產基地 Liaoning 北京 Tangshan Plant 遼寧 Luannan Plant 唐山生產基地 Hebei Beijing Plant 河北 Baoding Plant 灤南生產基地 北京生產基地 保定生產基地 Shanxi 山西 Shijiazhuang (Junlebao) Plant 石家莊(君樂寶)生產基地 Shandong 山東 Shaanxi 陝西 Henan 泰安生產基地 焦作生產基地 河南 Ma anshan Plant Anhui Hubei 馬鞍山生產基地 安徽 湖北 Sichuan Taian Plant Jiaozuo Plant Zhejiang 四川 浙江 UHT milk and milk beverages UHT 奶及乳飲料 Guangdong 廣東 Yogurt Jinhua Plant 酸奶 金華生產基地 Qingyuan Plant 清遠生產基地 Baoji Plant 寶雞生產基地 Meishan Plant 眉山生產基地 Dangyang Plant 當陽生產基地 Wuhan Plant 武漢生產基地 Ice cream 冰淇淋 Other dairy product 其他乳製品

8 Major Awards and Achievements Mengniu Products: Mengniu s Champion and Future Star were presented with the Innovative Products Award at the French International Food Fair (SIAL) Mengniu s Champion was presented with the International Food Industry Award by the International Union of Food Science and Technology The Group: Ranked 16th in the Report of Global Dairy Enterprises 2010 issued by Rabobank, the Netherlands Ranked 28th among Asia s Fab 50 Companies 2010 as compiled by Forbes, the only dairy enterprise in China on the roll, indicating Mengniu has the best brand value in China s dairy industry Presented with the Most-Watched Low Carbon Contribution Enterprise Award at the First Annual China Low Carbon Forum Garnered the Eco-China Contribution Award at the First Ecological China Forum Named as China s Outstanding Low Carbon and Energy Saving Enterprise at the International Forum on Innovation and Development of High-tech Enterprises of the 13th CHITEC SIAL Mengniu Brand: Selected among the Top 500 Asian Brands for five consecutive years and ranked as the second largest dairy brand in Asia Selected among the Top 50 Most Valuable Chinese Brands 2010 by WPP, a world leader in marketing communications Mengniu dairy products ranked first, in both sales volume and sales value, among similar products in China in 2010, according to the China Industrial Information Issuing Centre, National Bureau of Statistics of China, the fifth time Mengniu has led this market category 500 WPP China Mengniu Dairy Company Limited Annual Report 2010

9 CEO S Statement Pursuit of Excellence in Quality Leading the Way to a Green Life Endeavor to Become One of the World s Top Ten Dairy Companies Yang Wenjun Chief Executive Officer I am pleased to present the annual results of China Mengniu Dairy Company Limited (the Company ) and its subsidiaries ( Mengniu or the Group ) for the year ended 31 December 2010 to our shareholders. In 2010, China s rapid and sustained economic growth created favourable conditions for the steady growth of its dairy industry. However, upsurges in prices of raw materials and intense market competition also put dairy corporations under enormous pressure. Under such a tough environment, we adopted various initiatives to alleviate market pressure and achieved satisfactory results. According to statistics of China Industrial Information Issuing Centre under China s National Bureau of Statistics, Mengniu s dairy products ranked first, in both sales volume and sales value, among similar products in China for five consecutive years from 2006 to Total revenue of the Group was RMB30,265.4 million for the year, representing a growth of 17.7%. Net profit attributable to owners of the Company increased to RMB1,237.3 million and basic earnings per share were RMB The Board of Directors of the Company (the Board of Directors ) recommended a final dividend payment of RMB0.16 per share for the year ended 31 December %

10 CEO S Statement (Continued) Mengniu s sound performance in these challenging times was mainly attributable to the Group s advanced planning and decisive and effective measures. Through stringent cost control measures, we continued to streamline each source of costs and introduced cost saving proposals to reduce the cost burden. During the year, the Group carried out structural reform and merged horizontally similar departments though responsibilities and management mechanisms. Overall synergies to be created year-by-year will assist to reduce the costs of the Group. In addition, we identified new opportunities for business development and successfully acquired Shijiazhuang Junlebao Dairy Co., Ltd. ( ), the largest yogurt manufacturer in northern China. This competitor then became our partner to create development synergies in terms of milk sources, markets and channels in local competitive areas. The win-win cooperation brought consolidation in the industry, further reinforcing the leading position of Mengniu in the national yogurt market. Through ongoing optimisation of its product portfolio, the Group increased the proportion of high-end dairy products, and strengthened the market influence in various categories while maintaining steady growth of the Group s earnings, thereby boosting our position as a leading brand of China high-end dairy products. In particular, the Group s liquid milk segment maintained its competitive edge in the market with revenue increased by 18.2% to RMB26,871.8 million, accounting for 88.8% of the Group s revenue. Milk Deluxe (), as a mainstay high-end product, continued to rank first in terms of market share in the high-end milk market segment. The Group launched a new product Milk Deluxe Chunxian ( ), with phytosterol esters and food fibre, in addition to other existing products to cater for consumers pursuance of a healthy life. The well received and recognised Future Star Milk ( ) series was upgraded as a whole by adding DHA algal oil, and was expanded with three new products, Upgraded Wisdom ( ), Upgraded Vitality ( ) and Upgraded Youhu ( ), which catered for different stages of growth. Targeting female consumers, Mengniu also launched XinYangDao Zhenyang Milk (), which contains essences of food considered to be beneficial to blood circulation and skin beauty of females. These initiatives once again demonstrated Mengniu s emphasis on niche markets and care for the needs of different consumer groups. Featuring a high-end fashionable image, Fruit Milk Drink ( ) obtained three independent intellectual property patents during the 18.2% % DHA China Mengniu Dairy Company Limited Annual Report 2010

11 CEO S Statement (Continued) year. Suan Suan Ru () series closely aligned its brand image with musical dreams through Mengniu Suan Suan Ru Music Dream Academy () and established one of the most influential charity platforms in China for teenage music fans to realise their dreams. Our market share therefore steadily expanded. Mengniu also vigorously developed the yogurt market. Following on the heels of Champion ( ), our high-end brand, becoming the first yogurt product of the Group to obtain national certification as a health-care product, Mengniu went ahead to develop the natural, pure and quality Inner Mongolia Old Yogurt ( ), which received an overwhelming market response together with Youyi C ( C), which is rich with probiotic lactobacillus casein. During the year, revenue from our ice cream products, with the three major brands, Sui Bian ( ), Ice+ ( +) and Mood for Green (), as mainstay products increased by 15.9% to RMB3,111.5 million, accounting for 10.3% of the Group s revenue. Revenue from other dairy products was RMB282.1 million, accounting for 0.9% of the Group s revenue. Catering for the taste preference of domestic consumers, the Group also conducted research and development ( R&D ) and innovations leading to the strategic promotion of three major product series, namely Family Breakfast Cheese (), Growth Cheese () and Soft Cheese () to further expand into the cheese market. C C % % % Mengniu has always attached great importance to quality control, enhancement of milk sources and R&D capability, and has worked to ensure the quality edge and market adaptability of our products in each process. During the year, the Chinese Academy of Inspection and Quarantine ( ) and Mengniu co-established the Joint Dairy Products Laboratory () to collaboratively develop and study new methods for supervision and control of food safety, marking Mengniu s position at the forefront of the industry in respect of research on and practice of food safety control. Furthermore, factory laboratories of the Group in five locations were granted the qualification certificates in recognition of their national management and technology standard. In 2010, the Group further developed its milk source enhancement strategy by stepping up investment in the construction of the facilities in upstream and actively adopting the large-scale breeding model. In addition to the establishment of dairy farmers technology service centres ( ) for the provision of all-round services, including technical support for scientific breeding, prevention of and treatment for diseases, etc., to dairy farmers, the Group also planned its raw milk distribution centering on the concept of Farm in the Front and Factory at the Back () to increase the proportion of raw milk sourcing from scaled farms and ranches with advanced husbandry techniques to more than 70%, thus ensuring good quality for Mengniu s dairy products starting at the source. 70%

12 CEO S Statement t (Continued) Mengniu has been committed to the introduction of internationally advanced technologies and has established overseas R&D and information stations in Paris (France), Geneva (Switzerland) and Tokyo (Japan). The scientific research project themed Development of Lactic Acid Bacteria and Fermentation Agents with Self-owned Intellectual Property Rights ( ) jointly conducted with the Harbin Institute of Technology also attained breakthrough progress. The project was evaluated by experts of the Chinese Institute of Food Science and Technology ( ) in Beijing. The committee unanimously agreed that the achievement has attained the international standard and was vital to the development of lactic acid bacteria and the production of patented fermentation agents in China. In line with the Government s requirements on economic transformation and environmental protection, Mengniu launched a new brand slogan High Quality for a Green Life () to redefine its determination towards product responsibility, public responsibility, practice and advocacy of a low-carbon lifestyle, and commitment to corporate responsibility as its mission. Taking the new brand slogan as a long-term objective, Mengniu is enhancing its production efficiency through continued application of energy saving and consumption reduction technologies. Internally, all waste water and other wastes generated in the course of production are to be recycled and reused to achieve zero emission. Mengniu also conveyed the Green concepts of low carbon and environmental protection to the public through China Mengniu Dairy Company Limited Annual Report 2010

13 CEO S Statement (Continued) promoting large-scale public environmental protection activities such as the campaign themed Ecological Movement Support China ( ), the online Carbon Test () and initiated the use of packaging materials which were certified by FSC in the industry. These activities served as good illustration of both its social responsibility and contribution to a green and low-carbon economy to boost brand image and product sales. FSC With its numerous green community campaigns, Mengniu garnered the award as the Most-Watched Low Carbon Contribution Enterprise ( ) at the First Annual China Low Carbon Forum ( ), China s Outstanding Low Carbon and Energy Saving Enterprise () at the International Forum on Innovation and Development of High-tech Enterprises of the 13th CHITEC () and the Eco- China Contribution Award () during the First Ecological China Forum () in These honours showcased its green achievements. Meanwhile, the Group spared no efforts on its longterm caring community campaigns and extended the Love Gifts Action ( ) to cover Guangai School in Beijing, Dabieshan School in Shanghai and Chaping Town School in An County, Mianyang City, Sichuan. Coupled with ongoing community campaigns included a donation for relief for drought in southwestern China and disaster relief for the earthquake in Yushu, our image as an enterprise concerned about social responsibility was further reinforced. Our brand image again gained wide recognition during the year. In the Report of Global Dairy Enterprises issued by Rabobank, the Netherlands, in June 2010, Mengniu s ranking further jumped from 19th last year to 16th this year. Mengniu was one of the Top 500 Asian Brands ( 500 ) for the fifth consecutive year, ranking 132nd in the list and the second among dairy enterprises in Asia. It also ranked as one of the Asia s Fab 50 Companies 2010 ( ) as compiled by Forbes, being the only dairy enterprise in China on the roll. In the meantime, Mengniu was ranked 20th among the Top 50 Most Valuable Chinese Brands 2010 ( ) published by WPP, a world leader in marketing communications WPP In conclusion, we are proud of our achievements in 2010, as we managed to deliver remarkable results and marked a milestone in our history. The achievements were due to the concerted efforts of all Mengniu s staff in overcoming difficulties against the backdrop of various unfavourable conditions including an upsurge in raw material costs and intense industry competition during the past year.

14 CEO S Statement (Continued) In 2011, the first year within Mengniu s second five-year plan, the Group will enter an entirely new stage of development. Aiming for inclusion among the World s Top 10 Dairy Companies ( 10 ) and internationalisation, the Group has formulated a clear business development strategy and a strategy to nurture core competencies. Passing through industry fluctuations in conjunction with the reformation of China s dairy industry in the past, Mengniu has long ago managed cohesion of the Group and overcome obstacles, which had led to its rapid emergence as a Chinese brand to be proud of and which will lead the Group towards the position of a world leading dairy brand in the future. The year 2011 is to be a meaningful year for the Group s development, as well as a year of hope for Mengniu. 10 On behalf of Mengniu, I would like to take this opportunity to express our heartfelt gratitude to all sectors of the society for their consistent support and affection. We will adhere to a serious and sincere work attitude and strengthen the capabilities of the Group to maximise returns for investors and shareholders. In addition, we will perform our responsibilities in a practical manner as an outstanding Chinese enterprise and contribute to the development of the China dairy industry and Chinese society as a whole. Yang Wenjun Chief Executive Officer Hong Kong, 31 March 2011 China Mengniu Dairy Company Limited Annual Report 2010

15 Mengniu s High-Intelligence Production Base has a total of 22 production lines with a daily processing capacity of 2,000 tons of fresh milk. 22 2,000

16 Daily production capacity 2,000 tons 2,000 tons

17 Management Discussion and Analysis Financial Review In the context of strengthening domestic consumption, the Group further optimised its product portfolio to consolidate the market share of its highend products, and implemented stringent cost control measures, as well as adjusted the selling prices of certain products to cope with market change. These and other initiatives together contributed to the satisfactory results of the Group. During the year under review, revenue of the Group amounted to RMB30,265.4 million, an increase of 17.7% as compared with RMB25,710.5 million in Net profit attributable to owners of the Company was RMB1,237.3 million (2009: RMB1,115.8 million). Basic earnings per share were RMB0.712 (2009: RMB0.681). Gross Profit During the year under review, the Group recorded a gross profit of RMB7,786.4 million, an increase of 13.6% as compared with RMB6,852.2 million in Despite the rising raw material prices as a result of growing inflation in China, the Group managed to control the overall gross profit margin for the year at 25.7% (2009: 26.7%), attributable to the increased portion of high-end products, optimisation of product portfolio, stringent cost control measures and adjustment on selling prices of certain products, which effectively offset the effects brought by the surge in raw material prices. Operating Expenses In 2010, as the scale of operation of the Group expanded, the operating expenses of the Group increased to RMB6,524.9 million (2009: RMB5,630.3 million). However, its percentage to the Group s revenue declined to 21.6% (2009: 21.9%) as a result of precise management and effective cost control % % % 26.7% % 21.9%

18 Management Discussion and Analysis (Continued) Selling and distribution costs for the year accounted for 17.9% of the Group s revenue, down from 18.1% in The Group implemented specified marketing campaigns for its products and maximised the utilisation of marketing resources to ensure enhancement of the brand image of MENGNIU and market share of the Group whilst lowering related costs. The percentage of advertising and promotion expenses to the Group s revenue decreased from 10.3% in 2009 to 7.8% in the year under review. 18.1% 17.9% 10.3% 7.8% The percentage of administrative and other operating expenses to the Group s revenue was effectively lowered to 3.7% (2009: 3.8%), which was attributable to the Group s initiatives on internal structural reform and stringent control of related expenses. Profit from Operating Activities and Net Profit Attributable to Owners of the Company The Group s EBITDA for the year was RMB2,208.2 million (2009: RMB1,997.9 million). Although the Group was under cost pressure arising from the upsurge in raw material prices, EBITDA margin slightly adjusted to 7.3% (2009: 7.8%) through an upgrade of product portfolio and effective cost control measures. During the year under review, net profit attributable to owners of the Company was RMB1,237.3 million (2009: RMB1,115.8 million), and net profit margin attributable to owners of the Company for the year was 4.1% (2009: 4.3%). 3.7%3.8% EBITDA EBITDA7.3% 7.8% % 4.3% China Mengniu Dairy Company Limited Annual Report 2010

19 Management Discussion and Analysis (Continued) Capital Structure, Liquidity and Financial Resources For the year ended 31 December 2010, the Group s net cash inflow from operating activities amounted to RMB2,485.1 million (2009: RMB2,131.6 million). Net cash balances (cash and bank balances net of total bank loans) reached RMB5,997 million as at 31 December 2010 (31 December 2009: RMB5,476.4 million), indicating the strong financial position and healthy cash flow of the Group As at 31 December 2010, the outstanding bank loans of the Group amounted to RMB700.8 million (31 December 2009: RMB673.6 million), of which RMB550.8 million (31 December 2009: RMB323.6 million) was repayable within one year and RMB150 million (31 December 2009: RMB350 million) was repayable beyond one year. The bank loans totalling RMB270.8 million (31 December 2009: RMB323.6 million) were fixed interest-bearing loans The total equity of the Group was RMB10,217.5 million as at 31 December 2010 (31 December 2009: RMB8,911.7 million), and the debt-to-equity ratio (total bank loans over total equity) of the Group was 6.9% (31 December 2009: 7.6%) % 7.6% For the year ended 31 December 2010, the Group s finance costs amounted to RMB45.2 million (2009: RMB61.15 million), representing approximately 0.1% of the Group s revenue (2009: 0.2%). 4,520 6,1150.1% 0.2%

20 Management Discussion and Analysis (Continued) Market Review China s dairy companies pressed ahead amidst a market environment with opportunities and challenges abounding in Following a development theme of Adjusting Structure and Promoting Consumption, the Government aimed at vigorously boosting consumption demand and facilitating stable economic growth by speeding up urbanisation and expanding domestic consumption. Driven by the continuing increase in spending on food consumption and demand for quality consumption by Chinese people, the China dairy industry grew steadily in At the same time, the Government continued to strengthen safety control on the dairy industry. In 2010, 66 new national safety standards including those related to raw milk () were revised and re-promulgated and the Notice of Further Strengthening of Measures Regarding the Quality and Safety of Dairy Products ( ) and the Rules Governing the Review of Permission Granted for the Production of Dairy Products ( ) were promulgated to regulate the dairy market and accelerate industry consolidation. On the other hand, inflation in China with a rise in the consumer price index exceeded expectations, thus surging prices of raw milk and other raw materials had brought considerable cost pressures to bear on dairy companies. Meanwhile, as a result of industry competition, dairy companies sought to expand their foothold. Under the environment of high raw material prices and market competition, Mengniu implemented stringent cost control, optimised its product portfolio and adjusted selling prices to effectively alleviate the pressure arising from the soaring costs. The Group also carried out structural reform and formulated its five-year development plan to strengthen its leading position in the industry and lay a solid foundation for its future development. 66 China Mengniu Dairy Company Limited Annual Report 2010

21 Management Discussion and Analysis (Continued) Business Review Unique market insights and well-advanced development strategies were the keys to the Group s success in overcoming the tough situation across the dairy industry during the year. By implementing stringent cost control measures, Mengniu streamlined each source of costs and implemented cost improvement scheme within its various processes, ranging from raw materials, procurement, production, logistics, marketing and administrative management. The Group also introduced focused cost saving proposals and adjusted the selling prices of certain products timely to secure profitability. With reference to international enterprises, Mengniu carried out structural reform to reclassify business segments, adopt systematic responsibilities and management, facilitate exchange and cooperation between different departments and optimise resource allocation. Overall synergies to be created year-by-year will effectively reduce the costs of the Group. In line with the development strategy for high-end functional dairy products, whilst strengthening the enhancement of milk sources and enhancing product quality, the Group also forged ahead with the development and promotion of high value-added products and tapped market opportunities to add new growth drivers to the Group s business. In November 2010, the Group successfully acquired 51% equity interest in Shijiazhuang Junlebao Dairy Co., Ltd., the largest yogurt manufacturer in northern China, becoming its largest shareholder. Through this acquisition, Mengniu turned the competitor into its partner to create development synergies in terms of milk sources, markets and channels in local competitive areas. The win-win cooperation commenced industry consolidation and further reinforced the leading position of Mengniu in the national yogurt market. The acquisition is beneficial to the Group s overall planning and conducive to its long-term development. 51% Leveraging its advanced planning and timely and effective adjustment measures, Mengniu outperformed its peers amid intense competition and delivered outstanding results better than the average industry level during the year. According to statistics of China Industrial Information Issuing Centre under China s National Bureau of Statistics in 2010, market share of the Group s dairy products ranked first in terms of sales volume and sales value among similar products in China for the fifth consecutive year. Furthermore, according to monitoring statistics of Nielsen Company, the Group s liquid milk and yogurt both ranked first in terms of market share. The Group s leading position in the industry was demonstrably consolidated.

22 Management Discussion and Analysis (Continued) Branding and Marketing In 2010, Mengniu launched its brand new image of High Quality for a Green Life (), demonstrating its determination towards becoming a green enterprise, offering green products and advocating green consumption. The Group also focused on the society and the future, contributing to the exploration of the low-carbon economic development model. As a brand of pastures, Mengniu is committed to extending its green source dependence on a green environment and performing its necessary responsibility and mission as a leading Chinese dairy enterprise. While organising various large-scale eco-activity campaigns in China, Mengniu also launched large-scale marketing campaigns for its mainstay products. Examples include a large-scale music talents cultivation programme Mengniu Suan Suan Ru Music Dream Academy ( ), the Cholesterol Health Dissemination Expert Seminar Tour ( ) aiming at dissemination of health knowledge and the Champion Technology Pavilion ( ) for promotion of the high-tech value of products at the Shanghai World Expo, to boost its product sales as well as enhance its brand reputation among consumers. Through a series of focused activities, the Group further enhanced its corporate brand image and became the only dairy product partner of the Boao Forum for Asia for the fifth time. In the top 20 global dairy enterprises issued by Rabobank, the Netherlands, in June 2010, Mengniu s ranking jumped to 16th, reflecting that its corporate strengths have been recognised internationally. Mengniu was one of the Top 500 Asian Brands ( 500 ) for the fifth consecutive year, ranking 132nd, up 41 places, in the list and the second among dairy brands in Asia. It was included as one of the Asia s Fab 50 Companies 2010 ( ) compiled by Forbes, the only dairy company in China on the roll, and ranked 20th in the Top 50 Most Valuable Chinese Brands 2010 ( ) published by WPP, a world leader in marketing communications, recognising its brand value WPP China Mengniu Dairy Company Limited Annual Report 2010

23 Management Discussion and Analysis (Continued) Products Catering for consumers in pursuit of a healthy life and quality products along with the enhancement of society standards, the Group stepped up its efforts on the enhancement of milk sources and upgraded the supply of raw milk fully guaranteeing quality products manufactured from superior grades of milk. Meanwhile, Mengniu also focused on market segmentation, product R&D, quality improvement and portfolio enhancement to meet the needs of the market. By offering consumers natural dairy products with premium quality and advocating the concept of green living, Mengniu led the market through innovations and the concept of healthy life. Liquid milk Revenue from the liquid milk segment amounted to RMB26,871.8 million, an increase of 18.2% as compared with RMB22,736.2 million in 2009, accounting for 88.8% (2009: 88.4%) of the revenue of the Group as its major income source % 88.8%88.4% UHT milk Revenue from UHT milk products grew by 18.3% to RMB16,790.4 million (2009: RMB14,196.2 million), accounting for 62.5% (2009: 62.4%) of liquid milk segment revenue. UHT UHT 18.3% %62.4% The Future Star Milk ( ) series was upgraded by adding DHA algal oil through the application of advanced technologies. The Upgraded Wisdom ( ), Upgraded Vitality ( ) and Upgraded Youhu ( ) series were launched to cater for different stages of growth of children. Future Star Milk ( ) garnered numerous awards during the year, including the Innovative Product Award at the French International Food Fair (SIAL) ( SIAL ), the Monde Selection prize by the Belgian International Institute for Quality Selections, which is known as the Food Nobel Prize ( ), evidence of its remarkable success. Milk Deluxe () continued to be a mainstay high-end milk product, and under its product series, Milk Deluxe Chunxian ( ) was launched. With phytosterol esters and food fiber, it effectively balances the level of cholesterol in the human body, and enhances health, digestion and absorption. The product was well received by white-collar workers. Milk Deluxe () high-end product DHA SIAL Monde Selection

24 Management Discussion and Analysis (Continued) series sponsored the On the Stage with Lang Lang, a Splendid Life with Milk Deluxe ( ), leveraging the outstanding musical achievements of Lang Lang and his image as an international elite to highlight the top brand image of the product. Currently, members of the Milk Deluxe Club ( ) reached 1.22 million, which gathered a social group with relatively greater influence and demand for high-end living quality. Mengniu launched XinYangDao Zhenyang Milk (), which was the first in China developed for improving blood circulation and skin beauty of females. The mid-range to high-end product tailor-made for female consumers has combined essences of donkey-skin, medlar and red jujube, considered to be beneficial to blood circulation. 122 Milk beverages Revenue from the milk beverages segment was RMB7,336.2 million (2009: RMB6,387.3 million), increased by 14.9% from last year, accounting for 27.3% (2009: 28.1%) of the liquid milk segment revenue % 27.3%28.1% Mengniu continued to devote efforts on innovation and R&D. Featuring a high-end fashionable style, Fruit Milk Drink () obtained three independent intellectual property patents across the world, including one formula development patent and two production process patents, and has gained wide recognition in the market. The brand affinity of Suan Suan Ru () was strengthened by charity and through sponsorship of the Mengniu Suan Suan Ru Music Dream Academy ( ), and achieved market penetration aided by its positive brand image associates with Music, Dream and Charity. Its Fruit and Vegetable Suan Suan Ru ( ) contains a variety of nutritional elements to build a Pyramid of Nutrition () and supplement daily nutritional requirement for consumers pursuing health. Specially designed for children, Miao Miao Fruit and Vegetable ( ) focused on the two new tasty strawberry and pineapple flavours. Added with isomaltose ( ), the product is effective in aiding digestion. Not only does the product cater for children s demand for tasty beverages, but also helps children to ingest balanced nutrition and spur healthy growth. In addition, Mengniu launched a brand new series of Yiyou Te (), produced in plastic packages featuring vitamins and newly added special nutrients derived from quality milk (galactooligosaccharides, whey protein and milk minerals). This new product has further expanded the Group s product mix. China Mengniu Dairy Company Limited Annual Report 2010

25 Management Discussion and Analysis (Continued) Yogurt Revenue from the yogurt segment grew by 27.5% to RMB2,745.2 million (2009: RMB2,152.7 million), accounting for 10.2% (2009: 9.5%) of the liquid milk segment revenue. 27.5% % 9.5% Champion (), the bi-functional yogurt with a dominant position in the yogurt market, was honoured with the Innovative Products Award at the French International Food Fair (SIAL) ( SIAL ), the International Food Industry Award () presented by the International Union of Food Science and Technology ( ) and the Most Innovative Product Idea Award ( ) at the China International Health Brand Introduction Conference (). It was the first yogurt brand of Mengniu to obtain national certification as a health-care product and has enjoyed overwhelming favourable market response. Besides, Champion () spread consumers understanding and knowledge of its products and enhanced its image as the top yogurt brand through the Champion Technology Pavilion ( ) during the Shanghai World Expo period. The natural, pure and quality Inner Mongolia Old Yogurt ( ), produced with Mengniu s modernised technology to enhance its smooth and delicate texture, has become one of the best-selling yogurt products during the year. Youyi C ( C), which is rich with probiotic lactobacillus casein and fat-free, was well received by health-conscious consumers as it aids digestion. SIAL C C Ice cream Revenue of the ice cream segment amounted to RMB3,111.5 million (2009: RMB2,685.1 million), up 15.9% from last year, accounting for 10.3% (2009: 10.5%) of the revenue of the Group % 10.3%10.5% By enriching product categories, strengthening the development of midrange to high-end products and expanding market coverage, its product sales grew continually. With Sui Bian ( ), Ice+ ( +) and Mood for Green () as the three major brands, Mengniu continued to enrich its product series. Sui Bian ( ) maintained its brand image of Ready-for- Change () and initiated the Endless Joy with One More ( ) campaign for a second time to stimulate the consumption market. It has launched the new Euro ( ) series with big chocolate chips + +

26 Management Discussion and Analysis (Continued) added to bring an unique texture and a double taste to consumers. Ice+ ( +) launched Cranberry+Yogurt Flavor Bar (+ ), offering consumers with taste sensations for summer refreshment. Under the Mood for Green () brand, Lueshasha () was launched, which is an authentic flavour with green beans and cane sugar-free, satisfying health conscious consumers. + Other dairy products Revenue from other dairy products amounted to RMB282.1 million (2009: RMB289.2 million), accounting for 0.9% (2009: 1.1%) of the revenue of the Group % 1.1% For milk powder, ChaoJinzhuang ZhiJiayi ( ), a product of MENGNIU ARLA (), was launched with the amount of probiotics increased fourfold to provide sufficient nutrition for infants and improve their immune systems and their all-round development. In view of the growing demand for international branded milk powder in the market at present, Mengniu is poised to tap business opportunities through internal structure reform and rebranding. In addition, Mengniu has conducted market research during the year to gain a thorough understanding of market preferences. Tracing closely the trend of market development, the Chinese name of MENGNIU ARLA () was renamed as MENGNIU ARLA ( ) in December 2010 to focus on the high-end market. MENGNIU ARLA () is undergoing a comprehensive quality upgrade and is to be launched into the market with a brand new packaging, aiming to build a clear international brand image, embellishing the position of Mengniu s milk powder in the high-end market. In respect of cheese, the Group has continued its R&D to develop cheese products that are suitable for the taste of Chinese. Focusing on the promotion of three major product series, namely Family Breakfast Cheese (), Growth Cheese () and Soft Cheese (), the Group further enhanced its market penetration. In particular, the Growth Cheese ( ) series was Mengniu s focus in promotion. The Tour to Woolearn Academy ( ) campaign was organised to increase product exposure, deepen consumers knowledge of the product and capture the expanding market share of children s cheese. China Mengniu Dairy Company Limited Annual Report 2010

27 Management Discussion and Analysis (Continued) Quality Control In response to the further implementation of various national policies in the PRC to strengthen the supervision and evaluation of the safety of dairy products, the Group adhered to its serious attitude towards quality control at every stage of its production process. Efforts have been made to enhance the testing level and supervision over food safety. On the basis of the certifications already obtained for its quality control, environmental management, occupational health and safety management as well as food safety management, the Group continued to embark upon its implementation of GMP for dairy products production, obtaining GMP certification for seven of its production plants. The Group s five laboratories in Beijing, Jiaozuo, Ma anshan, Wuhan and Shenyang also passed evaluation earning qualification certificates, providing a sound guarantee for the Group s technological advancement in daily inspection of its products. To actively foster external cooperation in respect of laboratory testing projects, the Group collaborated with the Chinese Academy of Inspection and Quarantine () to establish a Joint Dairy Products Laboratory (), to jointly engage in the R&D of new methods for supervising and testing food safety. To strengthen its control over suppliers quality and ensure the quality and safety of the raw materials, the Group has also established a supplier quality management department to engage in regular guidance work in evaluating its suppliers. Production and Operations During the year, the Group continued to strive to expand production capacity. The aggregate annual production capacity increased to 6.5 million tons in December 2010 (2009: 5.76 million tons). GMP GMP By introducing technologically advanced production facilities including a fully automated high-speed injection machine () and fully automated packaging machines ( ) from France and Italy, the Group s per-capita production capacity and production rate of labour had been effectively boosted. Working around the idea of selling to where it is produced, the Group has established additional liquid milk production bases in northeastern China and more milk beverages production bases in southern China as well, in accordance with the regional diversification of the raw milk supply and market demand. Plant facilities were deployed for the second time, by enhancing the utilisation of its facilities and achieving the matching of production and sales, so that allocation of resources can be optimised. Further, in constructing new production plants, the Group paid special attention to the use of energy-saving equipment to reduce its operating costs.

28 Management Discussion and Analysis (Continued) The reform of the Group s internal structure has contributed to the integration of the existing production units under the Group which had previously been running quite separately. This move has created favorable conditions for the sharing of resources and cost saving. In addition, asset enhancement projects have been initiated, which have involved the handling of idle equipment and slow-moving components in operations by way of redeployment, re-sale or disposal. Meanwhile, an operating costs reduction project was put under trial run by the High Tech Department of the Group which aimed at reducing operating costs and enhancing the level of operational management. The project has delivered a promising initial performance and is planned to be promoted to various production regions under the Group. Enhancement of Milk Sources The enhancement of milk sources is taken by Mengniu as the key to being a leader in the industry. For years, the Group has been putting in continuous efforts in building up a pool of milk sources, stressing the modernisation of raw milk production and the tracking of such milk sources, which would secure the production of safe and reliable dairy products. During the year, the Group invested more than RMB700 million in enhancing these milk sources and supporting their production. This included providing of OCR 7 China Mengniu Dairy Company Limited Annual Report 2010

29 Management Discussion and Analysis (Continued) entrusted loans, prepaying for raw milk, investing in large scaled ranches and constructing in modernised ranches facilities. These ranches are all equipped with standardised and professional equipment and encouraged to apply modern cattle raising technology, creating favorable conditions for the provision of stable raw milk production and quality, and further raising the proportion of milk sources provided by ranches and scaled farms to more than 70% in 2010, well above the industry level. In addition, the Group has extended its reach to dairy farmers for providing technical services, establishing dairy farm technology service centres to provide allround services to milk farmers who could learn scientific techniques in cattle raising and in disease prevention and treatment. The Group also provided instruction in actively enhancing the level of supervision of the safety of fodder and drugs, monitoring the use of cleansing equipment by milk farmers and the inspection of cattle s health, adjusting and reducing the transportation time of milk-carriers for enhancing freshness of raw milk, all with a view to fully securing the good quality of Mengniu s dairy products at the upstream links of the production chain. R&D Achievements The Group has been stressing the importance of investing in R&D. This investment has given rise to the continuous increase in the technological level of the Group and kept the Group in a leading position well ahead of its peers. During the year, Mengniu set up its overseas R&D station in Paris and overseas information stations in Geneva and Tokyo, for closer connection with the latest development trends of global technology and timely introduction of internationally leading technology. Meanwhile, Mengniu has also strengthened its independent innovation and R&D capability, and has been approved by the PRC s Ministry of Human Resources and Social Security for establishing a post-doctoral scientific research centre. Adding to that is the Group s breakthrough development in its joint scientific research project with Harbin Institute of Technology on Development of Lactic Acid Bacteria and Fermentation Agents with Self-owned Intellectual Property Rights (). The project was evaluated by experts of the Chinese Institute of Food Science and Technology ( ) that the achievement was vital to the development of lactic acid bacteria for domestic dairy enterprises. This achievement is also a boon to the Group in its R&D of yogurt products which are better suited to the body features of Chinese. As at 31 December 2010, Mengniu has, on a cumulative basis, submitted 1,012 patent applications and obtained patents in respect of 750 items, out of which 88 patents were applied for and 83 patents were obtained during the year. The fruitful technological achievements have been widely deployed in the development of products and have provided the wherewithal for maintaining the leading market position of Mengniu in technological advancement. 70% 1,

30 Management Discussion and Analysis (Continued) Environmental Protection The Group has taken numerous actions in support of a green and lowcarbon economy by paying attention to various aspects of resources protection and bringing awareness of environmental protection to every detailed aspect of the Group as part of its commitment to promoting the green concept to the community as a whole. In its production operation, the Group implemented energy-saving and emission-reduction measures in each of its systems, including wise use of electricity, the renovation of equipment for reducing energy consumption, the adoption of recycling of cold/hot water in its self-built ranches, which effectively improved the utilisation of resources. Other environmentallyfriendly projects include methane power generation, sewage treatment, and turning abandoned mountains to green areas as part of its production process. Mengniu became the first dairy enterprise in the PRC to engage in carbon auditing for the full range of its production processes, in the hope of creating new approaches to the low-carbon development of the industry. In respect of brand building, the Group closely linked its corporate image to the concept of a green lifestyle and advocated the community s general recognition of environmental awareness. The Group is committed to involving all citizens in the PRC to let the Eco-China dream come true. During the year, the Group initiated 90 large-scale ecological experience activities Ecological Movement Support China ( ) in 30 cities across the PRC, and launched an online Carbon Test () in collaboration with cooperation partners on the network, to let consumers China Mengniu Dairy Company Limited Annual Report 2010

31 Management Discussion and Analysis (Continued) from different localities to easily calculate their own carbon footprints. Advocating the formation of a green ecological production chain in the dairy industry, Mengniu became a pioneer in the industry in using packaging materials which were certified by FSC. The Group has also successfully kicked off a package recycling activity in Shanghai under the slogan of Press it Flat after Drinking and Support the Recycling of Milk Cartons ( ). In addition, Mengniu also initiated a three-year Low-Carbon Enterprise Responsibility Programme () in cooperation with about 10 industry leaders such as Lenovo, Haier Group and Sohu, to harness the power of the pioneers from various sectors and jointly fostered the implementation and development of a low-carbon economy of the PRC. FSC During the year, leveraging its efforts in low-carbon economy and its longterm green charitable deeds which have been widely applauded by the community, Mengniu was recognised as the Most-Watched Low Carbon Contribution Enterprise ( ) at the First Annual China Low Carbon Forum ( ), the most authoritative and highest-ranking low-carbon forum in the PRC. Further, it was recognised as China s Outstanding Low Carbon and Energy Saving Enterprise () at the International Forum on Innovation and Development of the High-tech Enterprises of the 13th CHITEC (). It was also granted an Eco-China Contribution Award () at the First Ecological China Forum (), becoming a widely recognised ecological pioneer. Social Responsibilities The Group strongly believes that an enterprise which benefits from the community shall also contribute to the community, so it cares about social issues and participates in charitable activities all the way. During the year, Mengniu extended its Love Gifts Action, joining hands with The Foundation for Children and Teenagers () and China Milk Caring Fund () to bring the love of millions of netizens to children and promote good health and good fortune through campaigns such as the New Year s Love Gifts for Beijing Guangai School, Love Gifts Scheme for Shanghai Dabieshan Elementary School, and Wenchuan s Wishes in Chapingxiang Elementary School in An County, Mianyang City,