Dairy farmers deliver fresh milk to a collection center in Inner Mongolia. Mengniu, the country's largest dairy products provider, hopes to source 100 percent of its raw milk supply from large-scale farms. Qilai Shen / Bloomberg

China Mengniu Dairy Co Ltd, the largest dairy products distributor in the country, hopes to source 100 percent of its raw milk supply from large-scale farms, up from the 85 percent currently, as part of its efforts to ensure product quality.

The company plans to spend around 4 billion yuan ($629.6 million) on building wholly-owned large ranches in China to meet part of its raw milk supply requirements.

Bai Ying, executive director at Mengniu, in announcing the company's interim results at a press conference in Hong Kong on Tuesday, said currently, large-scale ranches were already under construction in Northeast China, North China and Northwest China.

"Currently, about 84 to 85 percent of our raw milk (supply) is from large-scale farms," Bai said, adding that by the year 2015, the proportion will be increased to 100 percent."

This is one of the company's moves to improve its product quality and safety by working on the raw milk supply sources, said Sun Yiping, chief executive officer at Mengniu.

In December of 2011, products from Mengniu's Meishan plant were found to contain high levels of cancer-causing Aflatoxin M1.

"Following the detection of M1, our sales volume plunged 30 percent," said Sun, adding that despite the company's efforts in promotion and marketing, its sales volume in the first half still contracted 5 percent from same period a year ago.

Sun said that since the incident's impact has been gradually disappearing, currently, Mengniu's sales volume has recovered to the levels before the December 2011 incident.

The company's chief financial officer Wu Jingshui said that in order to protect its market share after the M1 scandal, Mengniu had launched a series of promotions and discounts in the first half, causing its gross profit margin to contract 0.3 percentage point from a year ago to 25.7 percent.

"The discounts and promotions will be less in the second half, which is good for the profit margin...but the cost of raw milk is likely to increase," said Wu, adding that its gross profit margin in the second half may stay flat or see a "slight decrease" from the first half.

Jacqueline Ko, analyst at Kim Eng Securities, told China Daily that she is optimistic about Mengniu's performance in the second half.

"The management team told us that their sales were back to normal...and as the company will reduce its promotions in the second half, (and) its gross profit margin will be increased from its first half level," said Ko.

Ko also believes that the company's commitment to constructing ranches in China is a positive gesture, as the food quality issue is a major concern in the country, and the market will be happy to see the company's efforts on improving its quality control.

She believes that Mengniu is a good company, as currently its valuation is cheap. Due to the impact of the MI incident and the slowdown in the China's dairy industry, the company's first half revenue dropped 1.2 percent.

During the first six months of this year, Mengniu recorded 6.45 million yuan as profit attributable to owners of the company decreased 18.4 percent from a year ago. The company's revenue was 18.36 billion yuan in the period, representing a 1.2 percent drop year-on-year.

sophiehe@chinadailyhk.com

(HK Edition 08/29/2012 page2)