Summary of Key Points
As the world's largest supplier of raw milk, Youran Animal Husbandry has seen continuous expansion in scale (revenue, livestock inventory, production) over the past five years since its listing. However, it has reported losses in its profit statements for consecutive years (2023-2025). The losses are mainly due to "impairment of biological assets" caused by declining milk prices (a matter of accounting figures, not actual cash outflows), despite the company's stable operations (gross profit has been increasing for four years in a row). Nevertheless, the company faces several significant challenges: over-reliance on its major customer Yili (selling more than 90% of its raw milk to them), high debt levels resulting from aggressive expansion (interest-bearing debt of RMB 23.4 billion, with a short-term shortfall of RMB 13.6 billion), safety management and governance issues (accidents at benchmark farms that were concealed, frequent changes in senior management), and difficulties in developing its own brand. The current industry cycle may be turning around (with reduced supply, rising beef cattle prices, and lower feed costs), but these problems must be addressed if the company is to thrive beyond the cycle.
I. The Truth Behind the "Losses": The Deceptive Nature of Accounting Figures
Many people see Youran's consecutive annual losses (RMB 1.05 billion in 2023, RMB 432 million in 2025) and assume that its business is failing. In reality, the losses are caused by a combination of "accounting rules" and an industry cycle:
- What is impairment of biological assets? Cattle are considered the company's "biological assets," and when milk prices fall, their value on the books must be reduced. For example, if the price of milk drops from RMB 5 per kilogram to RMB 3.86 per kilogram, the valuation of the cattle also decreases. In 2025, this accounting loss amounted to RMB 4.3 billion, but it does not represent actual cash expenditure; it is merely a change in the financial figures.
- How is the business actually performing? Excluding the impairment, the company's profit in 2025 was RMB 3.88 billion, an increase of 26.7% year-on-year, with a gross margin of 29.8% (compared to 34.3% for raw milk). This indicates that the company's ability to sell milk and manage its farms is sound; it's just that the financial numbers look unfavorable during a downturn.
- Can't we avoid the cycle? Consumers are hoarding cheap milk, so upstream milk prices cannot rise. However, analysts suggest that once milk prices recover and beef cattle prices increase, the impairment will decrease, allowing profits to improve—although this depends on when the cycle turns around.
II. The Relationship with Yili: A Blessing or a Curse?
Youran's relationship with Yili is very close; Yili is both a major shareholder (owning 36% of the company) and its largest customer, purchasing over 90% of its raw milk.
- Pros: During an industry downturn, smaller farms may struggle to sell their milk, but Youran does not. Yili has also provided financial support, including an investment of RMB 2.33 billion in 2026 to help repay debts.
- Cons: Youran has little bargaining power when milk prices fall as Yili can pressure down on prices. In 2025, the price of raw milk dropped by 6.2% due to this lack of influence. Moreover, if there are issues with the cooperation, Youran's revenue could be severely affected (as acknowledged in the prospectus).
- Breaking Free from Dependence: Youran launched its own brand of pure milk in 2024, but the market response was lukewarm. Transitioning from a raw milk supplier to a brand owner is not an easy task.
III. Aggressive Expansion and the Burden of Debt
Youran aimed to become "another Youran" within five years of listing and acquired several farms (Saike Star, Hengnian Tiancai China Farm, Zhongdi Dairy), increasing its livestock inventory from 416,000 to 619,000 cattle. The cost of this expansion includes:
- Astounding Debt Levels: As of 2025, the debt-to-asset ratio was 71.77%, significantly higher than industry peers. With interest-bearing debt of RMB 23.4 billion and a short-term repayment obligation of RMB 16.08 billion, and only RMB 2.4 billion in cash on hand, there is a shortfall of RMB 13.6 billion.
- Relying on External Support: The company has had to issue additional shares frequently, seek capital injections from Yili, and mortgage core assets (such as Saike Star shares and Shanxi Farm shares) to manage its finances. Financial expenses in 2023 doubled to RMB 1.28 billion, all due to interest payments—borrowed money that does not stop accruing interest even when milk prices fall.
- A Dilemma: Continuing to expand may further increase the debt ratio during a turnaround in the cycle, while reducing debt could mean missing out on growth opportunities. This burden is substantial.
IV. Safety and Governance: Hidden Issues Beneath the Bright Numbers
Youran's Wuzhou Farm is known as China's highest-producing dairy farm (with a yield of 49 kilograms per cow), but this accolade hides serious problems:
- Concealed Accidents: In 2024, two workers died while working in a sewage pond at the Wuzhou Farm, and the company concealed the incident until it was reported. The cause was improper instructions, unsafe operations, and reckless rescue efforts. If even benchmark farms have such issues, what about others?
- Environmental Complaints: In 2022, the Hohhot Farm faced complaints from residents due to poor manure management, causing odors.
- Frequent Management Changes: Since listing, there have been frequent changes in the financial director, vice president, and board chairman. In 2025, one person held multiple positions (chairman, president, and executive director), and many Yili-related personnel joined the board, leading to an unstable governance structure that can easily lead to problems.
V. A Turning Cycle Ahead, but Holes Need to Be Fixed First
The good news is that the worst of the industry's situation may be over: milk inventory has decreased by 3% (indicating reduced supply), beef cattle prices are rising, and feed costs have lowered (due to falling soybean meal and corn prices). Analysts predict that Youran could earn RMB 980-1.37 billion in 2026 and RMB 2.4-2.7 billion in 2027.
However, these issues must be resolved:
- Without addressing its reliance on Yili, profits will still be subject to Yili's performance.
- With such high debt, any expansion could lead to further debt accumulation and potential cash flow shortages.
- Unresolved safety and governance issues could damage the company's reputation if another accident occurs.
- Without a strong brand, the company can only continue to profit from selling raw milk.
To move from being the largest in scale to the most valuable in the industry, Youran must address these internal challenges one by one. Otherwise, even a cyclical upturn will only benefit its overall position temporarily.
In Summary: Although Youran Animal Husbandry is a leader in the industry, it faces numerous challenges that hinder its long-term development. Investors should not rely solely on analysts' profit forecasts but should also assess whether these risks can be effectively managed.