China Modern Dairy Holdings Ltd. (1117.HK) returned to profitability in the first half of 2026, posting a net profit of 15.29 million yuan. This marks a sharp reversal from the net loss of 913 million yuan recorded in the same period last year.

The turnaround was driven largely by improved valuation of biological assets rather than raw milk pricing. While revenue grew 8.6% year-over-year to 6.59 billion yuan ($981 million), the average selling price for raw milk actually declined 2.4% to 3.21 yuan per kilogram.

What the Numbers Show

The divergence between operational performance and reported profit is stark. The company’s raw milk gross margin contracted to 29.5% from 30.2% in H1 2025, reflecting weak milk prices despite lower production costs. However, paper losses on dairy cow revaluation narrowed by more than 1 billion yuan, dropping to 760 million yuan from 1.82 billion yuan previously. This reduction in asset write-downs accounts for nearly the entire earnings swing, indicating that core operational profitability remains under pressure from soft commodity prices.

Operational Metrics

Raw milk revenue increased 6.5% to 5.4 billion yuan, supported by an 8.9% jump in sales volume to 1.68 million tons. The company achieved this volume growth while shrinking its herd size by 2.5%. The proportion of milkable cows rose to 60.1%, and average annualized yield per cow increased to 13.3 tons. Consequently, total raw milk production rose 7.1% to 1.78 million tons.

Cost efficiencies also contributed to the bottom line. The cost per kilogram of raw milk fell to 2.29 yuan from 2.32 yuan. These operational improvements helped offset the decline in selling prices, though they were insufficient to expand gross margins without the benefit of reduced asset revaluation losses.

Balance Sheet and Acquisition Signals

Modern Dairy completed its acquisition of a majority 53.53% stake in China Shengmu Organic Milk (1432.HK) during the period. Shengmu posted a profit of 64.01 million yuan in H1 2026. Financial consolidation and synergies are expected to materialize in the second half of the year.

However, leverage increased significantly. Bank borrowings rose to 12.93 billion yuan as of June 30, 2026, up from 10.58 billion yuan at the end of the previous year. Financing costs climbed to 354 million yuan in H1 2026 from 292 million yuan a year earlier. This rising debt burden adds pressure to the balance sheet if milk prices do not recover as anticipated.

Industry peers showed similar patterns. Youran Dairy (9858.HK) swung to an 806 million yuan profit from a loss, aided by narrower fair value losses on biological assets. AustAsia Group (2425.HK) also returned to profit with 108 million yuan, reversing a prior-year loss of 378 million yuan.

Market signals suggest a potential recovery in milk prices in the second half of the year. National live cattle prices rose 6.13% year-over-year to 28.72 yuan per kilogram in July, contrasting with stagnant milk prices. The national dairy herd shrank sequentially by 4,000 heads to 5.77 million, potentially tightening supply.