Yayi International Inc. today released the following open letter to
investors:
Dear investors:
Both Yayi’s manufacturing base and consumer market are based in mainland
China. Yayi has always been the No. 1 leading goat dairy brand in China.
Since Yayi has consistently put quality first on all our products as our
operating motto, we have won a good reputation among consumers in China.
According to statistics obtained from 3rd parties and institutions, the
market size of the Chinese dairy market in 2012 was approximately
220-240 billion RMB with the market share of imported and domestic milk
powder being around 67%:33%. Imported infant milk powder accounted for
80% of all imported milk powder. The market size of infant formula (0-7
years old) in the dairy market was approximately 62-65 billion RMB,
while sales of infant formula goat milk powder (0-7 years old) accounted
for approximately 0.7% of sales of infant formula milk powder (0-7 years
old). Market share of infant formula goat milk powder is expected to
increase from the current 0.7% to 3% by 2016 and 5% by 2020.
The Chinese government has launched a program to relax the one-child
policy this year, and this policy will be gradually implemented in local
areas starting in 2014. There were about 16 million newborn infants in
China in 2012 and the number is expected to increase by 7% annually. The
implementation of second-child policy is perhaps to bring approximately
an additional one million newborn babies in 2014, two million in 2015
and three million in 2016.
Sales growth of Milkgoat infant formula should be in line with the
development of the Chinese dairy market. With the second-child policy
boosting the sales of Chinese mainland infant goat milk formula, we have
conservatively estimated 7%-10% growth in sales over the next three
years. We are expected to turn the business around by 2015-2016 at this
rate of growth.
Toward the end of 2013, the Chinese government introduced a new policy
to integrate the dairy industry. Infant formula manufacturers must have
a self-controlled milk source base and implement a series of inspections
of raw milk and powder to ensure good quality. The policy also
emphasizes and strengthens the standardization and technical training
for dairy cattle farming and promotes standardized scale breeding. There
were 127 Chinese domestic infant dairy manufacturers in 2013. The
Chinese government issued a series of rigorous ‘entry’ standards,
improving the requirements of the dairy manufacturing environment,
equipment, technology, quality and milk resource control. After
re-assessment and licensing in 2014, likely only 70-75 infant dairy
manufacturers (licenses) are expected to remain in business, further
reducing to maybe only 50 such licenses in 2016 and 20 in 2020. The new
policy requires minimum asset value of dairy manufacturers to be an
estimated 250 million RMB, with 35%-45% to be the asset value of the
milk source base.
In the Chinese dairy industry’s volatile year of 2013, our Company
achieved sales of about 86.73 million RMB, gross profit of about 50.11
million RMB, operating expense of about 38.71 million RMB,
administrative expense of about 6.96 million RMB, financial expense of
about 10.28 million RMB and a net loss of about 6.19 million RMB.
As the Chinese dairy industry is in a consolidation stage, the Chinese
government has introduced and will soon introduce policies of more
strict high market entrance standards. In this critical moment, our
Company, in order to win a key place in the dairy industry, will stick
to our priority of developing the market and improving our industry
products line. In the year of 2014, we will vigorously develop our
liquid milk and milk tablets markets: we will launch a new marketing
campaign in 2014 to carry out a limited liquid milk subscription in the
Tianjin area, projected to generate at least 10 million RMB in revenue.
This project will further extend to the whole country if successful in
Tianjin. We are developing multi-standard, multi-stage milk tablets
products targeting different consumer groups to seize the Chinese goat
milk tablets market, projected to generate at least 30 million RMB in
revenue. After studying some successful stories of the domestic Fast
Moving Consumer Goods industry, we will integrate the original milk
sales sectors as a separate milk powder division and add a liquid milk
division, milk tablets division, store counter division, health products
division and e-commerce division. The divisional model will
significantly incentivize the sales enthusiasm and benefit the company
in shortening the receivable period and increasing cash flows. In 2014,
the divisions combined are projected to generate 150 million RMB in
revenue. Our Company plans to increase the marketing expense of 25
million RMB to 30 million RMB in order to meet the requirement of the
new division marketing campaigns.
At the same time, another essential element of our competitive strength
is to strengthen the manufacturing base construction and to further
invest in production technology and equipment.
Yayi always has put great emphasis on quality control and treats quality
as our number one principle and priority. We closely monitor quality
from the minute we start collecting raw milk from its source. We have
set up proprietary dairy goat breeding farms to source raw goat milk in
Shaanxi Province to ensure high quality control of milk sources. We plan
to further invest approximately 15 million RMB. At the same time, we
have our own raw powder manufacturing and processing plant there to
ensure the high quality of our raw powder. Currently, in order to meet
the Chinese government’s stricter requirements towards milk powder
industry, the largest raw goat milk powder manufacturing base by Yayi
(with access to the most advanced technology and equipment in China) is
under construction in the Economic Development Zone, Weinan city,
Shaanxi Province. This project is in need of further investment of 35
million RMB for plant construction. Yayi expects strong support from
Shaanxi provincial government and Weinan Municipal government,
especially since goat milk is listed as one of three key industries in
the Province (the other two being apple and cotton).
In addition, another new goat milk powder manufacturing base is being
constructed in the Jinghai Industry Zone of Tianjin, China. This new
facility will implement world-leading dairy manufacturing equipment to
produce goat milk formulas, tablets, liquid goat milk. This project is
in need of further investment of 15 million RMB for factory construction
and equipment purchase. The projects mentioned above will help to lay a
solid foundation for Yayi to be the leader of the whole goat milk
industry.
The new policy will further promote China's dairy leaders to grow bigger
and stronger, integrate advantageous resources, and connect various
phases in the dairy industry supply chain. Quality milk source and
advanced technology and equipment will become entry tickets for Chinese
dairy manufacturers to compete in the market. In this regard, Yayi's
Milkgoat brand should be certain to win the title. What kind of
opportunity will be there for Yayi when we are looking at 1/75 of the
overall Chinese dairy market in the future? The answer relies on the
hard work of Yayi’s people and further investments in hardware to
enhance enterprise competitiveness in the market, thus building a solid
foundation for a win-win situation for our business and investors.
Again, Yayi apologizes for not being able to pay back the principal of
the convertible note matured in September 2013, and being unable to pay
interest since September 2012. In addition, we continue to work to
unfreeze our foreign currency account in China so we can send the
previously promised $30,000 to investors. We are truly sorry about this.
However, we believe that with your long term support and continued
efforts of our own, we together will overcome the current difficulties,
walk out of this slump, turn around Yayi’s business and be a survivor in
this long downturn of the dairy industry in China. We promise we will do
our best to meet our obligations, commit to repay our convertible note
holders and do the utmost to protect the interests of our investors.
Our company is at a turning point in 2014. We are aiming to achieve
sales of 150 million RMB and an operating profit of 86 million RMB,
while keeping operating expenses at 66 million RMB, administrative
expenses at 8 million RMB, and financial expenses at 11 million RMB. Our
targeted net income is 1 million RMB, which means to cease losses and
even go beyond breaking even. Once we have achieved net cash inflow in
2014, we will pay our investors’ principal in the amount of the lower of
15% of 2014 net income and 15% of net cash inflow.
Thank you all again for your kind support.
Yayi International Inc.
Copyright Business Wire 2014