On August 5, the Hong Kong dairy sector made waves again. Modern Farming (01117.HK) surged over 9% intraday to HK$1.72, with cumulative gains exceeding 90% since June 26, making it one of the best-performing targets in the HK agricultural sector recently. Driving the stock's sustained rally were the official closing of its takeover offer for China Shengmu (01432.HK) and the profit forecast for the first half turning losses into gains. The market generally believes the completion of this acquisition, coupled with the earnings inflection, is sending a clear signal of a raw milk cycle reversal.
Takeover closed: Modern Farming's stake in China Shengmu rises to 83.52%
At 4:00 pm on August 3, Modern Farming's mandatory unconditional cash offer officially expired. The joint announcement showed that Modern Farming received valid acceptances for approximately 4.38 billion shares of China Shengmu, representing about 52.25% of its issued share capital; together with the approximately 2.62 billion shares held by concert party Start Great, Modern Farming and its concert parties hold a total of about 7 billion shares, representing approximately 83.52% of China Shengmu's issued share capital.
The acquisition drew market attention from its launch. Founded in 2005 and listed on the Hong Kong Stock Exchange main board in 2010, Modern Farming has long focused on large-scale dairy farming and is one of the largest raw milk producers in China, as well as a core upstream milk supplier for Mengniu Dairy (02319.HK). China Shengmu, known for organic milk, owns leading organic pasture resources in China. The synergy potential between the two companies in dairy farming and organic milk supply is immense. After the offer closed, the combined dairy cow herd of Modern Farming and China Shengmu reached 604,000 head, accounting for approximately 10.4% of the national total, marking the formation of an upstream giant controlling over one-tenth of the country's milk sources. For Hong Kong investors, this is not just an equity consolidation but also a new stage of concentration in China's dairy farming industry — leading players expand scale through M&A, and the competitive landscape is shifting from pure price competition to competition in efficiency and resource integration capabilities.
Profit alert and peak season expectations: earnings inflection emerges
Almost in tandem with the closing of the acquisition, Modern Farming issued a profit alert on July 23, expecting a pre-tax profit of no less than RMB 43 million for the first half of 2026, compared with a pre-tax loss of approximately RMB 972 million in the same period of 2025, achieving a year-on-year turnaround. The company attributes this to three factors: lower culling of dairy cows combined with higher prices, stable gross margin on raw milk sales and higher gross profit, and lower feed costs and effective operating cost control.
Notably, positive industry signals are also increasing. A research report from Guotai Haitong noted that domestic raw milk supply and demand are nearing balance, with a reversal expected in H2 2026. Given that current milk prices are at historically low levels, subsequent supply reduction could drive milk prices to recover further. Huaxi Securities said explicitly that the turnaround of leading dairy farming companies initially reveals the milk price cycle entering a reversal phase; a narrowing supply-demand gap combined with the approaching peak consumption season from August to October could accelerate a cyclical bottoming and rebound. CLSA also previously judged that China's raw milk prices have bottomed, industry overcapacity continues to decrease, and with the gradual release of formula powder and deep-processed dairy capacity and stabilizing liquid milk demand, raw milk prices will rebound in H2 2026.
Institutional views: earnings recovery and valuation re-rating
With fundamental and industry trend resonance, sell-side institutions have turned clearly positive on Modern Farming. According to statistics, over the past 90 days, four investment banks have given Modern Farming a buy rating, with an average target price of about HK$2, implying roughly 20% upside from the current price. Huaxi Securities' latest report gave Modern Farming a buy rating, believing the H1 profit alert has boosted confidence in a significant full-year profit improvement, and the company is progressing from balance-sheet financial improvement to operating profit improvement. Orient Securities maintained a buy rating on Youzan Dairy (09858.HK), noting its earnings recovery beat expectations; given that dairy farming and raw milk supply-demand are at cycle bottom and H2 is the consumption peak season, beef cattle and raw milk prices still have some probability of rising.
Why this is an allocation window for HK agricultural stocks
From a Hong Kong stock investment perspective, Modern Farming's recent rally provides a typical sample for assessing the value of the HK agricultural sector. First, HK agricultural stocks are mostly industry leaders, with valuations long in the doldrums. After years of falling milk prices and industry capacity clearing, most dairy stock prices have fully reflected pessimistic expectations. Once the cyclical turning point is confirmed, stock price elasticity tends to be significant. Modern Farming's near-doubling in a month and a half is a concentrated manifestation of this "cycle bottom + marginal improvement" logic.
Second, sustained southbound capital inflows provide liquidity support for the sector. According to BOC International statistics, net southbound capital inflows this year have exceeded RMB 700 billion, nearly doubling year-on-year, accounting for over 20% of Hong Kong's average daily turnover. Although funds have recently favored heavyweight sectors such as banks, agricultural leaders as part of Hong Kong's "core assets" tend to attract allocation capital back once earnings inflection is confirmed. At the individual stock level, southbound capital has also been quite positive toward Modern Farming: although it reduced holdings by 2.932 million shares on August 3, it increased holdings on three of the past five trading days, with cumulative net purchases of 13.056 million shares; over the past 20 trading days, cumulative net purchases reached 4.788 million shares. The capital flows reflect market divergence and trading over the pace of milk price reversal.
Third, the institutional advantages unique to the Hong Kong market are also emerging. The Hong Kong Stock Exchange has implemented the first phase of lowering the minimum stock tick size, narrowing bid-ask spreads by an average of about 35%, significantly shortening order matching time, and reducing transaction costs, which has enhanced institutions' willingness to participate in small and mid-cap agricultural stocks. In addition, Hong Kong allows flexible capital operation tools such as cash offers and convertible bonds, facilitating industrial integration — Modern Farming's rapid increase in its stake through a takeover offer is a manifestation of this institutional dividend, and it also lets investors see the unique ecosystem of the HK agricultural sector in industrial M&A.
Risk warning: cycle reversal still needs data confirmation
Of course, investors should remain rational. Current raw milk prices are still at historical lows, and agricultural product price trends are uncertain. Some agricultural companies, such as COFCO Joycome (01610.HK), still forecast losses for the first half, showing obvious industry divergence. Modern Farming's stock has risen significantly in the short term, creating profit-taking pressure; the consolidation effect and synergy value from the takeover offer also need time to materialize. Institutions generally caution that confirmation of the cycle reversal still depends on subsequent monthly milk price data and peak season consumption verification. Investors should make prudent decisions on HK agricultural stock positions based on their own risk tolerance and avoid chasing highs speculatively.
