Yuran Agriculture's shortsightedness and Yili's "long-term strategy": How to fill the 15 billion gap?

Ask AI · What’s the deeper meaning behind Yili’s positioning at the bottom of the dairy cycle?

By | Yishi Finance | Dongyang

Edited by | Gao Shan

At the start of 2026, China’s dairy industry has seen an unusual round of capital moves. On January 16, Yili announced that, through its overseas wholly owned subsidiary and a complex set of operations described as “sell first, buy later, and add to the position,” it withdrew a total of HKD 1.173 billion, raising its stake in Synlait Milk Industry (the global largest raw milk supplier) only from 33.93% to 36.07%, with a marginal increase.

On one side, Yili is “injecting” more than HKD 1.1 billion in real cash; on the other side, Synlait has a short-term funding gap of more than RMB 15 billion. This infusion is like a drop in the bucket. This is certainly not a simple rescue from the parent to the subsidiary—it reflects the cyclical predicament in China’s dairy upstream, the short-sighted consequences of Synlait’s aggressive expansion, and the deeper strategy and calculation behind Yili—the industry leader’s layout across the entire value chain.

I. How to fill the 15 billion funding gap?

To understand the essence of this deal, first we need to break down the operational details of “sell first, buy later, and add to the position.” According to Yili’s official announcement, the entire transaction is completed in two steps:

The first step is a “swap from old to new” replacement operation. Yili’s overseas subsidiary, Boyuan Investment, first places and sells 299.25 million old shares of Synlait held by it to at least six independent investors at a price of HKD 3.92 per share. At the same time, Synlait issues an equal number of new shares to Boyuan Investment at the same price. With this in-and-out arrangement, Yili’s ownership ratio does not change at all, yet it helps Synlait obtain about HKD 1.159 billion of net proceeds from the external market, without diluting its own control.

The second step is Yili’s additional share acquisition. After completing the above replacement, Boyuan Investment again subscribes for an additional 299.25 million new shares of Synlait at the same price of HKD 3.92 per share, for total investment of HKD 1.173 billion. After the entire transaction is completed, Yili’s combined ownership ratio in Synlait rises from 33.93% to 36.07%, further consolidating its position as the largest shareholder.

After this whole operation, Synlait’s total net proceeds are approximately HKD 2.33 billion. According to the company’s announcement, about 55% of the funds will be used to repay interest-bearing debts and optimize the capital structure, with the remainder used to replenish working capital. Based on this calculation, of this fund-raising amount, only about HKD 1.28 billion can be used to repay debts—given Synlait’s massive debt gap, it only buys a brief window of breathing room.

Synlait’s funding predicament has long been public knowledge. Based on data from the company’s 2025 interim report, as of the end of June 2025, Synlait’s cash and cash equivalents were only RMB 1.681 billion, while short-term borrowings due within one year totaled as much as RMB 17.332 billion. Roughly calculating, the company’s short-term funding gap exceeds RMB 15 billion. Meanwhile, the company’s asset-liability ratio has remained at a high level; from 2023 to the first half of 2025 it was 71.65%, 72.15%, and 71.77% respectively, far above the industry average.

More severe still, Synlait has fallen into a loss trap of “increasing revenue but not profits.” Financial reports show that from 2023 to the first half of 2025, the company’s net profit attributable to shareholders was RMB -1.050 billion, RMB -0.691 billion, and RMB -0.297 billion, respectively, with total losses over two and a half years exceeding RMB 2.0 billion. Although the first half of 2025 saw narrower losses and net cash inflow from operating activities reached RMB 2.869 billion, high finance costs and asset impairment continue to steadily consume the company’s profits. For example, in the first half of 2025 alone, the company’s finance costs were as high as RMB 0.395 billion.

For Synlait, mired in debt, this fund-raising of HKD 2.3 billion cannot fundamentally fill a debt gap on the order of 10 billion, nor can it solve the company’s core operating issues. And for Yili, this seemingly “loss-making” transaction actually has a deeper logic far beyond “rescue with a blood transfusion.”

II. The short-sighted “bitter fruit” of aggressive expansion

Synlait’s predicament today was not formed overnight. It is the inevitable result of its short-sighted behavior since listing—aggressive expansion, misjudging the cycle, and over-reliance on a single customer—concentrated and exposed during the industry downturn.

Synlait has a natural blood tie with Yili. Its predecessor was Yili’s animal husbandry business division. In 2015, it was formally spun off from Yili to operate independently. In June 2021, it listed on the Hong Kong Stock Exchange, raising a total of about HKD 4.994 billion at an issue price of HKD 6.98 per share, with net proceeds of about HKD 3.24 billion. It became, in name and reality, “China’s dairy upstream No. 1 stock.”

At the beginning of its listing, Synlait already wore the halo of “the world’s largest raw milk supplier.” With Yili’s order support, it embarked on a path of frantic industry consolidation and capacity expansion.

Starting in 2019, Synlait quickly built a full value-chain layout through a series of acquisitions. In 2020, it completed a controlling acquisition of Cykostar, a leading domestic dairy cattle breeding company, filling the shortage in the topmost breeding segment of the industry chain. In October 2020, it acquired six core ranches under Fonterra China for RMB 2.31 billion, expanding the capacity for high-end milk sources. In March 2022, it acquired 27.16% of the equity of Zhongdi Dairy for HKD 1.206 billion, further increasing the market share of its domestic core dairy cattle milk source belt. At the same time, the company continuously built new ranches to expand the scale of dairy cattle inventory. By the end of June 2025, the company operated 100 large-scale ranches nationwide, with dairy cattle inventory of 623,400 head, achieving several-fold growth compared with the end of 2019.

Aggressive expansion directly boosted the company’s leverage. Data shows that Synlait’s asset-liability ratio was only 36.09% in 2017, but by the 2025 interim report it had surged to 71.79%, nearly doubling. The net proceeds of HKD 3.24 billion raised in 2021 were quickly consumed amid ongoing capital expenditures. From 2021 to 2024, the company’s net cash flow from investing activities was consistently significantly negative, totaling more than RMB 29.4 billion—continuous investment completely drained the company’s cash flow.

More lethal than aggressive expansion was Synlait’s serious misjudgment of the industry cycle. In 2020–2021, domestic raw milk prices were in an uptrend cycle, peaking at RMB 4.38 per kilogram, and industry sentiment was booming. Synlait leveraged this cycle high point to expand with leverage on a large scale, without setting aside any safety buffer to deal with a downturn. However, starting in September 2021, domestic raw milk prices entered a long downtrend. According to official data from the Ministry of Agriculture and Rural Affairs, in February 2026, the average price of fresh milk in major producing provinces nationwide fell to RMB 3.04 per kilogram—over 30% cumulative decline from the 2021 cycle peak, returning to a near-decade low.

Raw milk prices continued falling, directly breaking through ranch profitability thresholds. The share of companies suffering losses expanded to more than 90% in the industry. Although Synlait improved performance through technical optimization, raising annualized milk yield per productive cow to above 13 tons, and in the first half of 2025 the cost per kilogram of milk feed decreased year-on-year by 12%, it still could not offset the impact of lower milk prices. More awkwardly, the enormous production capacity formed through expansion was almost entirely tied to Yili as a single customer.

Financial reports show that in the first half of 2025, Synlait’s revenue from selling raw milk to Yili accounted for 94.8% of its total raw milk revenue. The two parties formed a deep bind through long-term contracts under a procurement-and-sales “packaging” model. This kind of model brings stable income for Synlait in an upcycle, but in a downcycle it leaves the company completely deprived of independent market-based capabilities and resilience to risks. Once growth in downstream dairy product consumption slows down and Yili’s demand for raw milk undergoes structural adjustments, Synlait does not have sufficient alternative customer channels to absorb capacity, and can only passively endure dual pressure from both price and volume.

Meanwhile, the two big mountains pressing on Synlait are high depreciation and finance costs brought by the heavy-asset model. Even if the company’s operating cash flow achieved a positive inflow in the first half of 2025, it still could not cover the huge finance costs and losses from biological asset impairment. To relieve cash flow pressure, the company had to start selling assets. In June 2025, Synlait announced selling its Ruminant Animal Nutrition and Health Technology Research Center for a price not exceeding RMB 250 million to supplement cash flow. But such “patching one hole by breaking another wall” operations fundamentally cannot solve the root problem.

From “China’s dairy upstream No. 1 stock” to becoming trapped in a debt predicament on the order of billions, Synlait’s fall is, at its core, the inevitable outcome of short-sighted expansion. It mistook the industry cycle’s dividend for its own core competitive strength, bet on scale with leverage at the peak of the cycle, yet failed to establish independent profitability and resilience to risks. In the end, when the cycle turned downward, it could only rely on its major shareholder, Yili, to “keep it alive” with a blood transfusion.

III. Why did Yili have to rescue?

For Yili, this add-on position of HKD 1.173 billion is by no means a simple “rescue.” It is—at the bottom of the industry cycle—locking in a key chess move for the future of China’s dairy upstream at the lowest possible cost, backed by deep scheming that runs throughout Yili’s full value-chain layout.

“Whoever controls milk sources controls the world” is an iron rule that has remained unchanged for decades in the development of China’s dairy industry. Milk sources, as the most core raw material for dairy products, directly determine product quality, costs, and supply-chain security. They are the foundation of a dairy company’s core competitiveness. As China’s dairy leader, Yili has long treated independently controlled and traceable milk sources as a core strategy, and over the years has continuously improved its self-controlled milk source ratio through self-built operations, minority stakes, and controlling stakes. As the world’s largest raw milk supplier, Synlait is a core vehicle in Yili’s milk source layout. The raw milk it produces directly supports the stable supply of Yili’s core premium categories such as Yili Jin Dian and Yili Golden Collar.

The most core value of this “sell first, buy later, and add to the position” operation is that Yili uses minimal cost to further solidify its control over Synlait, while also achieving effective risk isolation.

In this entire transaction, Yili only paid HKD 1.173 billion to increase its ownership ratio by 2.14 percentage points. At the same time, through the “old-to-new” replacement operation, it helped Synlait introduce HKD 1.159 billion in funds from the external market without Yili having to bear all of Synlait’s debt pressure itself. More importantly, because Synlait is an independent listed entity and Yili is the largest shareholder, Yili does not need to consolidate Synlait’s huge liabilities into its own consolidated financial statements. It firmly controls the milk source, while isolating debt risk outside the listed company system, thereby avoiding deterioration of its own balance sheet.

At the same time, Yili continued to strengthen operational and financial oversight of Synlait. In June 2025, after Synlait completed board adjustments, Bai Wenzhong, former director of Yili Group’s financial shared service center, and Li Lin, former deputy general manager for budget analysis, were appointed as non-executive directors. They directly stepped into the company’s financial and operational decision-making—helping standardize financial operations, curb impulsive expansion, and further strengthen supply-chain coordination to ensure the safety of Yili’s milk source supply.

A deeper strategic logic lies in Yili’s precise grasp of the dairy industry cycle. Currently, domestic raw milk prices have already hit a trough and stabilized. According to data from the Ministry of Agriculture and Rural Affairs, in February 2026 the prices of fresh milk in major producing provinces turned from a decline to an increase month-on-month. The industry widely interprets this as a key sign of a cyclical turning point. Research reports from multiple brokerages, including Founder Securities and Shenwan Hongyuan, have judged that the domestic raw milk market in 2026 will enter an upcycle. As smaller and mid-sized ranches continue to clear out, the supply-demand structure will keep improving, and milk prices are expected to rebound steadily.

Yili’s add-on position at the bottom of the cycle is essentially a precise bargain-hunting move. Once raw milk enters an upcycle, Synlait’s performance is expected to reverse quickly. A March 2026 research report from Shenwan Hongyuan predicts that Synlait’s net profit attributable to shareholders in 2026 could reach RMB 1.39 billion, turning losses into profits. By then, Yili would not only benefit from equity appreciation, but also lock in milk supply during the upcycle, avoiding cost increases and supply-chain volatility and further widening the gap with competitors.

Looking at the longer-term industry landscape, Yili’s layout is designed to control pricing power and the right to speak in China’s dairy upstream. Currently, China’s dairy upstream is in a stage of accelerating market clearing: smaller ranches continue to exit, industry concentration keeps rising, and market share held by leading ranching companies will continue to expand. By controlling Synlait and simultaneously laying out businesses such as Zhongdi Dairy and Cykostar, Yili has built a full value-chain closed loop of “breeding—feed—ranching—processing,” giving it control over the most core capacity for high-quality milk sources in China.

This full value-chain layout not only ensures Yili’s own milk supply, but also allows Yili to hold absolute initiative in industry competition. In the face of future stock-based competition within the dairy industry, milk-source cost will become a core competitive factor for dairy companies. By controlling the upstream, Yili can achieve precise control of milk-source costs, support R&D and promotion of premium products, continuously improve its product gross profit margins, and consolidate its leading position. At the same time, through the market-oriented operations of Synlait, Yili can also provide technical services to the industry—such as breeding and feed and ranching—opening up new growth space.

For China’s dairy industry, this transaction marks the industry’s entry into a new stage of development. In the future, competition in the dairy industry will no longer be only competition among individual products and channels, but competition across the integrated value chain. The ability of downstream leaders to control upstream milk sources will become the core factor determining the industry’s competitive landscape. Upstream ranching companies must also break free from excessive dependence on downstream dairy companies. Only by building core competitiveness through technological innovation and refined management can they achieve sustainable development amid cyclical fluctuations.

Author’s statement: Personal views are provided for reference only