The Inner Mongolia-based company saw sales surge by 59 per cent to CNY7.55 billion during the six months, more than compensating for the significantly higher selling expenses to promote new products during the period, as well as higher raw milk and sugar prices.
Operating profits at the group were up 40.2 per cent.
Mengniu has been taking out products with low added value and developing mid to high-end products to tap demand from specific consumer segments. According to company spokesman Lin Tong, the firm's strategy was developed with consultants McKinsey & Company.
Lin told the China Daily that the international consultancy helped Mengniu draw up a five-year development plan in the beginning of this year to help it face off pressure on earnings from higher raw material costs.
In a statement to the Hong Kong stock exchange, Mengniu explained: "Although competition for traditional products remained intense..the group saw consumers become more aware of the nutritional value and specialities of dairy products and thus demand for them is rising. The group believes that products such as functional milk beverages, yoghurt and premium milk products will be the growth drivers for the industry."
The potential is already evident from its recent performance. Milk beverages, especially the Suan Suan Ru product, grew by 114 per cent to CNY1.67 billion during the first six months, while revenue from yoghurt was up 66 per cent thanks to its perceived health benefits, said Mengniu.
The firm, renowned for its innovative advertising campaigns, sponsored a number of new family TV programmes on the national CCTV channels to promote its Suan Suan Ru milk drink range and a new children's range Future Star.
Ice cream sales climbed 46 per cent to CNY1 billion while profits were up almost 60 per cent.
Liquid UHT milk nevertheless remained the primary revenue for the group, accounting for more than 85 per cent of its sales. The company said functional products like its Hi-calcium milk were behind the 48.7 per cent growth in sales in this segment.
The functional products also helped the group increase its share of the liquid milk market by 3 percentage points since December 2005 to 31.7 per cent in June 2006, according to AC Nielsen.
Mengniu has also increased cooperation with international partners. The company signed a CNY540 million joint venture deal with Denmark's Arla Foods Ingredients in May. In its statement this week, it said it will continue to "strengthen its business cooperation with leading international dairy enterprises and seek to achieve synergy in areas such as technology, distribution and marketing".
China is now the second-largest dairy market in Asia after Japan. Mengniu, Yili and Bright Dairy hold a combined third of the entire market.
Yili's earnings rose 18.2 per cent to CNY202 million in the first half although Bright is losing market share and reported flat sales.
