HONG KONG - Raw milk producer China Modern Dairy Holdings Ltd, in which KKR & Co LP holds an about 24 percent stake, said that it will steadily add dairy farms to meet rapid demand, and reduce cow imports to lower costs.

Modern Dairy, which supplies most of its milk to top Chinese dairy product maker Mengniu Dairy Co Ltd, planned to operate 20 dairy farms by June 2012, up from 16 now, with dairy cows to exceed 150,000 in fiscal year ending June 2012, said Chairman Deng Jiuqiang.

The company aimed to have 30 farms by 2015, each with 10,000-40,000 cows, Modern Dairy President Gao Lina said.

Modern Dairy, a major raw milk producer in China that had 110,000 cows at the end of June, aims to slash dairy cow imports over coming years to cut costs and improve margins, Deng told Reuters in an interview on Thursday.

"We will start reducing cow imports by 2013, and definitely will not need to import cows by 2015," he said.

Modern Dairy spends up to 660 million yuan ($104 million) to import 25,000 to 30,000 cows per year from countries including Australia and New Zealand, representing about a third of China's total dairy cow imports.

As the company builds more farms and its cows reproduce, reliance on imports would naturally decline, Deng said.



China's dairy market remains in its infancy, with consumption of dairy products growing an annual compound rate of 20 percent, a stark contrast to U.S. and European markets where demand has been shrinking in the past decade.

Deng said demand for high quality milk would increase rapidly, especially in the wake of a massive industry scandal in 2008, when melamine-tainted milk powder was blamed for the deaths of at least six children.

The scandal, which hit the country's major dairy product makers including Mengniu, Bright Dairy & Food Co Ltd and Inner Mongolia Yili Industrial Group Co Ltd, also left many people ill with kidney problems and other complications.

"The China market is not facing a shortage of milk, but a shortage of good quality milk," Deng said. "As people's incomes increase, demand for high quality milk will grow rapidly."

The company's farms are mostly located in eastern and northeastern provinces such as Anhui, close to downstream dairy processing plants and feedstock supply sources.

China Modern Dairy recorded a total revenue of 1.1 billion yuan for year ended June, up 89 percent. Net profit jumped 127 percent to 243.9 million yuan.

Shares of the company, which listed in November last year, closed down 1 percent on Thursday, giving it a market value of HK$9.3 billion ($1.2 billion). The stock has lost about a quarter of its value so far this year, compared with a 18 percent fall in the Hang Seng Index. ($1 = 6.346 yuan) ($1 = 7.782 Hong Kong dollars) (Editing by Charlie Zhu and Chris Lewis)