China Modern Dairy : (020) Letter from the Independent Financial Adviser (English)

SOMERLEY CAPITAL LIMITED

20/F., China Building, 29 Queen's Road Central, Hong Kong

Telephone: [phone] Fax: [phone] E-Mail: [e-mail]

14 February 2017

To: the Independent Board Committee

Dear Sirs,

CONDITIONAL MANDATORY CASH OFFERS BY UBS AG AND DBS ASIA CAPITAL LIMITED FOR AND ON BEHALF OF CHINA MENGNIU DAIRY COMPANY LIMITED TO ACQUIRE ALL THE ISSUED SHARES IN CHINA MODERN

DAIRY HOLDINGS LTD. (OTHER THAN THOSE ALREADY OWNED OR AGREED TO BE ACQUIRED BY CHINA MENGNIU DAIRY COMPANY LIMITED AND PARTIES ACTING IN CONCERT WITH IT)

AND

FOR CANCELLATION OF ALL OUTSTANDING OPTIONS IN CHINA MODERN DAIRY HOLDINGS LTD.

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee in relation to the conditional mandatory cash offers by UBS and DBS on behalf of Mengniu to acquire all the issued CMD Shares not already owned or agreed to be acquired by Mengniu and its Concert Parties, and for cancella tion of all outstanding CMD Options. Details of the Offers are set out in the Composite Document dated 14 February 2017, of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Composi te Document unless the context otherwise requires.

As set out in the Joint Announcement, Mengniu entered into the SPA, pursuant to which Mengniu has condi tionally agreed to acquire and Success Dairy II has conditionally agreed to sell 965,465,750 CMD Shares (being the Subject Shares) for a consideration of HK$1,873,003,555, representing HK$1.94 or US$0.25 per CMD Share at SPA Completion. Further details of the SPA are set out in the Joint Announcement. SPA Completion took place on 7 February 2017 where by the Subject Shares were transferred by Success Dairy II to Mengniu SPV, as directed by Mengniu. Immediately following issuance of the New CMD Shares to Success Dairy II and prior to the SPA Completion, Mengniu and its Concert Parties (other than Success Dairy II) were interested in 1,347,903,000 CMD Shares, representing approxima tely 22.0% of the then total issued share capital of CMD. Immediately following the SPA Completion but before commencement of the Offers, Mengniu and its Concert Parties beneficially own in aggrega te of 2,313,368,750 CMD

Shares, representing approxima tely 37.7% of the total issued share capital of CMD as a t the Latest Practicable Date. Accordingly, upon the SPA Completion, Mengniu is required to make (i) a conditional mandatory cash offer for all the issued CMD Shares not alrea dy owned or agreed to be acquired by Mengniu and its Concert Parties pursuant to Rule 26.1 of the Takeovers Code; and (ii) an appropria te offer to the Optionholders for the cancella tion of the outstanding CMD Options pursuant to Rule 13 of the Takeovers Code.

The Independent Board Committee comprising all non-executive CMD Directors and independent non-execu tive CMD Directors (who have no direct or indirect interest in the Offers other than the holding of the CMD Options), namely Mr. SUN Yugang, Mr. LI Shengli, Mr. LEE Kong Wai Conway, Mr. KANG Yan and Mr. ZOU Fei, has been established to advise the CMD Shareholders and the Optionholders as to whether the Offers are fair and reasonable and as to their acceptance. Mr. YU Xubo, Mr. WOLHARDT Julian Juul, Mr. HUI Chi Kin Max and Mr. ZHANG Ping, all of whom are non-executive CMD Directors, do not f orm part of the Indepen ent Board Commi ttee due to their respective interests in the Offers as out in the section headed "Independent Board Committee and Independent Financial Adviser" in the "Letter from the CMD Board" of the Composite Documen t. The Independent Board Committee has ap proved our appointment as the Independent Financial Adviser to advise the Independent Board Committee in rela tion to the Offers.

During the past two years, Somerley Capital Limited has acted as the independent financial adviser to the independent board committee and the independent shareholders of Yashili International Holdings Ltd (stock code: 1230) ("Yashili"), a subsidiary of Mengniu, in relation to (a) two major and connected transactions as detailed in Yashili's circulars dated 29 October 2015 and 3 May 2016 respectively; and (b) continuing connected transaction as detailed in Yashili's circular dated 23 November 2016. The af oresaid past engagements were limited to providing independent advisory services to the independent board committee and the independen t shareholders of Yashili pursuant to the Listing Rules, for which Somerley Capital Limi ted received normal professional fees. Accordingly, we do not consider the past engagements give rise to any conflict of interest for Somerley Capital Limited in acting as the Independent Financial Adviser.

We are not associated wi th CMD, Mengniu or any party acting, or presumed to be acting, in concert with any of them and, accordingly, are considered eligible to give independent advice on the Off ers. Apart from normal professional fees payable to us in connection with this appointment, and except as disclosed above, no arrangement exists whereby we will receive any fees or benefits f rom CMD, Mengniu or any party acting, or presumed to be acting, in concert with any of them.

BASIS OF OUR OPINION

In f ormulating our opinion, we have reviewed, among other things, (i) the Composite Documen t; (ii) the annual report of CMD for the year ended 31 December 2015, and the interim report of CMD for the six months ended 30 June 2016; (iii) the announcements published by CMD on the website of the Stock Exchange since 1January 2016; and (iv) the ma terial change statement set out in Appendix II to the Composite Document. We have sought and received confirmation from the CMD Directors that no

material facts have been omitted from the information supplied and opinions expressed by them. We consider that the information we have received is sufficient f or us to reach our opinion and recommendation as set out in this letter. We have no reason to doubt the truth and accuracy of the informa tion provided to us or to believe that any material facts have been omitted or withheld. We have, however, not conducted any independent investigation into the business and affairs of the CMD Group or Mengniu Group, nor have we carried out any independent verification of the information supplied. We have also assumed that all representations contained or referred to in the Composite Document are true as at the La test Practicable Date, and that the CMD Shareholders will be notified of any ma terial changes to such representations as soon as reason_ably practicable during the Offer Period.

We have not considered the tax and regula tory implica tions on the CMD Shareholders and the Optionholders of acceptance o.r non-acceptance of the Offers since these depend on their individual circumstances. In particular, CMD Shareholders and Optionholders who are resident overseas or subject to overseas taxes or Hong Kong taxation on securities dealings should consider their own tax positions and, if in any doubt, consult their own professional advisers.

PRINCIPAL TERMS OF THE OFFERS

The Share Off er

UBS as the financial adviser and DBS as the joint financial adviser, are making the Offers, for and on behalf of Mengniu on the following basis:

For each Offer Share . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$1.94 or US$0.25 in cash

The Offer Price of HK$1.94 or US$0.25 for each Offer Share under the Share Offer is equivalent to the consideration per CMD Share of HK$1.94 or US$0.25 pursuan t to the SPA, assuming the Investor Option is exercised and as determined using the Exchange Rate.

The Off er Price will remain at HK$1.94 or US$0.25 per CMD Share and will not be increased, and Mengniu does not reserve the right to do so. Further, the Off ers will be open f or acceptance f or 21 days f ollowing the date on which the Composite Document is posted. Unless the Off ers become unconditional as to acceptances, the Off ers will not be extended beyond the first date on which they are permitted to be closed.

The Option Off er

For each CMD Option with exercise price

below the Offer Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$1.94 or US$0.25

less the exercise price in respect of the relevant CMD Option in cash For each CMD Option with exercise price

above the Offer Price . . . . . . . . . . . . . . . . . . . HK$0.0001 or US$0.000013 in cash

Further details regarding the Option Offer is set out in the "Letter from UBS and

DBS" of the Composite Document.

As at the Latest Practicable Da te, there are 6,131,406,706 CMD Shares in issue (of which 2,313,368,750 are held by Mengniu and its Concert Parties) and 315,401,705 outstanding CMD Options conferring rights on the Optionholders to subscribe for CMD Shares. Out of the 315,401,705 CMD Options, there are 215,757,083 CMD Options with exercise prices lower than the Offer Price and 99,644,622 CMD Options with exercise prices higher than the Offer Price.

Conditions to the Off ers

The Share offer is conditional only upon Mengniu through its nominee, Mengniu SPV, having received acceptances in respect of th_e CMD Shares which, together with the CMD Shares held by Mengniu and its Concert Parties as at the Latest Practicable Date, will result in Mengniu and its Concert Parties holding more than 50o/o of the total issued share capital of CMD.

The Option Offer will be conditional only upon the Share Offer becoming or being

declared unconditional. The last day on which the Offers can become unconditional is the First Closing Date.

Non-Accepting Shareholders

As set out in section headed "Non-Accepting Shareholders" in the "Letter from UBS and DBS" of the Composi te Document, Mengniu and CMD have received written unconditional and irrevocable conf irma tions and undertakings from certain CMD Shareholders that they will not accept the Share Offer. As at the Latest Practicable Date, the number of CMD Shares held by the Non-Accepting Shareholders was 564,983,938, representing approxima tely 9.21% of issued CMD Shares (assuming none of the outstanding CMD Options is exercised). Further details in relation to the Non-Accepting Shareholders are set out abovementioned section of the Composite Document.