Rating: BUY (Initiation)
Target price: RMB25.20
Share price (17 Aug): RMB17.76
Market Cap (RMBm): 3,159.5
Up/downside: 41.9%
We initiate coverage with a BUY call and price target of RMB25.20. Xiaoming’s commercial chickens accounted for 12.52% of the domestic market share, and its business scale is within the forefront of the industry.
Analyze the development overview and future trends of egg production
China is the world's largest producer and consumer of eggs. Egg production has consistently ranked first in the world since 1985. As the per capita egg consumption of rural consumers increases, we expect egg market capacity to increase in the future. The current structure of China's egg production industry has small-scale and large-market characteristics. Compared with developed countries in Europe and the US, China's industry has room to expand in terms of breeding level and production efficiency. However, benefiting from environmental protection policy requirements and the promotion of safe production, industry concentration has continued to increase, so the trend of a large-scale breeding market seems inevitable. High-quality egg laying hen companies will enjoy a brand premium in the future, in our view.
In terms of breeding egg laying hens, although domestic heritage layer breeds have a high market share, their performance lags behind those of foreign heritage breeds. Based on in-depth research into layer breeds and the rich varieties of breeding materials, we expect the performance of domestic heritage layer breeds to gradually improve in the future, and its market share to further rise.
Xiaoming's egg and chicken business leads the industry; improving indicators
Located in Ningxia, Xiaoming integrates the introduction, production and promotion aspects of the laying hen seed business. The company uses advanced breeding models to create a sales model of centralized breeding and decentralized incubation. The products are disseminated to more than 31 provinces and regions across the country and also exported to Mongolia. In recent years, the company's various indicators have continued to improve, its market share in major segments has continued to increase, and its brand power across the product supply chain has continued to increase. Under the large-scale development trend of the layer hen industry, the company's operating strength could raise its scale advantages and bring in more major customers.
Competitive advantages; prioritizes biosafety to build up future growth
The company has established an advanced disease prevention and control system and values biosafety. It ensures safe and efficient operations through geographical isolation, strict control of vehicles and drinking water entryways, and closed-system management of breeding farms. On the basis of its biosecurity system, the company created a "centralized breeding and decentralized incubator" business model, reducing production costs via farming concentration, improving management efficiency, and innovations in farming areas, a "whole network high bed level support" welfare culture model and improving product quality, which has led to quality layer breeds that are recognized by customers, with good reputation. In terms of product sales, decentralized incubation is used to fully exploit the market, reduce product transportation losses, and achieve efficient utilization of hatchery capacity. The rapid expansion of business has formed a scale advantage. In 2020, the company's commercial chickens accounted for 12.52% of the domestic market share, and its business scale is within the forefront of the industry. A large breeding scale, mature industry network and wide-coverage sales network would help ensure its sustainable development and manage industry fluctuation risks.
Fund-raising projects: to lift production capacity and raise competitiveness
After the company's listing and fundraising, it invested funds in new layer breeding projects in Alxa League and Minning town. We expect that with the gradual implementation of fund-raising investment and construction projects, the company's breeding technology could be significantly improved to ensure future production capacity growth and strengthen its advantages in large-scale breeding.
Valuation and risks
We expect revenue of RMB680m/807m/1.01bn, up 25.97%/18.71%/24.57% yoy, and net profit of RMB115m/170m/ 136m, changing 129.43%/47.08%/-19.78% yoy, corresponding to EPS of RMB0.61/0.90/0.73. With reference to the average valuation of comparable companies, we conservatively give the company a 28x PE, corresponding to market value of RMB4.75bn in 2022E. We initiate coverage with a BUY call and price target of RMB25.2.
Risks include: risks of poultry disease; risks of raw material and price fluctuations; risks of the company's dependence on foreign layer breeders; risks of implementation of fund-raising investment projects; and risks of stock price fluctuations in the short term.
免责声明(DISCLAIMER):
此文件仅发给指定收件人或机构。其内容可能包含某种享有法律特权或者需要保密的信息。对于任何未经本公司授权而对本文件所载内容进行使用、披露、分发、变更之行为及由此产生的后果，天风国际证券集团有限公司及其联属公司和附属公司（「天风集团」）概不承担任何责任。如您并非此文件的指定收件人或机构，请立即通知天风集团，并立即销毁此文件。谢谢合作。
This message is intended only for the individual or entity to which it is addressed. It may contain legally privileged and/or confidential information. TF International Securities Group Limited and its affiliates and subsidiaries (「TF Group」) does not accept liability for the unauthorized use, disclosure, distribution and/or alteration of any information it contains or the consequences thereof. If you are not an intended recipient, please inform TF Group and destroy this message immediately. Thank you.
Rating: BUY (Initiation)
Target price: RMB25.20
Share price (17 Aug): RMB17.76
Market Cap (RMBm): 3,159.5
Up/downside: 41.9%
We initiate coverage with a BUY call and price target of RMB25.20. Xiaoming’s commercial chickens accounted for 12.52% of the domestic market share, and its business scale is within the forefront of the industry.
Analyze the development overview and future trends of egg production
China is the world's largest producer and consumer of eggs. Egg production has consistently ranked first in the world since 1985. As the per capita egg consumption of rural consumers increases, we expect egg market capacity to increase in the future. The current structure of China's egg production industry has small-scale and large-market characteristics. Compared with developed countries in Europe and the US, China's industry has room to expand in terms of breeding level and production efficiency. However, benefiting from environmental protection policy requirements and the promotion of safe production, industry concentration has continued to increase, so the trend of a large-scale breeding market seems inevitable. High-quality egg laying hen companies will enjoy a brand premium in the future, in our view.
In terms of breeding egg laying hens, although domestic heritage layer breeds have a high market share, their performance lags behind those of foreign heritage breeds. Based on in-depth research into layer breeds and the rich varieties of breeding materials, we expect the performance of domestic heritage layer breeds to gradually improve in the future, and its market share to further rise.
Xiaoming's egg and chicken business leads the industry; improving indicators
Located in Ningxia, Xiaoming integrates the introduction, production and promotion aspects of the laying hen seed business. The company uses advanced breeding models to create a sales model of centralized breeding and decentralized incubation. The products are disseminated to more than 31 provinces and regions across the country and also exported to Mongolia. In recent years, the company's various indicators have continued to improve, its market share in major segments has continued to increase, and its brand power across the product supply chain has continued to increase. Under the large-scale development trend of the layer hen industry, the company's operating strength could raise its scale advantages and bring in more major customers.
Competitive advantages; prioritizes biosafety to build up future growth
The company has established an advanced disease prevention and control system and values biosafety. It ensures safe and efficient operations through geographical isolation, strict control of vehicles and drinking water entryways, and closed-system management of breeding farms. On the basis of its biosecurity system, the company created a "centralized breeding and decentralized incubator" business model, reducing production costs via farming concentration, improving management efficiency, and innovations in farming areas, a "whole network high bed level support" welfare culture model and improving product quality, which has led to quality layer breeds that are recognized by customers, with good reputation. In terms of product sales, decentralized incubation is used to fully exploit the market, reduce product transportation losses, and achieve efficient utilization of hatchery capacity. The rapid expansion of business has formed a scale advantage. In 2020, the company's commercial chickens accounted for 12.52% of the domestic market share, and its business scale is within the forefront of the industry. A large breeding scale, mature industry network and wide-coverage sales network would help ensure its sustainable development and manage industry fluctuation risks.
Fund-raising projects: to lift production capacity and raise competitiveness
After the company's listing and fundraising, it invested funds in new layer breeding projects in Alxa League and Minning town. We expect that with the gradual implementation of fund-raising investment and construction projects, the company's breeding technology could be significantly improved to ensure future production capacity growth and strengthen its advantages in large-scale breeding.
Valuation and risks
We expect revenue of RMB680m/807m/1.01bn, up 25.97%/18.71%/24.57% yoy, and net profit of RMB115m/170m/ 136m, changing 129.43%/47.08%/-19.78% yoy, corresponding to EPS of RMB0.61/0.90/0.73. With reference to the average valuation of comparable companies, we conservatively give the company a 28x PE, corresponding to market value of RMB4.75bn in 2022E. We initiate coverage with a BUY call and price target of RMB25.2.
Risks include: risks of poultry disease; risks of raw material and price fluctuations; risks of the company's dependence on foreign layer breeders; risks of implementation of fund-raising investment projects; and risks of stock price fluctuations in the short term.
免责声明(DISCLAIMER):
此文件仅发给指定收件人或机构。其内容可能包含某种享有法律特权或者需要保密的信息。对于任何未经本公司授权而对本文件所载内容进行使用、披露、分发、变更之行为及由此产生的后果，天风国际证券集团有限公司及其联属公司和附属公司（「天风集团」）概不承担任何责任。如您并非此文件的指定收件人或机构，请立即通知天风集团，并立即销毁此文件。谢谢合作。
This message is intended only for the individual or entity to which it is addressed. It may contain legally privileged and/or confidential information. TF International Securities Group Limited and its affiliates and subsidiaries (「TF Group」) does not accept liability for the unauthorized use, disclosure, distribution and/or alteration of any information it contains or the consequences thereof. If you are not an intended recipient, please inform TF Group and destroy this message immediately. Thank you.
