Xiaoming shares released its semi-annual report for 2021: during the reporting period, the company achieved operating income of 354 million yuan, up 26.12% from the same period last year, and its mother's net profit was 52 million yuan, up 61.23% from the same period last year. In terms of profitability, the company's comprehensive gross profit margin was 30.57%, down 1.48% from the same period last year; weighted ROE was 7.53%, up 1.98% from the same period last year. Realize basic earnings per share of 0.33 yuan.

The business volume of commercial chicks has risen sharply. The sales volume of 21H1's commercial egg substitute chicks was about 82 million, an increase of 15.2% over the same period last year. In the first half of the year, the overall egg price was high, and the enthusiasm of farmers to fill the fence warmed up somewhat. The average sales price of the company's commodity egg chicks was about 3.57 yuan per feather, up 9.2% from the same period last year. Under the influence of the obvious rise in feed costs, the complete cost of the company's commodity generation chicken business in the first half of the year was about 2.94 yuan per feather, and the average profit was about 0.63 yuan per feather, an increase of about 0.14 yuan per feather compared with the same period last year. From a quarterly point of view, the prices of commercial egg-substituting chicks of 21Q1 and 21Q2 companies are about 3.35yuan and 3.77yuan respectively, and the average profit of feathers is about 0.46yuan and 0.78yuan respectively. Although the complete cost rose to nearly 3 yuan per feather in the second quarter, the improvement in price led to a significant increase in the profit per feather compared with the previous quarter.

Looking forward to the second half of the year, we expect that the tight balance between supply and demand in the laying hen industry will continue. Egg prices may reach the year's high in the third quarter and fall only slightly in the fourth quarter. The slow decline in the price of superimposed bulk raw materials is expected to drive the demand for egg chicks to improve the profit level of laying hens. We estimate that the sales volume of the company's commercial egg replacement chicks will reach 175 million in the whole year. Under the assumption that the price per feather and the complete cost are 3.62 yuan and 2.90 yuan respectively, the average profit of feathers is about 0.72 yuan per feather, and the net profit is nearly 130 million yuan.

In the long run, the market share has increased steadily. In terms of introduction, in June 2021, the company introduced about 50,000 sets of Highland Brown, Highland White and Highland Grey ancestral breeder hens from the United States, and we expect to contribute to the sales of commercial egg chicks from next year; in addition, the company's newly introduced Hyland pink shell laying hens have completed the pilot test and are undergoing breed approval, which is expected to become an important breed for the company to expand the southern market in the future. In terms of regional layout, the company plans to invest 150 million yuan to build the South seed Industry Center (Phase I) project in Changde City, Hunan Province, with an estimated annual incubation of 300 million eggs. We believe that with its excellent introduction and seed production ability and unique "centralized breeding, decentralized incubation" business model, the company is expected to continue to achieve the steady development of the national laying hen breeding market and the long-term improvement of the overall market share; we estimate that the sales volume of commercial egg chicks in the company from 2022 to 2023 is expected to reach 215 million and 255 million respectively.

Profit forecast and investment advice. We estimate that the net profit of the company in 2021 and 2023 will be 1.24 / 1.83 / 132 million yuan respectively, and the earnings per share will be 0.66 / 0.98 / 0.70 yuan respectively. We value the company at 25-30 times PE in 2021, with a reasonable value range of 16.50-19.80 yuan, maintaining a "better than the market" rating.

Risk tips. Poultry breeding blight, the price of eggs and breeding chicks fell sharply, and the schedule and rate of return of the fund-raising project fell short of expectations.