Investment highlight

For the first time, Fengxiang shares (09977) was given a neutral rating, with a target price of HK $2.00, corresponding to 19.7 times earnings in 2021 / 22. The reasons are as follows: White-feather broiler industry chain extends downstream and has a broad space for development: China's chicken consumption is the second in the world, reaching 15.21 million tons in 2020. The improvement of per capita GDP and the upgrading of meat consumption structure provide long-term growth power. The upstream and downstream models of the white feather chicken industry chain are different, upstream breeding and slaughtering reflects cyclical attributes, poultry prices fluctuate periodically; downstream deeply processed chicken products have the attribute of consumer goods and are expected to expand rapidly, we expect the market size to reach 70.4 billion yuan in 2025. CAGR+19.7%, growth in 2020-2025E stems from health awareness, increased penetration of deep processing, and brands gradually gaining popularity.

Short-term weak poultry prices may put pressure on the profits of the company's breeding business; long-term incremental cost reduction has some interesting points:

1) from a cyclical point of view, the performance of poultry prices has been low since the beginning of 2021, and the profits of the poultry breeding industry are at a low level. Considering the imbalance between supply and demand in the poultry breeding industry as a result of the rise in poultry farming volume and the decline in alternative consumption of poultry meat to pork, we judge that 2H21 poultry prices may remain in the doldrums, and it is difficult to have surprises in 2022, and the overall external environment of the industry is not good; 2) from the company's business point of view, the company adopts an integrated farming model, technology upgrading of each link is conducive to reducing costs and improving efficiency, and the food safety system that can be traced throughout the process provides product quality protection. At the same time, the company accelerates the expansion of aquaculture capacity, which helps to open the bottleneck of production capacity. On the whole, we think that the low off-price may put pressure on the company's short-term breeding profits, but the company's breeding business has a relatively solid foundation, and the incremental reduction is conducive to long-term development.

The rapid development of deep processing business pays attention to the long-term growth potential: the company's development focuses on downstream deep processing business, practicing internal skills in the three dimensions of products, channels and brands, and tapping long-term growth potential. 1) on the product side, focus on category expansion and continuous innovation to cover diversified needs; 2) on the channel side, actively promote channel upgrading and broaden the scope of cooperation of new retail channels, with new retail revenue in 2020 + 214% compared with the same period last year; new collection channels deepen cooperation among catering customers, covering more than 42000 stores in 2020; new export channels attach importance to regional expansion and customer development 3) on the brand side, the multi-brand system comprehensively covers the consumer group, and through strong promotion and heavy stickiness marketing, the brand premium is raised. What is the biggest difference between us and the market? The market pays more attention to the downward trend of the poultry cycle, and the development space and potential of the downstream chicken products business are not clear enough. We analyze the strength of the downstream business of the company and are optimistic about the long-term development potential.

Potential catalyst: the company launches new products of deeply processed chicken products.

Profit forecast and valuation

We estimate that the EPS of the company in 2021 and 22 is 0.09 EPS 0.14 yuan and CAGR is + 56.7%. The current share price corresponds to 11.7 times Pmax E in 2021 / 22, the target price for the first time coverage is HK $2.0, and corresponding to 19.7 pm in 2021 / 22. 12.5 times Pmax E7 up space. Taking into account the short-term pressure of the raw chicken products business caused by the low poultry prices and the long-term potential of the deep-processed chicken products business, a neutral rating was given.

Risk.

Periodic fluctuation of off-price; rising feed cost; epidemic risk; intensified market competition; food safety risk.