The performance falls short of expectations, and the price of raw milk may remain stable in 2022.
Youran Animal Husbandry (Youran) released its first annual report after listing on March 30. Excluding non-cash charges related to convertible bills, listing fees and arbitration losses from the acquisition of Secco Star and other non-recurrent items, adjusted net profit in 2021 increased 49% year-on-year to 2 billion yuan, 13% lower than our previous expectations, mainly due to large changes in the fair value of the company's biological assets. The management directs that under the balance of market supply and demand in 2022, raw milk sales will grow by about 20%, while prices will remain stable. We forecast that the diluted EPS for 2022-2024 will be 0.50 RMB 0.62 won respectively. We anticipate that rising feed costs may affect the company's short-term gross margin, so we reduce our target price by 26% to HK $6.50, corresponding to a 12-month forward diluted EPS of RMB0.55 and comparable company Modern Animal Husbandry (1117 HK) 9.9 times the historical average PE.
Raw milk sector: 2022 gross profit margin or pressure
In 2021, the revenue of raw milk business increased by 36.4% year-on-year to 9.5 billion yuan, mainly driven by the following factors: 1) the average price of raw milk rose 7.1% year-on-year to 4.9 yuan / kg; 2) the annualized yield of Yuran and Secoxing (excluding Jersey cattle) increased by 1.8% to 11.2 million 10.5 tons. 3) as a result of the company's acquisition of Fonterra China and cow breeding, the number of adult cows / total cow stock increased by 30% to 204500 / 416200 compared with the same period last year. In 2021, the sector's gross profit margin narrowed 1.4 percentage points year-on-year to 41.4% (1H21/2H21: down 0.3% 2.3% year-on-year), mainly because the increase in 2H21 feed costs offset the rise in raw milk prices (1H21/2H21: 10.7% up 3.9% year-on-year). Given that raw milk prices are stable, but feed costs are on the rise, we expect gross margins in this sector to increase or come under pressure, and gross margins are expected to contract by 2.1 percentage points in 2022.
CRFS plate: rapid expansion of channels
In 2021, ruminant breeding systematic solution (CRFS) business revenue increased by 21.3% to 5.8 billion yuan compared with the same period last year, mainly due to 21.2% increase in feed business sales due to the expansion of market groups in Shandong, Anhui and Jiangsu. Youran now provides CRFS for nearly 1.5 million ruminants and more than 500 dairy farms in China. Because its business adopts the "Youran product + service" model, the gross profit margin of CRFS plate is stable at 12.8% in 2021.
Lower the target price to HK $6.5, the valuation is not high.
Taking into account the recent increase in feed prices and the increase in financial costs related to convertible bills, we have lowered the company's 23-year net profit forecast for 2022, by 19% to RMB 2,400 billion, and introduced a net profit forecast of RMB 3.6 billion for 2024. Since Youran has not been on the market for a long time, we switched to the PE valuation method and calibrated the historical PE average of 9.9 times that of modern animal husbandry since 2019. We have lowered our target price by 26% to HK $6.50, and the current share price corresponds to 5.5 times the 12-month forward PE. We do not think the valuation is high.
Risk tips: 1) the price of raw milk is lower than we expected; 2) feed costs rise rapidly; 3) the fair value loss of convertible notes expands.