Key points of investment
Incidents: Tiankang Biotech achieved revenue of 15.744 billion yuan in 2021 (+31.4% year-on-year), net profit of the mother of -686 million yuan (-139.9% year-on-year), and net profit of -655 million yuan (-137.9% year-on-year).
Among them, in the fourth quarter alone, the company's revenue was 3.415 billion yuan (+1.5% year-on-year), net profit of -493 million yuan (-303.1% year-on-year), and net profit of -487 million yuan (-309.2% year-on-year).
First quarter of 2022: The company achieved operating income of 3.392 billion yuan (+1.6% year-on-year), net profit of -696.058 million yuan, -123.1% year-on-year, net profit of -700717 million yuan, -122.9% year-on-year.
Pig prices have entered a downward cycle, and the pig farming business has lost a lot.
(1) On the industry side, the recovery of domestic production capacity exceeded expectations after the epidemic. In 2021, pig prices continued to fall from a high at the beginning of the year to the bottom of history, and there was a slight rebound during the peak season in the fourth quarter. Domestic 2021Q1-Q4 domestic pig stocks were 31.1, 19.2, 14.5, and 15.6 yuan/kg respectively, with year-on-year changes of -15%, -40%, -61%, and -50%.
(2) Breeding and slaughter business: Annual revenue of 3.49 billion yuan (+0.5% year-on-year), with a total of 1,6033 million pigs released (+19.2% year-on-year). Among them, about 1.23 million fat pigs were sold, and the average sales price was about 15.8 yuan/kg. Affected by the high cost of purchasing piglets, the full cost is estimated to be over 21 yuan/kg, and the average loss of fat pigs is estimated at 750 to 800 yuan. About 370,000 piglets were released, and the average profit is estimated at 450 to 500 yuan. In addition, the company lost a total of 480 million yuan due to asset impairment losses and the elimination of sows, etc., while the farming sector estimated a loss of about 1.23 billion yuan.
(3) In terms of production capacity, at the end of 2021, the company's fixed assets were +18% year on year, and projects under construction were +66% year on year. Risk warning: animal epidemics, pig price fluctuations, raw material prices rose sharply, and sales fell short of expectations. Productive biological assets are 35.6 billion yuan, +1.3% year on year. It is estimated that about 120,000 sows will be kept and 60,000 reserve sows will be kept by the end of the year. The future may continue to expand the scale through the release of production capacity at existing bases in Henan and Gansu and extended growth. The number of pigs released in 2022 and 2023 is expected to reach 2.2 to 5 million heads.
R&D channels are progressing side by side, and the market is growing rapidly. As farming profits deteriorated, the sentiment of the vaccine industry began to weaken in the second half of 2021, but the company's market continued to rise. In 2021, the company's pharmaceutical business revenue was 980 million yuan (+15.8% year on year), sales volume was 1.32 billion ml (+2.4% year on year), of which sales of foot-and-mouth disease/minor ruminant/ruminum/swine fever/blue ear vaccine were 770 million/280 million/150 million million/22.47 million/7.74 million/7.74 million/7.74 million/ -4.2%/-5.6%/-4.4%/+0.9%/-25.5% year on year. The overall gross profit margin of the pharmaceutical business is 68.4% (+0.88pct year on year), and the profit contribution is estimated to be about 250 million dollars. In recent years, the company has been boosting the market vaccine through multiple channels. The dominant products, foot-and-mouth disease OA divalent and swine fever E2, have been successfully promoted. Market vaccine revenue is expected to double in 2021, and its share of vaccine sales revenue will rise from more than 20% in 2020 to more than 40%. Furthermore, the new swine epidemic diarrhea inactivated vaccine (XJ-DB2 Co., Ltd.) was launched in 2021, and there is still plenty of room for growth in the future in the environment where the epidemic has been high in the industry in recent years.
The feed industry is booming, contributing to stable cash flow. Thanks to the restoration of downstream pig storage in 2021, the feed industry remained buoyant. The company sold 2,313 million tons of feed throughout the year (+21.1% year-on-year). Among them, 1,279,000 tons of pig feed (+52.1% YoY), 458,000 tons of poultry feed (-23.6% YoY), 454,000 tons of ruminant feed (+27.2% YoY), and 52,000 tons of aquatic feed (-4.2% YoY). Feed business revenue was 5.14 billion yuan (+21.8% year on year), gross profit margin was 13.4% (+0.34 pct year on year), and the profit contribution is estimated to be about 250 million yuan (+40% year on year).
In other sectors, the revenue from the corn collection and storage and oil processing business was 3.83 billion yuan/1.64 billion yuan respectively, +94.6%/+47.1% compared with the same period last year. The total profit contribution is estimated to be about 90 million yuan.
Pig farming continued to lose money in the first quarter, and vaccines bucked the trend. In the pig farming business, Q1 company released 377,000 pigs. It is estimated that about 370,000 fat pigs will be released. The average sales price is about 11.6 yuan/kg, the full cost is 18-19 yuan/kg. The average initial loss is estimated to be about 750 yuan. The piglets have a slight loss, compounded by the decline in inventory prices in Q1. The estimated loss of Q1 pig farming is about 170 million yuan. In the vaccine business, the company's market continued to gain strength under the downturn in the Q1 industry. The sector's profit contribution is estimated to be 70 to 80 million, maintaining positive year-on-year growth. Furthermore, feed is estimated to have a profit of around 0.2 billion.
Production capacity in the industry is gradually being reduced, and pig prices are expected to rebound in the third quarter. With the sharp drop in pig prices in 2021, the industry's production capacity began to be eroded. According to data from the Ministry of Agriculture and Rural Affairs, domestic breeding sows turned negative month-on-month in July 2021, with a cumulative decline of 9-10% by the end of Q1 2022. Pig prices in Q2 are still bottoming out and fluctuating. It is expected that the impact of the reduction in production capacity in the early Q3 period will be evident. Coupled with the peak season consumption recovery, pig prices are expected to begin an upward cycle.
Investment advice: The company adheres to the layout of the entire aquaculture industry chain, and the feed and vaccine business effectively hedged some farming losses in 2021. In the future, the company's pig production capacity will expand steadily, breeding costs will trend down, and the second half of the year is expected to bring performance elasticity as pig prices rebound. Furthermore, new vaccine products continue to be implemented, and future growth rates can still be expected. We are optimistic about the company's long-term growth capacity. We adjusted our profit forecast. It is estimated that the company's EPS for 2022-2024 will be 0.06, 0.99, and 1.75 yuan respectively. Based on the closing price on April 29, 2022, the corresponding PE will be 155.6, 9.0, and 5.1 times, maintaining the “buy” rating.
Risk warning: animal diseases, fluctuations in pig prices, sharp increases in raw material prices, and sales fall short of expectations.
