In May, the number of pigs released was reduced, and sales prices rebounded, and the share of the supply market in Hong Kong remained high. The pig cycle is about to reverse. The company has a cash advantage and a location advantage in supplying Hong Kong, and growth can be expected. Maintain a “Highly Recommended” investment rating.
Sales prices have risen month-on-month, and the share of supply to the Hong Kong market has not decreased. In May 2022, the company sold 38,900 pigs (down 14% month-on-month, 57% year-on-year increase). The month-on-month decline in listing volume was mainly due to the company's optimism about future market conditions, thereby reducing piglet sales and putting pressure on commercial pigs. The sales structure in May was still dominated by commercial pigs (29,600 heads listed in a single month), and we estimate that about 17,000 to 19,000 commercial pigs were sold in Hong Kong. According to data from the Hong Kong Food and Environmental Protection Department, the total number of live pigs supplied from the mainland to Hong Kong in May was about 91,900 heads. We estimate that the company's monthly supply to Hong Kong accounted for about 19% to 21%, which continues to remain high. The company's pig sales revenue in May was 77 million yuan (up 5.5% from the previous month), mainly due to the rebound in pig prices in May; in May, the average sales price of the company's commercial pigs was 19.9 yuan/kg, an increase of 16% over the previous month. Based on the company's 22Q1 cost performance, we estimate that the average initial loss of the company's pig breeding business in May was only about 100 yuan.
Breeding sows can speed up the elimination of sows, and a reversal in pig prices can be expected. Currently, pig prices are on the eve of the start of a new cycle. Judging from the four dimensions of sow production capacity, absolute value of pig prices, breeding profit, and pig feed sales, the 22H2 reversal trend has been established. Considering that sow prices are still at the bottom and the industry's cash flow is seriously damaged, we determine that the removal of sow production capacity has not yet bottomed out, and cyclical flexibility can be expected.
Abundant cash+location advantage, quality and volume expansion can be expected. Currently, the company is one of the few listed pig companies with a low debt ratio and sufficient cash on the books, and scale expansion is expected to accelerate. Based on the company's barns, sows, personnel and funding, we expect the company's listing volume to reach 60/120/1.8 million heads in 2022/23/24. Benefiting from higher pig prices and high quality prices in Hong Kong, the continuous increase in the proportion of the company's own production and supply to Hong Kong, and proper prevention and control of epidemic prevention and control, the company's breeding profit center far surpassed the industry in the past cycle. Considering that the mainland supply market is already recovering, the company's geographical advantage and historical high degree of completion are expected to drive its share of the Hong Kong supply market to continue to rise. It is expected that the company's share of Hong Kong supply sales is expected to remain high, thereby supporting its initial profit level to continue to be superior to the industry. Looking at the medium to long term, the Greater Bay Area is still in a period of economic take-off, and the pig price advantage in Guangdong and other places is expected to expand, and the profit level of domestic sales may be on par with supply to Hong Kong.
Maintain a “Highly Recommended” investment rating. The pig cycle is about to reverse, and the company can be expected to grow as a leading supplier of live pigs to Hong Kong. Net profit of the mother is expected to be 70 million yuan/886 million yuan/642 million yuan respectively in 2022/23/24. Considering that the PE valuation of leading pig companies in the peak year of the first two cycles was usually 11 times to 20 times, the company's profit in 2023 was valued at 11XPE, with a target price of 55.18 yuan, maintaining the “highly recommended” investment rating.
Risk warning: Pig price performance falls short of expectations, changes in Hong Kong supply policies or company quotas to supply Hong Kong, company scale expansion progress falls short of expectations, etc.