1H22's adjusted net profit is slightly better than market expectations.
The company announced 1H22 results: revenue 5.63 billion yuan, year-on-year + 77.1%; homing net profit 510 million yuan, year-on-year + 2.2%; adjusted net profit (net profit after deducting foreign exchange and derivative financial instruments profit and loss) 730 million yuan, an increase of 48.9% over the same period last year; net profit is basically in line with market expectations, and adjusted net profit is slightly better than market expectations, mainly due to a better-than-expected gross profit margin.
Trend of development
The per unit area yield of 1H22 has increased significantly, and the high sales volume of the report has driven a high increase in income. Thanks to measures such as genetic improvement and technological improvement, the per unit yield of adult dairy cattle of 1H22 increased by 11% to 12.3 tons compared with the same period last year, and the herd size of the company increased from 354000 at the end of 2021 to 383,000 (252000 vs 1H21, with M & A factors).
Benefiting from the increase in per unit yield and the natural growth of the herd, we estimate that the company's production growth is at least double-digit; combined with the contribution of mergers and acquisitions, 1H22 reported raw milk production of 1.15 million tons, with production and sales increased by about 57% compared with the same period last year. In terms of milk prices, disturbed by the demand under the epidemic, 1H22 domestic raw milk prices fell 1.7% compared with the same period last year, while the company's milk prices fell slightly by 1.2% year-on-year, which performed better than the industry. Benefiting from the increase in sales, 1H22's raw milk revenue also increased by 53%, while the new feed business also contributed to the overall revenue growth.
Rising costs are a drag on 1H22 profit margins, and the company outperforms the industry under endogenous benefits. 1H22's gross profit margin for raw milk fell 5ppt to 32.2%, mainly due to cost pressure and a slight decline in milk prices; dragged down by a decline in gross profit margin, a slight increase in fees and an increase in the share of feed business, 1H22's net profit margin fell 6.6ppt to 9.0% compared with the same period last year. The price of feed such as 1H22 soybean meal, alfalfa and cottonseed increased by 18-30% year-on-year, and the company's comprehensive purchase price of bulk feed rose 10.9% compared with the same period last year. However, due to the high yield per unit area, the company's kilogram milk feed rose 0.17 yuan (8.1%) year-on-year, significantly better than the industry (up 0.3-0.4 yuan), and the endogenous benefit was obvious.
With the reduction of cost and efficiency and the contribution of consolidated statement, the profit increased steadily for the whole year. According to the Ministry of Agriculture, social milk prices fell by about 4-5% from July to August compared with the same period last year, mainly due to relatively weak consumer demand, marginal increase in supply and seasonal factors. Considering that the supply and demand pattern has improved, we expect milk prices to decline year-on-year or slightly in the second half of the year. Benefiting from 1H22's herd expansion and better-than-expected per unit yield increase, the company expects full-year yield growth to reach a high number of units, with sales up 40 per cent year-on-year by 45 per cent to about 2.3 million tons. In terms of cost, as soybean meal and alfalfa are mainly imported while overseas supply is still relatively tight, the company expects 2H feed prices to remain high; considering that the company continues to reduce costs and increase efficiency, we expect the controllable range of 2H gross profit margin. Looking forward to the full year, benefiting from the substantial increase in sales, we expect profit growth in the report to remain robust.
Profit forecast and valuation
The company trades at 6.7 times 2022 pound's 23-year price-to-earnings ratio. Basically maintain the profit forecast for 2022Universe 23 years.
Taking into account the downward valuation of the market, the target price was cut by 16 per cent to HK $1.35, corresponding to 8.4x2022max 23-year price-to-earnings ratio and 29 per cent upside for shares. Maintain an industry rating that outperforms.
Risk.
Decline in milk price; upward feed cost; epidemic uncertainty.