In 2022H1, the company's revenue/net profit was +19.4%/-61.7% year-on-year. Milk prices fell slightly year on year, feed costs were under significant pressure, compounded by fair value adjustments for biological assets, which dragged down the company's profit in the first half of the year. As feed costs and milk prices stabilize, the company's H2 profit is expected to improve significantly compared to H1. In “five years to create an excellent animal husbandry”
Under the planning goal, the company will maintain a high level of capital expenditure in the next few years to push the herd to maintain a high growth rate.
The company was given 10 times PE in 2022, corresponding to a target price of HK$3.2, maintaining the “increase in holdings” rating.
Revenue is growing rapidly, and adjustments to the fair value of biological assets have dragged down net profit. 2022H1 achieved revenue/net profit of 8.71/44 billion yuan, respectively +19.4%/-61.7% year-on-year, of which a loss of 852 million yuan was due to adjustments to the fair value of biological assets. By business, revenue from the raw milk/ruminant farming systematized solutions business was 52.2/349 billion yuan, respectively, +27.9%/+27.4% over the same period. 2022H1's gross profit was 210 billion yuan, -2.0% year on year, and gross margin was -5.3 Pcts to 24.08% year on year, mainly due to a sharp increase in raw material prices.
The company has excellent cost control. The 22H1 sales/management expense ratio was -0.6 Pct/ -0.9 Pct year on year to 3.2%/3.8%, respectively. Affected by the increase in the scale of financing and the increase in financial expenses, the financial expense ratio was +1.8 Pcts to 5.9% year on year.
Under the pressure of feed costs, the gross margin of the company's raw milk and ruminant breeding program business declined year-on-year in the first half of the year.
2022H1 was affected by the local epidemic and improvements in supply and demand. The company's milk price was -1.3% year-on-year to 4.63 yuan/kg. Since H2 2022, as the epidemic has slowed down and festival demand has been driven by demand, it is expected that H2 milk prices will improve month-on-month. On the cost side, due to the sharp rise in the prices of feed raw materials such as corn, soybean meal, and alfalfa grass, the company's 2022H1 feed cost per kilogram was +14.6% year-on-year to 2.43 yuan. By implementing a raw material procurement strategy, adopting measures such as raw material substitution and formulation optimization, the company has partially calmed the upward pressure on costs. The sharp rise in costs caused the gross margin of the company's 22H1 raw milk business to -8.1 Pcts to 32.3% year-on-year, putting short-term profit pressure on. The gross margin of 2022H1's systematic solutions business for ruminant farming was -1.1 Pcts to 11.9% year-on-year. Mainly due to the increase in raw material prices, the decline in feed gross margin exceeded the increase in frozen sperm gross margin, but the overall decline was small.
Cow herds expanded and yield increased, and raw milk production and sales increased by more than 20% year-on-year. As production capacity is gradually released from self-operated ranches and newly built ranches with advance layout, the company's 2022 H1 cow inventory was +19.1% to 447,000 heads. The expansion of dairy herds maintained double-digit growth, and the proportion of the company's adult dairy cows reached -3.8pcts to 46.7% year-on-year. Through fine control of TPM, effective integration of mergers and acquisitions, and application of advanced technology, 22H1's own dairy yield (excluding Juanshan beef) was +1.8% to 11.4 tons, and continued to maintain an upward trend in yield. The yield of some ranches exceeded 13 tons, and Inner Mongolia Excellent (Fonterra China Ranch excluding mergers and acquisitions) yielded +1.7% to 11.9 tons. The expansion of dairy cows combined with the increase in yield drove the company's 22H1 raw milk production to 1.51 million tons compared to +21.4%, and sales volume +21.5% year on year to 1.128 million tons.
The whole industry chain layout & digitalization help “recreate excellence”, and the company's revenue growth can be expected. The company has laid out an ecosystem of the entire industry chain, from grass farming, feed, breeding, and breeding to e-commerce technology in Jumucheng. The advantages of platformization are obvious.
At the same time, the company continues to apply lean management models to innovate digital upgrades, further reduce costs and increase efficiency, and improve management efficiency. Entering 2022H2, with the gradual easing of the local epidemic and a recovery in demand driven by festivals, the price of raw milk is expected to rise steadily. On the cost side, in the current international situation and climate, we expect that the prices of raw materials such as 22H2 soybean meal and alfalfa will remain high, there is limited room for raw materials with a high self-sufficiency rate, such as corn, to drop, and the company's costs may continue to be under pressure. Under the planning goal of “rebuilding an excellent animal husbandry in five years”, it is expected that the company will maintain a high level of capital expenditure over the next 3 to 4 years (3.5 to 4 billion yuan per year) to support the rapid growth of the herd and promote the increase in the company's revenue.
Risk factors: the risk of falling raw milk prices; the development of COVID-19 in parts of the country exceeding expectations; expansion of the company's production capacity falling short of expectations; risk of environmental policy changes; risk of dairy cow disease and other natural disasters.
Investment suggestion: Considering the large increase in feed costs, we lowered our EPS forecast for 2022/23/24 to 0.26/0.42/0.50 yuan (original forecast 0.45/0.52/0.61 yuan). Referring to the comparable company Hyundai Animal Husbandry's 2022 PE 7x valuation (Wind's unanimous expectation), and considering the company's market position as the largest ranch in China and its clear production increase plan and excellent management and control capabilities, it was given 10 times PE in 2022, corresponding to a target price of HK$3.2, maintaining the “increase in maintenance” rating.