Nanjing Yurun's results for the third quarter of '13 showed that Yurun Foods' pig slaughter volume continued to decline, but core losses narrowed quarterly thanks to a sharp improvement in gross margin. Nanjing Yurun's revenue for the third quarter of '13 fell 34.7% year on year, but gross margin increased by 6.0 percentage points year over year, or 3.6 percentage points from quarter to quarter. We believe that Nanjing Yurun's pig slaughter volume fell by more than 40% in the 3rd quarter of '13. We estimate that Nanjing Yurun's core loss in the 3rd quarter of '13 was RMB 170 million, down from the loss of RMB 217 million in the 2nd quarter of '13, mainly benefiting from an improvement in gross margin.

Although changes in sales channels have had a positive impact on gross margins, market share is being lost. We think there is little chance that pig and pork prices will rise sharply in 2014, and Yurun's gross margin will continue to improve. However, weak sales and expectations of non-cash equity expenses have had a negative impact on the company's profits. Taken together, we expect Yurun's core loss per share in '13 and '14 to be HK$0.420 and HK$0.108 respectively, while the core net profit per share for 15 years was HK$0.158.

Due to the extremely low capacity utilization rate, we don't think Yurun's capital expenditure will be too high in 2013-2015, so the company has a chance to record positive free cash flow in 2015. Although Yurun's worst case is over, its performance has not improved faster than market expectations. Therefore, we only raised the company's investment rating to “neutral”, and at the same time raised the target price to HK$5.5. This target price is equivalent to 0.65 times the 13-year net price-earnings ratio and 20.5 times the 15-year price-earnings ratio.