Event: the profit rate of slaughtering and meat processing of rainy meat will recover gradually as expected, but the new production capacity and meat department will be a drag on the meat industry in the short term.
The market is different: the management incentive mechanism is in place. After the first equity challenge to senior executives at the beginning of the year, Yuyang recently launched a second phase of the equity exercise for larger managers of the Chinese people's Bank of China (involving 105 million shares with a total of HK $5.002). The total number of shares involved is about 1.65 shares and the exercise right is more than HK $5. I believe that these stock rights incentives, which have a high rate of review, have well integrated the interests of management and equity management, so as to pave the way for corporate restructuring and recovery.
How to improve slaughtering gross margin in 2013? the gross profit margin in 2012 was mainly due to the sharp decline in gross profit margin, which was mainly caused by the 2012 increase in new production capacity and the production line of meat products. At the end of 2012, Yuzhu had a total slaughtering capacity of 5700 million tons, of which 1 and 3 were new ones. Due to the gradual development of local small slaughterhouses and private slaughterhouses and the gradual cultivation of markets, new production capacity is generally in a state of decline in the previous year. This year, Yufu has adopted the following measures to increase gross profit: 1) reduce the investment of new production energy and capital investment from 50 billion Hong Kong dollars in 11 years to about 1 billion Hong Kong dollars in 13 years; 2) increase new direct supply pipelines, including restaurant links, food companies and specialty stores, etc. 3) the sale of roast meat is less and most readily cancelled, because its gross profit is more vulnerable to fluctuations. 2012, however, the gross profit of grilled meat reached HK $423 million, exceeding the positive gross profit generated by slaughtering. We expect that these measures will be a gradual recovery of gross profit, and the expected upstream gross margin will be corrected in the first half of 13 years.
Conduct industry integration is the guarantee of long-term growth rate. In the first half of 13 years, as the company sold less meat and reorganized the pipeline, the volume may decrease slightly. However, the lack of supervision and highly dispersed agricultural industries and traditional vegetable farms (supplied with cut meat) are the main causes of some recent virus outbreaks and other food safety problems. Like other food industries, the Chinese government is strengthening the supervision of the meat industry: 1) enacting legislation to regulate private slaughtering as a criminal offence; 2) the Ministry of Commerce has issued fewer slaughtering licenses and required more than 50% of private slaughtering production capacity by 2015. Because the targeted slaughtering enterprises have consumed 355 million tons in 12 years, which is equivalent to about 50% of meat consumption in China, this means that the market share of small slaughterhouses is close to 50%. 3) raise the quality standard and promote the consumption of cold meat and small packages of meat, which aims to account for 20% of the market share and more than 60% of the market price of cut meat. In 2012, the total number of small-scale slaughtering houses and fixed-point slaughtering houses decreased by 27.7% and 22.5%, respectively. Industry integration is beneficial to the industry such as Rain Foods: the slaughtering capacity of rain food is expected to exceed 60 million tons by the end of 13 years. In the process of applying for and obtaining a slaughtering license in the future, small-scale slaughtering has a scale effect and quality quality. We believe that the volume will return to growth at the beginning of 2014.
It is expected to turn into a profit in 2013. By reducing the new production capacity exhibition and investment departments and focusing on the recovery of gross profit margin, the Rain Finance Plan will turn around in 2013, which I consider to be a huge task, especially the main operating expenses (excluding other income in 2012) reached 1.55 billion Hong Kong dollars (mainly government revenue). We have seen some positive changes, such as the improvement of both upstream and downstream gross profit margins compared with the previous year. Nanjing Yuli, the largest subsidiary of Yuyi Foods, also succeeded in turning profits into profits in the first quarter of this year, which also supports our expectation of a positive profit in 13 years. However, we still think that the rainstorm activities in the first half of the year are still strong and will still be recorded, which is partly due to the increase in management costs caused by the large-scale stock rights incentive program.
Valuation and headline: we maintain a positive attitude towards rain as the beneficiary of industry consolidation. We also think that the new management has been very positive because its focus has changed from investment to gross profit margin. Based on the continued slaughtering gross profit recovery, we believe that it is a high probability that the rainy season will turn around in 13 years, and that its profit recovery will be very high. We maintain the level of increase, target and profit forecast.
Hypothetical: 1) the annual annual gross profit margin of slaughtering has been flat in 13 years; 3) the upstream slaughtering volume may be reduced due to the lack of meat sales activities; 4) the consumption of other income production capacity has decreased by 63% compared with the same period last year.
Catalyst: slaughtering volume and gross profit recovery, government policies to support the integration of the agricultural industry. Profits: slow recovery of gross profit margin, corporate governance issues and food safety issues.
