Yurun wholly-owned subsidiary Nanjing Yurun's 14-year first-quarter results are OK. Although revenues still fell 16.6 per cent year-on-year to 3 billion yuan, gross profit margin rebounded strongly 5.8 percentage points year-on-year to 8.7 per cent. The reported net profit was RMB12 million while the core net profit narrowed significantly from RMB 120 million in the first quarter of 13 to RMB 3 million in the first quarter of 14. The slaughtering volume of designated pig slaughtering enterprises across the country increased by 7.4% in the first four months of 14 years. Although Yurun continued to lose market share in the first quarter of 14, we think the company is gradually coming out of the darkness.

Z domestic average pig and pork prices fell by 13.3% and 11.1% respectively in the first half of 14 years, but due to the low level of pig stocks, we only expect the average price for the whole year to fall by 5% year on year. Gross profit margin returned as scheduled, but pig and pork prices rose sharply in May or affected domestic pork demand. We do not expect Yurun to retrench again and operating expenses may be flat on a year-on-year basis. Due to low capital expenditure, the company's net debt ratio may remain at about 40% in 14-15 years. Overall, we believe that the company will still record a core loss in 14 years, but will be able to successfully record a core profit in 15 years. Yurun's reported net profit per share for 14-16 is expected to reach-HK $0.084, HK $0.152 and HK $0.302, respectively.

Z although gross profit margin improved significantly and core loss narrowed in the first quarter of 14, Yurun's performance did not improve faster than we expected. As a result, we reiterated that the company's investment rating was "neutral" and the target price was lowered to HK $3.80 as a result of the lower profit forecast. The target price is equivalent to 0.44 times 14-year price-to-book ratio and 25.0 times 15-year price-to-earnings ratio.