Benefiting from the improvement in gross profit margin, Yurun narrowed its core loss in the first half of 14 years, roughly in line with expectations. Yurun's revenue fell 12.2 per cent year-on-year, but gross profit margin improved 3.3 percentage points year-on-year to 7.4 per cent. With operating expenses under control, the core operating loss narrowed from HK $396 million in the first half of 13 to HK $73 million in the first half of 14. Yurun reported a net profit of HK $16 million in the first half of 14 years, a year-on-year decline of 9.7%. Excluding government subsidies and other non-core items, the core loss narrowed to HK $197 million (first half of 13: core loss of HK $512 million).

The pace of industry consolidation has slowed down, but management hopes to accelerate in 15 years. Yurun will continue to raise the gross margin of its upstream business, while breaking even capacity utilization is 30% (assuming a 5% gross margin for chilled meat). Yurun will record operating cash outflows in 14 years, but the company still chooses debt financing as its first choice. Due to weaker-than-expected income and higher net interest expenses, we reduced Yurun's core net profit per share for 14-16 years by 14.7%, 14.9% and 25.5%, respectively. We expect Yurun to have a core loss of HK $0.212 per share for 14 years and HK $0.036 and HK $0.184 per share for 15-16, respectively.

Yurun's finance is getting worse, and we think the company needs to sell some of its old factories. Yurun's performance is improving, but the company is facing difficulties in winning market share in the pig slaughtering industry. Therefore, we reiterate that the company's investment rating is "neutral", but raise the target price to HK $4.00, which is equivalent to 0.46 times 14-year price-to-book ratio and 27.4 times 15-year price-to-earnings ratio.