Key points of investment:
Actively expand new businesses based on livestock and poultry farming. The company is the first “vegetable basket” joint stock listed company in China. It is the largest vegetable basket project support base in Hainan and the largest breeding base for breeding pigs in Hainan. The business covers livestock and poultry farming processing, real estate, education, and cold chain logistics. Among them, livestock and poultry farming processing, real estate, and education are the main components of the business, accounting for about 50%, 25%, and 14% of revenue in the reporting period. The company's future focus is on the following points: 1) Expectations for pig breeding business expansion. 2) Expectations that the industrial park cold chain logistics project and the Luoniushan Tengde Testing Center project will undertake outsourced services. First, in terms of pig breeding business, the company entered the industry early and has more than 20 years of experience. The technical advantages accumulated in the field of pig breeding are expected to be a strong driver for business expansion within and outside the province. Second, in terms of industrial park-related projects, the Luoniushan Agricultural Products Processing Industrial Park is listed as one of the 12 pillar industrial key projects in Hainan Province and the “13th Five-Year Plan” major modern agricultural industry development project in Haikou City. It is the largest agricultural product processing and food cold chain logistics project in Hainan Province, with the highest grade, the most advanced process equipment, the strictest quality standards, and the most complete supporting facilities. As can be seen, the project has a strong government-led intention, and government support is strong. It is also the high capital investment that has brought about a high entry threshold for this business.
Future highlights: 1) Performance is expected to continue to grow steadily. The company's future performance growth is mainly due to pig breeding expansion, real estate business, and cold chain logistics business operations. Among them, the pig breeding business comes from the investment of new production capacity, but the future decline in pig prices is expected to dilute the business's performance growth; the pace of future performance release of the real estate business mainly depends on the country's strategic positioning of Hainan Province and the direction of national industrial policy, but industry attributes determine that the business is profitable; cold chain logistics and other projects have high entry barriers, and the industry prospects are broad. The utilization rate of cold chain logistics warehouse space that has now been built and operated has reached 80%-90%. The future business deserves attention. 2) Asset restructuring provides a margin of safety for the company. As of the 2017 three-quarter report, intangible assets and financial assets available for sale were 338 million yuan and 593 million yuan respectively in the company's assets. Of these, the vast majority of the intangible assets of 338 million yuan are land use rights. Combined with the current development of China's real estate industry, the gradual implementation of the Hainan international tourist island policy, and the gradual advancement of rural arable land and land for collective construction, the company's land use weighted valuation will increase. The financial assets available for sale are mainly financial assets such as various rural commercial banks and various rural credit cooperatives. The asset profitability is high. Among them, Haikou Rural Commercial Bank Co., Ltd., which has the highest investment amount, reached 107.7 billion yuan in total assets at the end of 2016, operating income was 2.18 billion yuan, and realized net profit of 730 million yuan (the company's investment amount was 378 million, and the shareholding ratio reached 10%). Under the general trend of asset securitization, the financial assets held by the company have good prospects for development. Also, the company's layout in the financial sector is expected to be grafted into the company's agricultural and animal husbandry industry chain, and the company has laid the foundation for developing rural finance. In addition, the company also holds 63.88 million shares of the listed company ST Donghai, with a shareholding ratio of 17.55%. Currently, the company's PB is around 2.8 times. Judging from the weighted valuation of land use rights, financial assets, and shares of listed companies held by the company, the company has a certain margin of safety.
Profitability forecast investment recommendations. Combined with expectations of falling pig prices in China and the high depreciation and operating expenses brought about by the company's new fixed assets (cold chain logistics projects, etc.), it is estimated that the company will achieve net profit of 160 million yuan and 180 million yuan in 17-18, corresponding to earnings per share of 0.14 yuan and 0.16 yuan respectively. The current stock price corresponds to 18 years PE of about 60 times, corresponding to 18 years of PB of about 2.8 times. Short-term valuation is not advantageous. Considering the company's market position in Hainan's agricultural and animal husbandry industry, the long-term development prospects of cold chain logistics projects, and the intrinsic value of the company's assets (especially holding shares, financial assets, land use rights, etc. of listed companies), we gave the company an “increase in holdings” investment rating.
Risk warning. Food safety risks, natural disaster risks, and the operation of additional production capacity fell short of expectations.