In 2019, the supply of duck and duck seedlings was relatively tight, combined with demand boosted. Duck prices rose significantly, and industry sentiment drove the company's duck fry business performance growth. However, the company has a large business sector layout, and large losses in some sectors have led to a decline in the company's overall operating performance, so the investment rating was temporarily downgraded to “Cautious Recommendation - A”.
Incident: Recently, the company revealed its latest monthly sales report. In November 2019, the number of duck seedlings sold by the company was 11.2321 million, an increase of 44.81% over the previous year and a decrease of 8.48%; sales revenue was 75.674 million yuan, an increase of 74.58% over the previous year and a decrease of 12.21% from the previous month. The company's duck seedling sales revenue rose sharply year on year, mainly due to the high level of prosperity in the industry, and the sales price of duck seedlings products remained high.
Tight supply is compounded by rising demand. The meat duck industry is expected to continue to be booming in 2020 due to environmental tightening in 2017 combined with the withdrawal of loss-making farmers in the industry. The recovery in duck breeding stock was slow in 2018, and supply of ducks and duck seedlings was still relatively tight in 2019. At the same time, affected by African swine fever, China's pig breeding production capacity has dropped drastically, there is a clear gap in pig supply, and the consumption of chicken and duck meat has been clearly boosted as a substitute for pork. According to Boya Hexun data, as of December 20, the average price of duck seedlings in the country's main production areas in 2019 was 5.42 yuan/feather, an increase of 32.62% over the previous year; the price of hairy duck in the main production areas was 8.56 yuan/kg, an increase of 8.95% over the previous year. According to data from the Ministry of Agriculture, as of November 2019, 2 million sows capable of breeding were kept, a year-on-year decrease of 34.57%. Looking ahead to 2020, pig prices are expected to remain high, and the popularity of the meat duck sector is expected to continue.
Higher costs are compounded by debt expenses. Short-term profits are under pressure. Although the company's duck fry sales revenue has risen sharply year over year, the company's slaughter frozen processing sector has increased costs due to rising purchasing prices of raw materials for major products, leading to a clear decline in operating profit. The company's operating profit fell 48.83% year-on-year in the first three quarters of 2019. At the same time, due to the tightening of the financing environment, the company's liquidity has been affected to a certain extent. Net cash flow from operating activities decreased by 269 million yuan compared to the same period of the previous year, a decrease of 78.98% over the same period last year. It was mainly used to pay bills due and payable.
Profit forecast and valuation: We expect the company's net profit for 2019-2021 to be 0.92/1.03/115 million, respectively, and the corresponding EPS of 0.17/0.19/0.22 yuan. Giving 30-32 times PE in 2020 yielded a target price of 5.70-6.08 yuan, with room for an increase of 4%-11% from the current price, giving it a “prudent recommendation - A” rating.
Risk warning: The company's operations fell short of expectations, duck prices fell short of expectations, cost control fell short of expectations, high pathogenic epidemics led to an increase in breeding mortality, and major food safety incidents.