Key points of investment
Investment advice: Maintain the “increase in holdings” rating with a target price of HK$1.17. While developing new businesses, the company will provide high-quality fresh raw milk to its customer base, provide high-end high-quality and reliable milk sources to dairy producers, and help producers produce healthy and diversified products to give back to consumers. We expect the company's revenue for 2023/2024/2024/2025 to be 172.7/226.9/28.77 billion yuan, a year-on-year ratio of +40.5%/+31.4%/+26.8%; the net profit of the mother is 135/21.4/31.0 billion yuan, +140.8%/+58.3%/+44.5%, respectively. The company's target price corresponds to 6 times P/E in 2023.
Revenue was high and growing rapidly in double digits. The company's revenue in 2022 was +73.7% year on year to 12.30 billion yuan, of which raw milk revenue was +42.0% year on year to 9.95 billion yuan. The company began feed sales business after completing the acquisition of Fuyuan International in November 2021, and recorded sales revenue of 2.35 billion yuan in 2022. Adjusted net profit was $950 million, +2.7% year on year.
Operating indicators have improved markedly, and core business growth has been strong. In 2022, the basic development of the company's core business, raw milk, was stable and resilient. In 2022, the group's herd size reached 405,000 heads, an increase of 5.1 thousand heads over the previous year; the average annual yield of adult dairy cows increased by 8.0% to 12.2 tons per head, leading the industry; milk production reached 2.36 million tons during the reporting period, +46.6% year on year.
Affected by fluctuations in feed costs and milk prices, the gross margin of the raw milk business is under pressure. Since the beginning of 2022, domestic and foreign feed prices have risen sharply. The average cost of the company's raw milk feed was 2.33 yuan/kg, an increase of 0.22 yuan/kg over the previous year; the average price of raw milk sold during the same period was 4.27 yuan/kg, a decrease of 3.2% over the previous year. The company's financial performance is highly correlated with milk prices and feed costs. Affected by fluctuations in feed costs and milk prices, the gross margin of the company's raw milk business in 2022 was 31.1%, year-on-year - 5.1pct.
Acquire Aiyu Cow Technology to enhance the upstream and downstream collaboration advantages of the dairy industry. The company completed the acquisition of 75% of Aiyangniu Technology's shares on June 28, 2022. Aiyangniu Technology is mainly engaged in animal husbandry e-commerce platforms, animal husbandry service cloud platforms, animal husbandry service industry operations, etc. in China. The acquisition of Aiyangniu Technology can further strengthen the collaborative advantages of the company's industrial chain.
Risk warning: Product safety issues, raw milk quality does not meet standards, forage costs exceed expectations, raw milk prices fall short of expectations, herd diseases.