1H23's performance was in line with the forecast; gross margin or month-on-month improvement in the second half of the year was due to insufficient demand for dairy terminals, the price of raw milk continued to fall, compounded by high feed costs and loss of fair value of biological assets, which increased to 5.3 billion yuan (1H22:350 million). Modern Animal H23's net profit fell 58.8% year-on-year to 210 million, and the performance was in line with the previous profit warning (200-220 million). We expect terminal demand to improve marginally in the second half of the year, while raw milk prices may remain weak, while the year-on-year pressure on feed costs will ease somewhat, driving a month-on-month recovery in gross margin. We lowered the 2023E-25E basic EPS forecast by 10.8/5.0/ 2.7% to 0.07/0.12/0.15, mainly reflecting the lower gross profit margin. We lowered our target price by 4% to HK$0.90, based on a 12-month dynamic EPS of $0.10 and 8.3 times dynamic PE (average PE since 2019). Maintain the “buy”.
Increased sales volume was partly offset by weak raw milk prices
1H23 revenue increased 17.8% year over year to 6.63 billion. Among them, revenue from the raw milk business increased 3.8% year on year, driven by a 4.4% year-on-year drop in raw milk prices (the average domestic raw milk price fell 5.6% year on year during the same period) and an 8.7% year-on-year increase in raw milk sales. 1H23 feed business revenue increased 42.8% year over year to 1.11 billion; while digital intelligence platform (industrial chain internet trading platform) revenue was 480 million yuan (1H22:0). In the first half of the year, the company's total herd/adult cows increased 9.4/ 9.5% year on year to 418,596/204,086 heads, adult cows accounted for 49% (1H22:51%), and yield increased 2.4% year over year to 12.6 tons. We expect annual raw milk business revenue to increase 5.3% year over year to 10.5 billion yuan. Of these, raw milk prices will drop 3.7% year on year, and sales volume will increase 9.3% year on year.
Profit margins are squeezed by weak milk prices and high feed costs
1H23 The gross margin of raw milk fell 3.9 pp to 28.3% year on year, mainly due to falling raw milk prices and rising feed costs. The cost of feed per unit of 1H23 increased by 5.8% year on year to 2.39 yuan/kg of milk. According to Wind, the average domestic price of 1H23 corn/soybean meal increased 4.8/ 1.3% year on year. Low gross profit margin is included (1H23:
After 5.9%) of the new business (feed business and digital intelligence platform business), 1H23's overall gross margin fell 6.5 pp to 22.9% year over year. The ratio of 1H23 operating expenses to sales increased slightly by 0.3 pp to 8.3%; financial expenses increased to 260 million dollars (1H22:150 million), mainly due to an increase in actual loan interest rates. 1H23's net debt declined slightly to 9.9 billion from the end of '22 ($10.1 billion), and the net debt ratio increased slightly by 2.0pp to 84% during the same period. After accounting for higher changes in the fair value of biological assets (1H23:5.3 billion), the 1H23 net interest rate fell 5.9pp to 3.2% year-on-year.
Adjust profit forecasts; maintain “buy”
Hyundai Animal Husbandry's stock price corresponds to 6.9 times the 12-month dynamic PE, a 17% discount compared to the average PE value since 2019 (8.3 times). The company's stock price has fallen by 24% from the beginning of the year, which may reflect investors' expectations of weak demand. Considering that milk prices may gradually recover next year will help repair the company's performance and maintain “buying.”
Risk warning: 1) raw milk prices are lower than our expectations; 2) feed costs are rising rapidly; 3) capital expenditure is higher than our expectations; and 4) implementing expensive external financing plans.