1H23 performance is in line with market expectations
The company announced 1H23 results: revenue of 6.63 billion yuan, +18% year-on-year; net profit of 210 million yuan, -59% of the same period; net profit was basically in line with market expectations.
Development trends
Revenue contributed by the new business grew relatively well, and the revenue performance of raw milk was steady. 1H23's revenue increased 18% year over year. Among them, sales of raw milk and new business (mainly beef raising and feed business) increased by 4% and 105% year on year, respectively, and the share of new business sales increased from 14% to 24%. The size of 1H23's herd increased from 405,000 to 419,000 heads at the end of 2022 (vs. 1H22,383,000 heads, same increase of 9.4%, and the share of adult dairy cows decreased by 2.5ppt to 48.8% year on year). Benefiting from genetic improvements and technical improvements, the yield of 1H23 dairy cows increased 2.4% year-on-year to 12.6 tons. Benefiting from the natural increase in herds and the increase in yield, 1H23's output increased by 8.7%. In terms of milk prices, hampered by weak demand, 1H23, domestic raw milk prices fell 5.5% year on year, and the company's milk price fell 4.4% year on year, slightly better than the industry.
Benefiting from increased production and sales, 1H22's raw milk revenue also increased 4%.
The decline in milk prices dragged down 1H23 profit margins, and the company outperformed the industry under domestic benefits. 1H23's raw milk gross margin fell 3.9ppt to 28.3%, mainly due to falling milk prices and a slight increase in costs. Dragged down by a decline in gross margin, an increase in losses due to changes in the fair value of dairy cows, reduced sales costs, and an increase in financial expenses, 1H23's net interest rate fell 5.9ppt to 3.2% year on year, benefiting from month-on-month cost improvements, and an increase of 2.3 ppt in the company's net interest rate. On the cost side, the price of 1H23 alfalfa grass feed increased 21% year on year, and the company's comprehensive purchase price of bulk feed rose 9.2% year on year, but benefiting from the increase in yield and other cost reductions (the cost of non-feed kg milk fell 0.08 yuan year on year), the sales cost of 1H23 kg milk was +1.7% year on year. The performance was better than the industry, and the internal benefits were obvious.
Cost reduction and efficiency continue to advance, and 2H23 operations may basically continue the 1H trend. According to data from the Ministry of Agriculture, social milk prices fell 8.8% year on year in July-August, mainly due to relatively weak consumer demand, increased supply, and seasonal factors. On a month-on-month basis, milk prices stabilized. Taking into account the supply and demand situation, we expect that milk prices may still be under pressure year-on-year in the second half of the year, and that the company's milk prices may fall by about one unit during the year. In terms of cost, considering the high cost base of 2H22 and the comprehensive cost is currently basically stable, we expect the cost of kilogram milk to decline year-on-year in the second half of the year; considering that the company continues to reduce costs and increase efficiency, we expect the 2H23 gross margin decline to narrow month-on-month, and gross margin may be basically stable month-on-month.
Profit forecasting and valuation
The company traded 10.6/6.4 times the 2023/24 price-earnings ratio. Considering the decline in milk prices, the 23/24 profit forecast was lowered by 48.9%/27.4% to 50.80 million yuan. The target price was lowered by 16.7% to HK$1, corresponding to 14.1/8.5 times the 2023/24 price-earnings ratio and 33% room for the stock price to rise. Maintain outperforming industry ratings.
risks
Demand is weak; milk prices are falling; feed costs are rising.