In the first half of 2023, the company was affected by a long-term slump in pig prices. The pig breeding business lost money, which dragged down the company's overall performance. The company's feed business is developing steadily, its scale advantage continues to expand, and its profitability has increased year-on-year.
It is expected that with the marginal recovery in pig prices in the second half of the year, the company's performance is expected to improve marginally. The company's hybrid industry is developing at an accelerated pace and is about to enter a stage of high growth. The industrialization of biological breeding is approaching, and a significant lead has helped the company open up room for performance growth. Taking into account factors such as pig breeding, the prosperity of the feed and hybrid industry, the progress of the industrialization of biological breeding, and the competitive advantages of the company's various businesses, and factors such as low pig prices, we lowered our 2023-2025 EPS forecast to 0.05/0.43/0.60 yuan. Referring to the valuation level of comparable companies in the feed, pig breeding, and seed industries, the overall valuation of the company was given 20 times PE in 2024, corresponding to a target price of 9 yuan, and the “buy” rating was maintained.
Pig prices continue to be sluggish, dragging down overall performance. Dabeinong released its 2023 mid-year report. 23H1 achieved operating income of 15.67 billion yuan, an increase of 17.0% over the previous year; realized net profit of 770 million yuan, net profit of non-return net profit of 750 million yuan, an increase in losses over the previous year. In the first half of 2023, as pig prices continued to be sluggish for a long time, the company's breeding business increased losses, which dragged down overall performance.
The scale of feed sales continues to expand, and profitability is steadily increasing. 23H1's feed business contributed 11.61 billion yuan in revenue, an increase of 21.4% over the previous year, accounting for 74.1% of the company's revenue. By providing comprehensive services to small and medium-sized farmers, family farms, large-scale farms, etc., the company has broadened feed sales channels and scale, and feed sales have steadily increased, laying the foundation for the company to increase revenue. 23H1's feed sales volume was 2.782 million tons. Among them, 2,226 million tons of pig feed accounted for 55.8%, up 22.4% year on year; 325,000 tons of ruminant feed, up 16.5% year on year; and 149,000 tons of aquatic products, down 15.2% year on year. The company adjusted and optimized the feed sales structure, focused on the supply of high-quality feed, further expanded its scale advantage, and steadily increased the profitability of the feed sector. The gross profit margin of 23H1's feed products was 12.1%, an increase of 0.65 pct over the previous year. We estimate that the 23H1 feed sector contributed about 370 million yuan in net profit to the mother, an increase of more than 20% over the previous year. We expect the company's feed sector to maintain steady operation in 2023, setting the basis for performance.
Farming has suffered serious losses, and marginal restoration is expected in the second half of the year. 23H1's pig breeding business achieved revenue of 2.75 billion yuan, an increase of 50.2% over the previous year; the gross profit margin was -7.8%, down 8.8 pcts from the previous year; and the holding company released 1,725 million pigs, an increase of 38.3% over the previous year. In the first half of the year, as pig prices continued to be low for a long time, the pig breeding industry lost deep losses, and the company's breeding business was also under gradual pressure. We estimate that 23H1's pig breeding business contributed about 750 million yuan to the mother's net profit. Since July 2023, pig prices have picked up marginally. Considering that Q4 is the traditional peak consumption season, the increase in demand is expected to boost pig prices to a certain extent. We expect 23H2 overall pig prices to increase month-on-month, and the company's pig breeding performance or marginal recovery.
The volume and price of the hybrid industry have risen sharply, and the advantages of biological breeding are remarkable. 23H1 sold 10.64 million kilograms of seeds, up 22.7% year on year, contributed 260 million yuan in revenue, and increased 45.5% year on year. Among them, rice seed sales revenue was 167 million yuan, up 4.3% year on year; corn seed sales revenue was 74.39 million yuan, up 553.9% year on year.
The volume and price of the company's hybrid industry have risen sharply, content growth and epitaxial expansion are driven by two-wheel drive. The scale advantages of the corn, rice, soybeans, and commercial seed industries continue to expand, and the regional layout continues to advance. The development of the company's seed industry has entered a new stage of rapid growth. Furthermore, the company's corn industry and biological breeding have developed collaboratively, forming strong cooperation. According to a report from the Ministry of Agriculture and Rural Affairs, in the pilot cultivation of genetically modified corn and soybeans during this planting season, insect resistance and herbicide resistance were outstanding, and crop production increased markedly. We believe that the company's seed characteristics and varieties have shown stable performance in this season's planting pilot. We believe that the industrialization of biological breeding is actually nearing implementation, and that China's seed industry is about to begin a new era. The company's biological breeding business has a significant leading edge and is expected to provide the company with continuous and considerable flexibility for performance growth.
Risk factors: risk of pig price fluctuations; risk of pig breeding epidemics; risk of price fluctuations in feed raw materials; industrialization of biological breeding falling short of expectations; risk of natural disasters; risk of fluctuations in food prices, etc.
Profit forecasts, valuations and ratings: Pig prices continued to be sluggish for a long time in the first half of 2023, dragging down the company's overall performance.
The feed business is developing steadily, the scale advantage is expanding, and profitability is steadily increasing. As pig prices marginally pick up in the second half of the year, pig breeding performance is expected to improve marginally. The volume and price of the company's hybrid industry have risen sharply, and the biological breeding business has a significant leading edge, bringing continuous and considerable room for growth in performance. Combining factors such as the prosperity of the pig breeding, feed, and hybrid breeding industry, the progress of the industrialization of biological breeding, and the competitive advantages of the company's various businesses, and considering factors such as low pig prices, we lowered our 2023-2025 EPS forecast to 0.05/0.43/0.60 yuan (the original forecast was 0.29/0.45/0.62 yuan). Referring to Wind's unanimous expectations for feed (Haida Group, New Hope, average of 11.9 times PE), pig breeding (Wen's shares, Mokuyuan shares, Superstar Farming and Animal Husbandry, etc.), and the seed industry (Denghai Seed Industry, Quanyin Hi-Tech, Longping Hi-Tech average 34.0 times PE), combined with the company's competitive advantage in business, gave the company an overall PE valuation of 20 times in 2024, corresponding to the target price of 9 yuan, maintaining a “buy” rating.