The company is a supplier of high-quality pigs in the Greater Bay Area, leading the Hong Kong supply business industry. Since listing, the company has accelerated the expansion of the scale of farming, continuously improved the integrated layout, gradually implemented industrial chain extension projects, and had great potential for future growth. Considering that the aquaculture boom is still relatively sluggish in the short term, we lowered the company's profit forecast for 2023-2024, added a profit forecast for 2025, and predicted an EPS of -1.63/2.65/1.71 yuan for 2023-2025. Referring to the valuation level of comparable companies, considering the company's domestic and overseas market allocation optimization and future growth potential, it is given 10 times PE in 2024, corresponding to a target price of 27 yuan, maintaining the “buy” rating.

Incident: The company released its 2023 annual report. 2023H1 achieved revenue of 556 million yuan, 20.5% year-on-year, and net profit of -330 million yuan, or -458.6%; of these, 23Q2 achieved revenue of 230 million yuan, -0.9% year-on-year, -29.2%, and achieved net profit of -139 million yuan, -418.4% yoy, +27.1%.

Our comments on this are as follows:

There has been a steady increase in listing, and sluggish pig prices and the epidemic are dragging down performance. The number of pigs released by the company maintained steady growth. 23H1 released 366,400 pigs, +50.9% year on year. Of these, 156,500 pigs were listed in Q2, +33.7% year on year, and -25.4% month on month. 23H1's average commercial pig price was 16.60 yuan/kg, down 12.6% year on year. The pig business achieved sales revenue of 528 million yuan, down 23.0% year on year. Pig prices were low in the first half of the year. At the same time, the company experienced diseases such as blue ear and pseudorabies in individual farms, which led to early and accelerated listing, compounded by expenses such as depreciation and amortization of new farms, and short-term pressure on the company's profit side.

As we continue to reduce costs and increase efficiency, farming costs are expected to drop. Excluding data on abnormal fields and newly built sites, the company's total cost in July-August was around 17.80 yuan/kg, of which the complete cost of excellent sites could reach 15.60 yuan/kg. Currently, the entire company is benchmarking the production management model of excellent farms, implementing batch production, and fully implementing a series of measures to reduce costs and increase efficiency. Population changes and sales volume continue to increase, and future costs are expected to drop further. According to the company's announcement, the company's goal is to reduce the complete cost to less than 17 yuan/kg within the year, and the goal for the next two years is to reduce the complete cost to less than 16 yuan/kg.

Pig production capacity is expanding at an accelerated pace, and the industrial layout continues to improve. According to the company's announcement, the company can currently keep more than 40,000 sows, and it is expected to keep about 65,000 sows by the end of the year. At present, the company has reserved land for 2 million heads of aquaculture projects, of which 1.5 million heads have been built, 500,000 heads are under construction, and is actively expanding and developing to surrounding cities. 200,000 head farming projects have been released in the Huizhou reserve year. Furthermore, the company continues to improve the industrial chain layout through fund-raising projects. On May 31, the company's slaughter and processing project was officially put into operation. It has signed strategic cooperation agreements with Shenzhen, Dongguan and other places, and supplies no less than 100/500,000 heads of pigs and meat products to Shenzhen/Dongguan each year. The company has sufficient number of sows on hand, low debt ratio, sufficient cash on hand, and strong ability to expand later.

Based on the company's planning and expansion capabilities, we expect the company's future sales volume to continue to grow, and it is estimated that the number of pigs released by the company will reach 100/160/2 million heads in 2024-2026. At the same time, as its industrial chain layout continues to expand, the company's profitability is expected to further improve.

Risk factors: The rise in pig prices fell short of expectations; the price of raw materials fluctuated greatly; the large-scale spread of the non-plague epidemic; the expansion of the company's breeding scale fell short of expectations; the improvement in the company's breeding efficiency fell short of expectations; changes in the pig breeding industry policy.

Profit forecast, valuation and rating: Taking into account low pig prices and changes in share capital, we adjusted the 2023-2024 performance forecast and added 2025. We expect 2023-2025 EPS to be -1.63/2.63/1.71 yuan respectively (the original 2023-2024 forecast was 3.94/3.53 yuan). Referring to the PE level expected by the comparable company Wind in 2024 (8 times Wenshi shares, 10 times Muyuan shares, 9 times New Hope), considering the company's domestic and overseas market allocation optimization and future growth potential, 10 times PE was given in 2024, corresponding to a target price of 27 yuan, maintaining the “buy” rating.