Due to the low pig prices, 2023Q2 brings losses in breeding, impairment and asset disposal, which makes profits under pressure, but the company's prefabricated food business has achieved rapid development under the recovery of demand, and the product-channel expansion is smooth. It is expected that 2023H2 still faces operating pressure but weakens month-on-month, while the prepared food business is expected to continue to develop rapidly.

2023H1 revenue is-1.3% year-on-year, and its net profit is a loss of 670 million yuan, which is in line with the performance forecast. 2023H1 achieved revenue of 6.73 billion yuan, year-on-year-1.3% (Q2 year-on-year-6.5%), net profit of 670 million yuan and profit of 36.18 million yuan in the same period last year (Q2 net profit of 650 million yuan and profit of 12.75 million yuan in the same period last year) The non-return net profit deducted was 460 million yuan, compared with a profit of 89.13 million yuan in the same period last year (Q2 deducted a loss of 490 million yuan in the same period last year and a profit of 42.72 million yuan in the same period last year). Q2 company suffered a large loss mainly due to the decline in pig prices leading to the company's pig farming losses and impairment and other factors, performance in line with the previous forecast.

The downward price of pigs has put pressure on the growth of slaughtering business, and the business of prepared vegetables has maintained rapid development. From a sub-sector point of view, 1) slaughtering business: 2023H1 achieved external income of 4.7 billion yuan,-8.5% year-on-year, of which 3.27 million heads were slaughtered, basically the same as the same period last year, and the decline in revenue was mainly due to the decline in pig prices. 2) Food business: 2023H1 achieved revenue of 1.08 billion yuan, + 58.8% year-on-year, of which prefabricated food 2023H1 achieved revenue of 960 million yuan, + 89.4% year-on-year, mainly due to good customer demand at downstream B end after the epidemic. At the same time, the company is actively expanding its products and channels. In the first half of the year, the company opened up its major customer Coffee Coffee and supplied it with roast sausage products, with a revenue contribution of more than 10 million yuan. the key fat sausage series continues to launch white water fat sausage, stewed fat sausage, fat intestine chicken, fat intestine fish and other products this year. Under the strategy of "solidifying the old and opening the new" to the original big B customers, the company actively expanded the small and medium-sized B channels. Xintuo had more than 280 prefabricated vegetable dealers in the first half of the year, and the total number of prefabricated food dealers in 2023H1 has exceeded 1000. From a regional point of view, the income of Shandong, the main sales area of 2023H1, and other areas of East China has reached 2.62 billion yuan, which is + 4.4% and 16.9% respectively compared with the same period last year. Central China / North China / South China / Northeast / Southwest / Northwest and other regions 2023H1 realized income of 9.3%, 3.8%, 3.8%, 34.3%, 15.6%, 98.8%, respectively, compared with the same period last year.

Mostly due to the decline in gross profit margin, the decline in pig prices led to impairment and other losses to expand losses, profitability under pressure.

2023H1, the gross profit margin of the company is reduced by 5.4Pcts to-1.0% (Q2 is down by 12.1Pcts), among which the gross profit margin of different businesses is different. Among them, the gross profit margin of the slaughtering industry is also reduced by 2.2Pcts, which is judged to be mainly due to the decline in pig prices leading to breeding losses. The gross profit margin of prefabricated vegetables increased with 0.2Pct and remained stable. In addition, Zhonghe Shengjie 2023H1, a subsidiary of the company mainly engaged in import business, made a loss of 76.55 million yuan (59.56 million yuan in the same period last year), mainly due to the decline in the price of frozen beef and mutton, which was also a drag on the company's gross profit margin. The overall cost of 2023H1 sales / management / R & D / finance remained stable compared with the same period last year. The year-on-year cost of 2023Q2 sales / management / R & D / finance was-10.6%, 5.3%, 22.8%, 15.7% and + 0.9%, respectively. Among them, the sales expenses / management expenses / R & D expenses / financial expenses of RPG were-7.3%, 4.8%, 27.9% and + 20.5%, respectively.

In addition, as the 2023Q2 pig price is below the breeding cost line and shows a continuous downward trend, the superimposed company optimizes the stock structure, resulting in an asset impairment loss of 190 million yuan (Q2 amount of 190 million yuan) and asset disposal loss of 170 million yuan (Q2 loss of 160 million yuan). The combination led to a reduction in 2023H1's parent net interest rate by 9.8Pcts to-9.3% (Q2 to-19.9% by 20.2Pcts).

It is expected that H2 is still under operating pressure, but the month-on-month ratio is weak, and the prepared food business is expected to maintain a rapid development trend. Due to the small volume of prepared food business, the company's performance is still dominated by the breeding and slaughtering business, which is closely related to pig prices. Looking forward to 2023H2, pig prices have risen since July, and the company also expects that the trend of pig prices in the second half of the year will be better than that in the first half of the year. However, due to the high stock volume and frozen meat inventory in the industry, the flexibility of pig prices may be limited, which makes the company's breeding and slaughtering business still face operating pressure. And prefabricated food in the company's main channel B-end demand continues to recover, expand products-expand customers, is expected to continue to maintain a rapid growth rate.

Risk factors: the risk of large fluctuations in pig prices; the expansion of new prefabricated dishes is not as expected; the expansion of prefabricated food channels is not as expected; market competition is greatly intensified; food safety issues.

Investment suggestion: taking into account the pig price trend and the company's performance and other factors, adjust the EPS forecast from 2023 to 2025 to-0.43, 0.16, 0.26 (the original forecast is 0.10, 0.19, 0.36). It is expected that the scale of the company's prefabricated food business will continue to develop rapidly, so as to successfully complete the business transformation and stabilize the cyclical fluctuation of performance.