2023H1 year-on-year company income / return net profit + 4.2% pesque 552.3%, milk price decline year-on-year, feed costs continue to be under pressure, superimposed biological assets fair value adjustment greatly dragged down the company's first-half profits. Considering the limited improvement in raw milk prices and costs during the year, the company's results in the second half of the year are expected to remain under pressure. As the unit yield increases & the pasture is put into production, the company's cattle herd is expected to continue to expand in the coming years, driving revenue growth.

Income grew steadily, and the adjustment of the fair value of biological assets dragged down the net profit. 2023H1 realized income / homing net profit of 90.8 million yuan, which was + 4.2% and 552.3% respectively compared with the same period last year, of which the fair value adjustment of biological assets resulted in a loss of 2.26 billion yuan (850 million yuan in the same period last year). From a business point of view, the business income of the systematic solution for raw milk / ruminant breeding is 6.16 billion yuan respectively, which is 16.3% compared with the same period last year. Among them, the decline in business revenue from the systematic solution for ruminant breeding is mainly due to the company's active adjustment of sales strategy in response to the narrowing of industry breeding profits. 2023H1's gross profit was 2.09 billion yuan,-0.2% year-on-year, and gross profit margin was-1.0Pct to 23.1% year-on-year, mainly due to the decline in raw milk prices and high feed costs. The sales expense rate of 23H1 company increased from + 0.1Pct to 3.3% compared with the same period last year, mainly due to the increase in warehousing expenses for controlling the raw material cost reserve at the beginning of the year, and the management expense rate from + 0.2Pct to 4.0% compared with the same period last year. The financial expense rate increased from + 0.3Pct to 6.2% compared with the same period last year, mainly due to the increase in interest on bank loans.

Feed costs continued to be under pressure, and the gross profit margin of raw milk business decreased compared with the same period last year. 2023H1 domestic raw milk supply phase surplus, the company's milk prices from-5.2% to 4.39 yuan / kg,2023H2 since the demand side gradually improved and festivals pull downstream sales, H2 company milk prices are expected to remain stable compared with H1. On the cost side, due to the increase in the cost of feed raw materials and forage grass, the company's 2023H1 feed cost per kilogram is + 2.5% to 2.49 yuan compared with the same period last year. Through large-scale procurement, technological innovation to reduce costs and efficiency and formula optimization and other measures, the company has partially stabilized the pressure of rising costs.

Rising costs led to the company's 23H1 raw milk business gross profit margin-4.0Pcts to 28.3% year-on-year, profit pressure.

The gross profit margin of 2023H1's ruminant breeding systematic solution business was + 0.1Pct to 12.0% compared with the same period last year, mainly due to the increase in gross profit margin of dairy supermarket breeding consumables sold by the company.

The per unit yield of dairy cows is more than 12 tons per year, and the production and sales of raw milk are growing rapidly. With the expansion of its own operating farms and the gradual release of production capacity of new farms, the company's 2023H1 cow stock is + 20.6% to 539000 compared with the same period last year, cow expansion has maintained double-digit growth, and the proportion of adult dairy cattle in the company has increased from + 0.3Pct to 47.0% year-on-year. Through the fine management and control of TPM, the effective integration of M & A business and the application of advanced technology, 23H1's own cow per unit yield (excluding Jersey cattle) is + 7.0 to 12.2 tons compared with the same period last year, maintaining the trend of increase in per unit yield; the daily per unit yield of some farms exceeded 49kg, reaching the world's leading level; Inner Mongolia Yoran (excluding mergers and acquisitions of Fonterra China Ranch) per unit yield from + 5.0 to 12.5 tons. The superimposed yield increase of dairy cows pushed the company's 23H1 raw milk production to + 24.9% to 1.437 million tons year-on-year, and sales to 1.402 million tons.

2023H2 outlook: the pressure of feed cost is expected to be alleviated, and the construction of the whole industry chain of the company continues to deepen. Affected by the imbalance between supply and demand in the industry, raw milk prices have continued to decline since 2023. Data from the Ministry of Agriculture and villages show that raw milk prices in August are-8.7% year on year, and we expect prices to decline in the whole year. Driven by the release of capacity and the launch of new products, 2023H2 expects its revenue to be faster than that of H1. On the cost side, with the arrival of the new harvest season, the pressure on feed costs is expected to be alleviated. According to the Ministry of Agriculture and Agriculture, the price of soybean meal / corn in August is + 5.0% and 1.3% compared with the same period last year. We expect the price of soybean meal to decline year on year, and the cost of corn is expected to fall steadily. With the gradual production of the company in the construction of pastures and the continuous optimization of the cattle structure of the existing pastures, the company's raw milk production and sales are expected to continue to grow.

The company continues to promote the construction of the whole industry chain, focuses on lean operation in the field of raw milk business, gradually moves towards digital intelligence, strengthens breeding technology, standard enabling grass industry, and optimizes feed production in the business field of systematic solutions for ruminant breeding. the company's systematic service capacity continues to improve.

Risk factors: raw milk prices fell more than expected; feed costs rose sharply; the company's capacity expansion was lower than expected; environmental policies changed more than expected; cow diseases and other natural disasters; increasingly fierce competition in the industry.

Investment advice: considering the higher-than-expected loss on the value of 2023H1's biological assets, we downgrade the company's annual EPS forecast for 2023-24-25 to-0.37max 0.19max 0.39 yuan (the original forecast was 0.21max 0.25max 0.28 yuan).

With reference to the comparable company's current price of modern animal husbandry corresponding to the 2024 PE 5x valuation (Wind consensus expectation), taking into account that the animal husbandry is in a downward cycle, the short-term industry dairy industry is still under pressure, and the company's leading position in domestic farms, it is given 7 times PE in 2024, corresponding to the target price of HK $1.60, maintaining the "overweight" rating.