2023H1's income / return net profit year-on-year + 17.8% to 6.63 billion / 210 million yuan, of which the profit decline is mainly due to rising costs & falling milk prices & biological assets impairment drag. During the reporting period, the herd scale, production and sales volume of the company expanded steadily, the performance of milk price and cost were better than that of the industry, and the ability to reduce cost and increase efficiency was further improved. Looking forward to the second half of the year, we expect the company's feed costs to remain low, raw milk prices flat than H1, and steady growth in revenue and profit for the whole year.

2023H1's income / home net profit is + 17.8% compared with the same period last year, which ranges from 58.8% to 6.63 billion / 210 million yuan. 2023H1 benefited from the expansion of herd size, the increase of per unit yield and the rapid growth of feed business, and the company's revenue increased by 17.8% to 6.63 billion yuan. 2023H1 is affected by the high operation of feed prices, the downward price of raw milk and the impairment of biological assets, and the company's net profit is-58.8% to 210 million yuan compared with the same period last year.

Feed cost pressure-the downward price of raw milk led to a decline in gross profit margin, during which the rate improved compared with the same period last year. In terms of business, 2023H1's raw milk income was + 3.8% to 5.04 billion yuan, accounting for 76%, mainly due to the continuous increase in herd size and per unit yield; new business (forage business and digital platform business) revenue from 105.3% to 1.59 billion yuan, accounting for 24%, of which forage sales business was + 42.8% to 1.11 billion yuan compared with the same period last year, mainly because the company effectively integrated grass resources to achieve rapid sales growth. 2023H1 raw milk business gross profit margin year-on-year-3.9Pcts to 28.3%, mainly due to the decline in milk prices; new business gross margin year-on-year-5.8Pcts to 5.9%, mainly due to the increase in the price of feed raw materials. Under the combined influence, 2023H1's gross profit margin was-6.5Pcts to 22.9% compared with the same period last year. 2023H1's sales / management / financial rates are year-on-year-0.3pct / flat / + 0.1pct to 2.6% 0.2Pct 5.7% Universe 3.9%. With the expansion of the business scale, the company's cost control performance is eye-catching, sales rates are down, management rates are flat, and company period rates are year-on-year-0.2Pct to 12.3%. The impairment of 2023H1 biological assets was 530 million yuan (mainly due to the decline in beef prices & the decline in raw milk prices and the rise in feed costs, which was 340 million yuan in the same period last year), which was a drag on profit performance.

The oversupply of raw milk & the high feed cost, the company's milk price fell by 4.4% and the cost per kilogram of raw milk increased by 1.7%, both of which outperformed the industry. Affected by the periodic oversupply of raw milk in the industry, the price of raw milk in 2023H1 Company also dropped 4.4% to 4.09 yuan / kg (the price of raw milk in the industry dropped 5.5% to 3.96 yuan / kg). The price of 2023H1 soybean meal / alfalfa / cottonseed is still at a relatively high level in history. From January to June, the price of soybean meal / alfalfa / cottonseed is-0.3% and 21% respectively compared with the same period last year. The price of soybean meal and alfalfa shows a monthly decline, while the price of cottonseed has increased since May. By simplifying the purchasing process, optimizing the feed formula, adjusting the feed structure, and continuously promoting cost reduction and efficiency, the company effectively suppressed the impact of the rise in feed costs, resulting in a 5.8% to 2.39 yuan increase in feed costs per kilogram of dairy cows. other costs per kilogram of dairy cows are-12.5% to 0.56 yuan compared with the same period last year, a record low, and the sales cost per kilogram of dairy cows increased by 1.7% to 2.95 yuan. The performance is better than the industry average.

The per unit yield of 2023H1 dairy cows was + 2.4% compared with the same period last year, the scale of adult dairy cows maintained expansion, and the company's raw milk production and sales increased steadily.

2023H1 benefits from effective herd management, feed formula optimization and continuous improvement of herd health. The per unit yield of dairy cows is + 2.4% to 12.6 tons compared with the same period last year, and the annual yield is expected to be stable at more than 12.5 tons. The company's dairy cow scale has maintained steady growth, with 419000 cows as of 2023H1, an increase of 36000 over the same period last year, including an increase of 8000 / 28000 adult / calves and young cows respectively. The increase in yield per unit area and the scale of adult dairy cattle pushed the company's raw milk production / sales in the first half of the year to 1.249 million tons / 1.233 million tons compared with the same period last year.

2023H2 outlook: milk prices continue to fall & feed prices fall at a high level, and production and marketing increase steadily. 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 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 production 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 1.3% higher than that of the same period last year. We expect the price of soybean meal to decline year on year. Corn costs are expected to fall steadily. The company has realized the layout of the whole industry chain from the seed industry, grass industry, feed, cow breeding and industry chain Internet trading platform. At present, the company has a leading cost advantage and a better profit performance than the industry. Under the guidance of the goal of "500000 stocks and 3.6 million tons of milk production in 2025", the company is expected to achieve steady growth in revenue and profit.

Risk factors: higher-than-expected decline in raw milk prices, sharp rise in feed costs, lower-than-expected capacity expansion, risk of environmental policy changes, cow disease and other natural risks.

Investment advice: considering that the company's 2023H1 profit performance is lower than expected, we downgrade the company's annual EPS forecast for 2023-24-25 to 0.06 Universe 0.10 Plus 0.13 yuan (the original forecast is 0.11 Universe 0.16 Plus 0.23 Yuan). Referring to the current price of comparable company Youran animal husbandry corresponding to the dynamic PE 5x in 2024 (wind consensus expectation), and considering that animal husbandry is in a downward cycle, short-term milk prices are still under pressure, and the company's excellent capital control capacity, we give the company's 2024 target PE 7 times, corresponding to the target price of HK $0.80, maintaining the "overweight" rating.