Overview of events

On August 29, 2023, the company released interim results in 2023, achieving revenue of 6.63 billion yuan, + 17.8% year-on-year; net profit of 220 million yuan,-59.0% year-on-year, in line with previous profit warning; cash EBITDA of 1.27 billion yuan, year-on-year-11.8%; net operating cash increased by 70.2% to 2.18 billion yuan, and free cash flow changed from negative to positive to 900 million yuan. Among them, the annual per unit yield of adult dairy cattle increased to 12.6 tons, + 2.4% compared with the same period last year, and the raw milk output reached 1.249 million tons, + 8.4% compared with the same period last year.

Analysis and judgment:

Income end double-digit growth, new and old business complementary co-development of the company in the reporting period, from the herd size, per unit yield, total milk production and raw milk sales revenue have achieved a breakthrough. According to the China report, the overall revenue of 1H23 increased by 17.8% to 6.63 billion yuan compared with the same period last year. Among them, the sales revenue of raw milk reached 5.04 billion yuan, an increase of 3.8% over the same period last year. From the split volume price, the total milk production of raw milk in the core business reached 1.249 million tons, an increase of 8.4% over the same period last year, but the average selling price was 4.09 yuan / kg,-4.4% compared with the same period last year. Although the company's raw milk sales price has dropped, it is better than the industry; as of June 30, 2023, the company has invested and operated a total of 42 farm companies in mainland China, raising a total of 418596 dairy cows. Coulan Niu Tau + 9.4% compared with the same period last year, among which the annual yield of adult dairy cattle increased by 2.4% to 12.6 tons.

At present, raw milk enterprises are facing the industry dilemma of high feeding costs and low milk prices, resulting in an oversupply of raw milk market, so modern animal husbandry has added new business sectors in the past two years, including forage sales, digital intelligence platform and so on. The new business not only serves the core dairy industry, but also increases new profit growth points, reduces costs and enhances the ability to resist risks. According to the company's medium report, the overall income of the new plate in the first half of 2023 was 1.59 billion yuan, an increase of 105.3% over the same period last year, of which the feed business contributed 1.11 billion yuan, + 42.8% compared with the same period last year, leading the industry; and Mathematical Intelligence platform contributed 480 million yuan. The share of new business in the group's total revenue has increased by 10 percentage points. The coordinated development of new and old business has further improved the whole industry chain, adding new impetus to the sustained and steady development of the group.

Profits are squeezed down by weak milk prices and high feed costs, and are expected to improve in the second half of this year. According to China Finance and Economics, in the first half of this year, due to weak dairy consumption, milk prices continued to decline and breeding costs continued to rise, leaving the domestic raw milk industry losing as much as 60%. At the same time, due to the conflict between Russia and Ukraine and rising prices of protein feed such as soybean meal, the company's gross profit margin and net profit data fell. According to the company's report, the gross profit of 1H23's core raw milk business was 28.3%, year-on-year-3.9pct, while net profit fell to 220 million yuan,-59.0% year-on-year. The average feed cost of raw milk of 1H23 Company was 2.39 yuan / kg, up 5.8% from the same period last year, mainly due to the increase in market prices of major raw materials such as soybean meal and alfalfa. According to the report, the average import price of alfalfa in the first half of 2023 was US $566.5 / ton, an increase of 21.0% over the same period last year, while the average prices of soybean meal and corn were 4.6yuan / kg and 2.97yuan / kg, up 4.0% and 1.2% from the same period last year. On the other hand, the oversupply of milk in the market has led to weak milk prices. according to data from the Ministry of Agriculture and villages, domestic milk production increased by 7.5% in the first half of the year compared with the same period last year, but the average price of fresh milk (raw milk, raw milk) in the main dairy producing provinces was 3.96 yuan / kg, down about 5.7% from mid-2022, and the monthly average price fell for eight months in a row.

According to Sun Yugang and CFO Zhu Xiaohui, presidents of China News and Zhitong Finance, the company focuses on cost-leading strategy to achieve cost reduction and efficiency: first, continue to increase per unit yield and total production. The annual yield of 1H23 adult dairy cattle reached 12.6t, a year-on-year + 2.4%, another peak; second, by accurately grasping market nodes, formulations and prices, through futures price locking in advance and precise management of pastures, the company has locked in 80-90% feed prices in the second half of the year and about 50% soybean meal prices in January-September next year; third, vigorously increase the proportion of characteristic milk, including organic milk and A2 milk, and raise milk prices. The company has laid out two organic milk industrial parks, and it is expected that the daily sales of organic milk will be 400 tons by the end of the year, and the proportion of characteristic milk in 25 years will be increased to 10%. The fourth is to tap potential and reduce expenditure, save other cash costs and improve efficiency.

Cash flow is bright, financial leverage is steadily declining, rating stable companies continue to reduce costs and increase cash internally, and externally actively tap the potential of upstream and downstream coordination to cope with the operating pressure of the industry, resulting in a 70% to 2.18 billion yuan increase in net operating cash compared with the same period last year. Free cash flow rebounded sharply from-560 million in the same period last year to 900 million yuan this year. The net leverage ratio of modern animal husbandry 1H23 (in terms of total interest-bearing loans minus the percentage of cash and deposit assets in total equity) is 80.6%, 4.6 percentage points lower than that of December 31, 2022; according to the report, the financing cost ratio in the first half of the year was 3.5%, year-on-year-0.01pct; the net interest-bearing debt ratio dropped to 44.6%, year-on-year-1.4pct, and financial leverage declined steadily. At the same time, according to the company's management, it is expected that the free cash flow in the second half of this year will still be positive, and the operating cash flow will be 3 billion to 4 billion next year. The overall investment will match the cash flow next year, and will still maintain a positive free cash flow to cope with the trough of the industry.

Modern Animal Husbandry has been awarded "BBB" investment grade credit rating by S & P for three years in a row, and its outlook is stable. It is the first Chinese dairy company in China to receive this rating, which fully demonstrates the confidence of the capital market in the company's performance in many aspects, such as sustained growth and financial soundness. The credit rating also confirms the affirmation of the international credit rating agencies on the large-scale farming model of the company and even China, and also helps the company to obtain more competitive financing terms.

Investment suggestion

In the long run, with the increasing warming of the domestic consumer market and the clearance of the industry, the raw milk enterprises in the head may usher in a recovery, and the raw milk production capacity of modern animal husbandry will also begin to enter a period of rapid release, relying on the cost leadership and the organic coordination of new and old businesses. it is expected that profits will significantly improve in the second half of the year, and the company's business will continue to develop with high quality and steady growth. With reference to the latest financial data of the company, the 23-24 revenue is increased by 1.288 billion yuan to 14212.2 billion yuan, the net profit of return to the mother is reduced by 141.6 billion yuan to 1.2 billion yuan, and the net profit of EPS 0.17 pound is reduced to 0.15 yuan, and the 25-year income / net profit of return to the mother is forecast to be 18.8 billion yuan, and EPS is 0.20 yuan. The closing price on October 31, 2023 is 0.80 HKD, which corresponds to a multiple of 9-5-4 (the exchange rate of the Hong Kong dollar to the RMB is 0.9350), maintaining a "buy" rating.

Risk hint

Risk of continuous decline of newborn population; risk of food safety; risk of change in raw milk price; control of carbon emission reduction on animal husbandry