Key points of investment:
Overview of Wenshi Convertible Bonds (123107.SZ):
AAA grade, with a bond balance of $7.739 billion, accounting for 83.24% of the total amount issued, with a remaining term of 3.34 years.
The latest closing price is 126.14 yuan, the conversion premium rate is 11.21%, and YTM is -3.48%.
Main stock: Wen's shares (300498.SZ) Overview:
The leader in the pig breeding industry, with a total market value of 128.5 billion yuan. The actual controllers are the Wen family, individuals of a nature, holding a total of 15.78% of the shares. The net profit growth rate for the most recent period was -760.77%. WIND unanimously anticipated the 2023EPS growth rate -134.82%. The current stock price corresponds to PB (MRQ) 3.75x, which is at the 57th quartile of the last 5 years.
The main points of interest:
1) The pig cycle will not disappear: This round of pig cycle bottoming out time is longer than before, and Shanzheng Agriculture expects 2024 to reach the fourth “bottom loss” in this cycle. However, we believe that regardless of the scale of the industry, domestic and foreign pig prices are characterized by cyclical fluctuations, and the pig cycle will not disappear.
2) The inflection point is unknown, and debt conversion is defensible: Currently, the market generally accepts that the pig cycle is at the end of the cycle, but the inflection point is highly controversial. We believe that considering uncertainties such as bottoming out time, loss margin, and systemic risk, etc., the current scenario allocation-related debt conversion may be more preferable. The downside risk of allocating debt conversion can be controlled without missing out on sectorial gains; it is also possible to allocate a small amount as an observation warehouse, focus on it, and then allocate more stocks when an inflection point is established.
3) Industry leader, preferred configuration: Wen's is the leader in the breeding industry. It has opened up the entire “raw material-farming-slaughtering-processing-sales” industry chain, leading the country in breeding scale. In 2022, the number of pigs released was second in the industry, and the market accounted for 2.56%; the yellow feather broiler industry ranked first, with the market accounting for 28.98%. At the same time, the company's balance ratio is relatively low, the number of sows that can breed is high, and the growth rate is better among enterprises of the same level.
4) Wen's convertible bonds have a high rating and a large scale, and are the mainstream varieties in the market; at the same time, both low are attractive. The implied volatility is lower than the historical volatility of the last 120 days, and the value of options may be underestimated.
Reasonable valuation derivation of convertible bonds
At this point, we recommend arranging the pig cycle by allocating Wen's convertible bonds. Based on the valuation model of Mountain Securities convertible bonds, assuming that the underlying stock price does not change, and combining BSM, binary tree, and MC simulations, we believe that the reasonable valuation of Wen's convertible bonds is 127-138 yuan.
Risk warning: risk of debt conversion and redemption; risk of aquaculture epidemic; risk of natural disasters; risk of price fluctuations of feed ingredients, etc.