Under the goal of becoming the hog farming leader in Hunan Province, New Wellful is gradually transitioning from a "company + farmers" model to a self-raising model with leased farms. Backed by its intensified expansion efforts, the Company's capacity growth takes the lead in the industry. New Wellful has been lowering its costs steadily through hardware upgrades, replacement of breeding pigs, and efficiency improvements in management. It also boasts financial stability underpinned by the support from state-owned assets. Based on the hog feeding cycle, we estimate the Company's 2023E-25E hog production volume to be 3mn/5mn/7mn head, respectively, and EPS to be Rmb- 0.77/0.02/1.77. We have selected Muyuan Foods (002714.SZ), Wens Foodstuff (300498.SZ), New Hope Liuhe (000876.SZ), Tecon Biology (002100.SZ), Tangrenshen (002567.SZ), Shennong Agricultura (605296.SH), Giantstar Farming (603477.SH), Huatong Meat Products (002840.SZ), Kingkey Smart Agriculture Times (000048.SZ), Dongrui Food (001201.SZ), Aonong Biological Technology (603363.SH) and COFCO Joycome (01610.HK) as comparable companies, which are trading at 8.1x 2023E PE and 3x 2023E PB on average based on Wind consensus estimates. By adopting both PE and PB valuation methods and factoring in the valuation of comparable peers, we assign 8.1x 2025E PE and 3x 2025E PB to derive a target price of Rmb13-14. Furthermore, considering the potential share cancellation if Tianxin Seed-a company acquired at the end of 2022-fails to meet its earnings commitment, the Company will see a further emphasized valuation safety cushion. We initiate coverage with a "BUY" rating.
New Wellful is the leading hog farming SOE in Hunan with in-depth presence along the whole value chain.
New Wellful started its business with supply of live pigs to Hong Kong and Macao. Since 2008, its strategic focus has shifted to the domestic market.
The state-owned platform the Company belongs to has undergone multiple rounds of restructuring. In 2022, New Wellful successfully acquired Tianxin Seed. Currently, the Company has become the only listed company with pig farming as its core business under the Hunan Provincial State-owned Assets Supervision and Administration Commission (SASAC). In 2022, the Company achieved a pig production of 1,826,800 head (+122.3% YoY), with both the production capacity and inventory scale leading in Hunan Province.
Hog price fluctuates at the bottom level, and the expectation of a rebound becomes evident.
Since the beginning of this year, hog price has fallen into a loss zone after a brief rebound in Jul. In the short term, we believe that the pressure on hog supply will likely be difficult to alleviate in 1H24, and the hog price may continue to hover at the bottom level. Amidst the sustained decline in pig prices and recurrent outbreaks of pig diseases, the industry continues to experience "bleeding", and we anticipate an acceleration in the pace of capacity reduction, with the turning point in the cycle gradually approaching.
We expect the pig price to gradually rise in 2H24, with the average annual price likely surpassing that of 2023. We estimate the average pig prices from 2023 to 2025 to be Rmb15.5/16.5/20.0 per kg. From the perspective of industry competition, the ongoing process of industry scaling is speeding up, and the concentration of the industry is likely to further increase in the future.
In 2022, 16 listed pig enterprises collectively accounted for 17.6% of the total national pig production. This proportion may increase to 21.5%/24.7% in 2023/24. The industry's CR3 and CR5 are also likely to continue rising. Each cycle in the pig farming industry is marked by the replacement of old by new capacities. Only those players with robust cost control and financial capabilities can weather the downturn and achieve rapid growth.
Model upgrade and management optimization make profitability improvement visible.
New Wellful has completed its business model transition from the traditional "company + farmers" model to a self-raising model with leased farms.
Currently, the capacity proportion of leased pig farms is approaching to 90%.
The Company has intensified the transition of breeding pig strains to French varieties, achieving a comprehensive upgrade in breeding equipment and biosecurity control, and management has been continuously optimized to enhance operational efficiency. With the Company's ongoing efforts to reduce costs, increase efficiency, and improve capacity utilization, we expect the Company's hog production costs to decrease from the Rmb19/kg in the beginning of the year to Rmb17/kg. And further cost reductions are also visible in the future.
With robust safety margin, the capacity is advancing rapidly, and we expect high growth in pig production volume from 2023 to 2025.
In 2023, due to the sluggish market, many listed companies slow down their development pace, while New Wellful bucks the trend and expands. As of 1H23, the Company's sow inventory reached 198,000 head (with capacity of 258,9000 head). With the continuous promotion of sow and hog facilities, the sow capacity may exceed 300,000 head at the yearend, steadily supporting high volume growth from 2023 to 2025. Backed by a state-owned platform, the Company has ample cash reserves and a line of credit (LOC) with low costs, providing a substantial safety margin.
Potential risks: Fluctuations in livestock and poultry product prices; fluctuations in raw material prices; animal diseases; risks related to farming facility leasing; food safety issues; capacity construction falling short of expectations; cost control not up to expectations; changes in environmental policies; changes in industry policy.
Investment strategy: Under the goal of becoming the hog farming leader in Hunan Province, New Wellful is gradually transitioning from a "company + farmers" model to a self- raising model with leased farms. Backed by its intensified expansion efforts, the Company's capacity growth takes the lead in the industry. New Wellful has been lowering its costs steadily through hardware upgrades, replacement of breeding pigs, and efficiency improvements in management. It also boasts financial stability underpinned by the support from state-owned assets. Based on the hog feeding cycle, we estimate the Company's 2023E-25E hog production volume to be 3mn/5mn/7mn head, respectively, and EPS to be Rmb-0.77/0.02/1.77. We have selected Muyuan Foods (002714.SZ), Wens Foodstuff (300498.SZ), New Hope Liuhe (000876.SZ), Tecon Biology (002100.SZ), Tangrenshen (002567.SZ), Shennong Agricultura (605296.SH), Giantstar Farming (603477.SH), Huatong Meat Products (002840.SZ), Kingkey Smart Agriculture Times (000048.SZ), Dongrui Food (001201.SZ), Aonong Biological Technology (603363.SH) and COFCO Joycome (01610.HK) as comparable companies, which are trading at 8.1x 2023E PE and 3x 2023E PB on average based on Wind consensus estimates. By adopting both PE and PB valuation methods and factoring in the valuation of comparable peers, we assign 8.1x 2025E PE and 3x 2025E PB to derive a target price of Rmb13-14. Furthermore, considering the potential share cancellation if Tianxin Seed fails to meet its earnings commitment, the Company will see a further emphasized valuation safety cushion. We initiate coverage with a "BUY" rating.