Investment highlights
Covering Tang Renshen (002567) for the first time, the target price was 8.50 yuan, corresponding to 45 times P/E in 2024 (based on the SOTP valuation method). The company integrates “breeding, feed, breeding, and meat”, making full use of financing instruments to better match the pace of capital and business development, and is expected to achieve steady growth.
The reasons are as follows:
Industry: The “capital competition” returns to “cost competition”, and pig companies with low cost and stable capital have grown excessively.
China is the largest pig market in the world, and there is room for long-term growth in scale and concentration. We believe that low pig prices based on tight capital are catalysts. The industry has entered a stage of accelerated capacity removal driven by “financing hedging losses” and returning to “loss to remove production capacity”, starting a cost competition elimination race.
We believe that in the context of the lengthening elimination cycle, increased capital pressure, and continued low pig prices, enterprises with excellent cost levels, sufficient capital reserves, and greater flexibility in listing are expected to achieve excessive growth.
Core competitiveness: Feed strengthens cash flow guarantees, and procyclical financing ensures stable release of pig production capacity.
1) Feed-based: The company's internal and external feed sales volume in '22 was 6.17 million tons, and the external sales volume CAGR for 20-22 was +4%. The product matrix was perfect, the channel layout was extensive, and the profit was relatively stable, strengthening performance and cash flow ballast. 2) Pigs are wings: At the pig breeding level, Meishen breeding pigs have characteristics such as low feed-to-meat ratio and high health, and the “new Dan family” helps improve breeding performance. At the management level, continue to promote digital management processes to achieve high-quality expansion. The company promoted rapid growth in listings around regions with high pig prices in the South. In 20-22, the CAGR of listing volume increased 45% to 2.16 million heads. We estimate that the full cost of the company's 1H23 is about 17.7 yuan/kg, and 3Q23 fell to 17.3 yuan/kg, showing a continuous downward trend. 3) Use of capital: The company has procyclical financing many times, which better matches the pace of capital and business. A total of 4.2 billion yuan was raised in 2018-23, and the 3Q23 balance ratio was 65%, slightly lower than the industry average.
Growth drivers: Based on sufficient capital, digital transformation and pig breeding system optimization to release dividends, pigs are expected to grow steadily. 1) Pig breeding: Digital transformation continues to iterate, clarifying standardized procedures and operation lists for pig farming. Based on the optimization of the pig breeding system, fund-raising projects, and the ability to breed 170,000 sows, we estimate or support the release of 349/4.57 million heads in 23/24. 2) Feed: Production capacity is abundant. We expect export sales to reach 559/5.87 million tons in 23/24, providing stable cash flow.
3) Deep processing business: Exploring pre-made dishes, branded catering and other business formats is expected to smooth out cycle fluctuations.
What is our biggest difference from the market? We believe that the market has not yet fully understood the strategic significance of the company's procyclical financing to accelerate business development, as well as the medium- to long-term development potential of the pig breeding business.
Potential catalysts: Accelerated removal of industry production capacity, rapid growth in company launch volume, and steady decline in company costs.
Profit forecasting and valuation
We expect the company's EPS for 23/24 to be -0.74/0.19 yuan, respectively, and a CAGR of 41%. The current stock price corresponds to 37.5x P/E in '24. For the first time, coverage gave the company a rating that outperformed the industry. Based on the SOTP valuation method, the target price was 8.5 yuan, 21% upward space, corresponding to 45x P/E in '24.
risks
Risk of pig epidemic; pig prices and release volume below expectations; feed raw material prices rose more than expected; policy change risk; cost control fell short of expectations; meat food safety risk; hedging risk.