Key points of investment:

Hunan pig breeding state-owned enterprise. The company started the live pig export business from Hong Kong and Macau, and is one of the main live pig exporters at mainland ports. In 2009, the Breeding Development Department was established to start domestic pig breeding business. After many restructurings, Tianxin Breeding was successfully acquired in 2022 and became the only enterprise in the entire pig breeding industry chain under the State-owned Assets Supervision and Administration Commission of the Hunan Provincial People's Government. Its business layout is pig breeding, pig slaughter, and meat sales. The scale of pig farming is growing rapidly: in 2018-2022, the company's production CAGR reached 25.12%; the 2023H1 company listed pigs +95.79% compared to the same period last year.

Pig breeding: The scale of large-scale industry is at an all-time high, and attention is being paid to the acceleration of production capacity reduction driven by internal and external factors. Pig farming is a veritable big industry: huge and stable pork consumption supports a market size of over trillion dollars. At the same time, the process of modernization and large-scale pig farming is accelerating unprecedentedly under the combined influence of various factors. In 2023, abundant supply led to a downturn in the industry, and farmers continued to lose money. Given that breeding sows have declined by only 3.43% from their high point (as of November 2023), and sow production efficiency has improved, we expect the supply of 2024H1 pigs may still be sufficient. Abundant realistic supply, pessimistic future expectations, production capacity reduction may be facing active+passive double catalysis: the financial pressure on aquaculture companies cannot be underestimated; most companies are cautious about expanding production, and some are even actively shrinking production capacity; the phased outbreak of the epidemic is also a “passive” factor in capacity reduction that cannot be ignored. The acceleration of production capacity reduction is the core catalyst driving the pig breeding sector. It is recommended to pay close attention. In addition to listing growth rates and breeding cost advantages, we should now focus on targets with strong financial security: at the beginning of the year, we proposed two major principles of “choosing the best” for pig breeding companies: listing growth rate and breeding costs. As of now, we believe that sales volume (growth rate) and cost advantage are still core indicators. However, financial safety directly determines whether farming enterprises can successfully get through the bottom of the cycle, and even plays a critical role in whether enterprises can continue to grow in volume, consolidate, and continuously optimize farming performance during the downturn. We believe that the new Wufeng is one of the targets with outstanding advantages in all three areas.

The rental self-supporting model has been upgraded, and the ability to control the epidemic has been enhanced. Since 2015, the company has been leasing standardized, new-process sow farms and fattening farms to achieve high quality and rapid development. Compared with the substitution model, leased self-raising is easier to standardize the farming process, and there is less capital expenditure and investment compared to the traditional self-care model. At the same time, in recent years, the company has comprehensively upgraded and perfected the breeding biosafety system, and its ability to resist the epidemic has improved markedly. Specifically, ① make full use of regional and environmental advantages to build breeding bases; ② build a four-level epidemic prevention barrier system for pig farms; ③ raise employees' awareness of active epidemic prevention, etc.

Production capacity expansion continues to advance, and market growth is one of the core highlights. The company's production capacity expansion is mainly based on leasing, which is complemented by self-construction and transformation. The company expects to deliver 36 leased pig farms in 2023. The company's breeding capacity is entering a period of rapid growth: by mid-2023, the company will be able to breed 198,000 sows and keep 76,000 backup sows. The company's sow production capacity is expected to continue to grow significantly at the end of the year in the context of continued development of production capacity of leased sow farms and the completion of construction of self-built sow farms. The expansion of production capacity “protects” the increase in production volume: the company expects to release 300/500/7 million pigs in 2023-2025, with a CAGR of 53%, which is at the leading level in the industry.

The financial advantage is outstanding to ensure that the company safely passes through the bottom of the “cycle”. The company relies on a state-owned background platform and has strong financial strength: the level of leverage is relatively low (2023Q3 balance ratio of 70.2%, lower than the industry average, should be lower after excluding leasing liabilities), and financing costs are lower than other companies. At the same time, the company's short-term debt repayment pressure is light, and credit facilities are abundant. These are all guarantees for the company to cross the bottom of the cycle.

Covered for the first time, a “gain” rating was given. As a company with a state-owned background, the company has strong financial strength; after upgrading the leasing self-supporting model, the company is also continuing to expand production capacity, and is expected to lead the industry in terms of growth in the future. Improving pig breeding efficiency, optimizing feed formulations, and upgrading personnel management will continue to drive the company to optimize breeding performance and reduce breeding costs. The company's core focus is its growth rate, farming costs, and high financial security. We expect the company to achieve operating income of 72.03/107.27/14.81 billion yuan in 2023-2025, +46.0%/+48.9%/+38.1% year-on-year; achieve net profit to mother of -9.36/1.62/1,108 billion yuan. Covered for the first time, a “gain” rating was given.

Risk warning: Capacity commissioning plans fall short of expectations; capacity utilization falls short of expectations; farming costs rise; raw material prices fluctuate, etc.