Investment highlights

Covering Dekang Agriculture and Animal Husbandry (02419) for the first time, gave it a rating of outperforming the industry. The target price was HK$78.00. Based on the SOTP valuation method, corresponding to 17 times P/E in 2024, the company integrates breeding, breeding and feed production of pigs and yellow feather broilers, and is expected to achieve rapid growth. The reasons are as follows:

Industry: The domestic “company+farmer” model may be further iteratively upgraded to the Danish model. Dekang's “No. 2 Farm” sow surrogacy model is leading the iteration. On the basis of limited endowments, Denmark relies on an asset-light model to achieve global leadership in efficiency indicators such as PSY and daily weight gain. We believe that the key to the Danish model is a deep specialized division of labor and two-way empowerment among enterprises, associations, and farmers. We believe that the Danish model may target the upgrade direction of the domestic “company+farmer” model. Dekang's “No. 2 Farm” innovates the domestic “sow surrogacy” model, enhances farmers' interests, and empowers farmers in terms of technology, management, and large-scale procurement, and is representative of the transformation and upgrading of domestic pig companies to the Danish model.

Core competitiveness: leading scale, efficient management, technological empowerment, joint construction of a moat. 1) Leading scale: The company is the sixth/third largest pig/yellow feather chicken breeding enterprise in China. Among them, 5.43 million pigs were released in '22, and the CAGR reached +99% in 2020-22; 78.6 million yellow feather chickens were sold in '22.

2) Efficient management: Mainly using the company+farmer breeding model, the innovative and unique “No. 2 farm” model entrusts farmers to raise sows and piglets on their behalf to achieve rapid expansion with low assets and low cost. We estimate that the full cost of the company 3Q23 was reduced to 15.5 yuan/kg. 3) Technological Empowerment: Continued strengthening of breeding and nutritional technology advantages. The company's pig breeding performance is leading in the country. It has 2 national pig core breeding farms, 1 of which ranks first in the country in terms of growth performance.

Growth drivers: capacity expansion, R&D expansion, vertical expansion, horizontal integration to drive growth.

1) Capacity expansion: Relying on the No. 2 farm model, which has both penetration potential and expansion capabilities, based on production capacity of 1.48/14.81/333,200 heads of core pigs/purebred pigs/sows, we expect the company to launch in 23/24 to reach about 700/9.5 million heads. 2) Increased R&D: Continue to improve efficiency through breeding and smart breeding technology to enhance efficiency advantages. 3) Vertical expansion: expand business to meat products production and processing, and create a leader in integrated high-quality food production. 4) Horizontal integration: Seek domestic and overseas mergers and acquisitions around the industrial chain, improve product quality, and achieve diversified product matrices.

What is our biggest difference from the market? The market has yet to recognize the company's asset-light, low-cost, and highly flexible expansion advantages under the company's “No. 2 farm” model, as well as the long-term growth space of the company's entire industrial chain layout.

Potential catalysts: Accelerated production capacity removal in the industry, high flexibility in company sales volume, and falling company costs exceeding expectations.

Profit forecasting and valuation

We expect the company's EPS to be -3.8 yuan, 4.0 yuan, and 9.7 yuan respectively in 2023-25, and the CAGR will be 56%. The current share price corresponds to 13 times the 2024 P/E. The first coverage gave the company a rating that outperformed the industry. Based on the SOTP valuation method, the target price was 78 yuan, with 30% upward space, corresponding to 17 times P/E in 2024.

risks

Pig prices are lower than expected, upward pressure on costs, release is lower than expected, epidemic and policy risks.