Incident: COFCO Jiajiakang released an operating report. In December 2023, the company released 753,000 pigs, an increase of 85% year-on-year and 79% month-on-month. A total of 5.2 million pigs were released that year, an increase of 27% over the previous year. The average sales price of commercial pigs in December 2023 was 13.9 yuan/kg, a year-on-year decrease of 26%. Fresh pork sales were 24.5 thousand tons, a year-on-year decrease of 0.7 thousand tons.

The number of pigs released in 2023 slightly exceeded the target, and production capacity growth progressed steadily. The company released 5.2 million pigs in 2023, slightly exceeding the target at the beginning of the year. By the end of 2023, the company's breeding capacity was 6.17 million heads. Recently, the production capacity of the company's breeding sows has declined slightly compared to the level of about 240,000 heads in the end of 3Q23. The main reason is that the company rotates the population of sows that can reproduce in order to increase breeding efficiency. Furthermore, the winter plague also had some effects. In 2023, the company will vigorously promote the expansion of aquaculture production capacity, and more than 1 million breeding projects have been approved. In 2024, construction of these breeding projects will begin one after another to support the company's future expansion of farming scale.

Pig prices are not strong during the peak season, and production capacity continues to decline. According to research, pork consumption decreased significantly during the peak season of pickled pork in 2023, and pig prices were not strong during the peak season. Combined with the current high supply of pigs and pig price performance before National Day and New Year's Day in 2023, we expect that the rebound in pig prices was limited a year ago, and the industry may continue to lose money. Referring to the fact that the number of 1H23 breeding sows has declined slightly, and the 1-3Q23 industry has a high volume of seedlings, we expect that the pressure on pig supply will still be high in the next 1-2 quarters. At present, it seems that the trend of losing production capacity for breeding sows is deepening. According to industry data, the number of large-scale farm breeding sows in December decreased 2.02% month-on-month, 5.45% year-on-year, and 5.30% in December 2023 compared to January. We expect a bottom inflection point in the pig cycle after 2Q24.

High-end flaxseed pork sales performance is impressive, and various extended products are being developed. Overall food consumption has been sluggish recently, but the company's high-end flaxseed pork has performed well. On top of a year-on-year increase of more than 100% in 2022, sales growth of about 47% was achieved in 2023. The company is currently continuing to develop products such as dumplings and pearl meatballs using flaxseed pork as raw materials, and hopes to better meet high-end consumer demand in the future.

Profit forecast and investment advice: Since the rise in pig prices is weaker than originally anticipated, we expect the company's revenue for 2023/24/25 to be 136/160/181 billion yuan (previous value of 143/163/181 billion yuan), respectively, and net profit to mother of -0.4/47/8.4 billion yuan (previous value of 5.3/10.2/1.41 billion yuan), respectively. According to the industry valuation and the company's historical valuation level, the company was given 1.4 times PB in 2024, corresponding to a target price of HK$2.48 (previous value 2.39 was based on 10 times PE in 2024. Currently, the industry is in the loss phase, PB valuation is more reasonable, 1RMB = 1.08HKD), maintaining a “superior to the market” rating.

Risk warning: Pig prices fluctuate, pig disease outbreaks are repeated, and feed prices fluctuate.