Zhejiang Province's “farming+slaughter” double leader, the pace of integrated operation is accelerating. The company started with a feed and slaughter business. After the plague, it benefited from the province's stable production and supply policy and began large-scale pig breeding, becoming the leading producer and slaughter of livestock and poultry in Zhejiang Province. Currently, the company's business covers four major business links, including feed production, livestock and poultry slaughter, and deep processing of meat products. Huatong uses a building breeding, self-breeding and self-raising model. In '22, the company slaughtered 3.464 million pigs (+14.70%). Zhejiang Province accounted for more than 30%, with 1.20.48 million pigs released, +776% year on year, achieving leapfrog development of over one million heads.
Production capacity continues to be reduced under low pig prices, and emphasis is placed on left-side layout opportunities in the pig sector. In the short term, pig supply pressure is still too high. Combined with high frozen product inventories, pig prices are expected to have a limited boost during the peak season; in the medium term, 24H1 supply is expected to increase year-on-year, compounded by the low consumption season after the holiday season, pig prices are expected to see a low point in this cycle. As of November '23, production capacity in this cycle has been reduced for 11 months, with a cumulative total of more than 5%. We predict that with 24H1 pig prices bottoming out, capacity removal will continue, and as losses accumulate and increase, capacity removal is expected to accelerate, and the cumulative removal rate is expected to reach 10% +, supporting a medium to large cycle. Under the premise of financial security, pig companies with low costs and high growth are expected to grow through the cycle.
The pig business has clear goals and ideas, and extends endogenously and exogenously to high-quality growth. 1) Deeply cultivated in the Zhejiang region, the pig price advantage is obvious.
Pig prices in Zhejiang Province have long been higher than the national average due to production and sales gaps. Since the beginning of '23, pig prices in Zhejiang Province have had a 0.85 yuan/kg premium over the country. From January to November 2023, the average price of the company's commercial pigs was 15.15 yuan/kg, higher than the average price of other comparable companies of 0.47 yuan/kg. 2) The path of scale expansion is clear, and rapid growth in listing can be expected.
The 2023Q1-3 company listed 1.6808 million pigs, doubling the year-on-year increase. At present, the company has built a production capacity of 3 million heads in Zhejiang Province. As of 2023H1, the utilization rate of pig production capacity is 70.88%. The increase in future sales is mainly due to full production capacity within the province and expansion of production capacity outside the province. Within the province, the company can promote a rapid increase in pig production by increasing the utilization rate of production capacity. Outside the province, the Anhui Jixi project has a design production capacity of 350,000 heads and is expected to be completed in the following year; the long-term target of the Jiangxi Fuzhou project is 2 million heads, which is expected to be gradually implemented. The company's target for listing in '24 is 4-5 million, and the median value in the range is expected to increase by 95% year-on-year. 3) The cost reduction results are remarkable, and there is strong certainty about future cost improvements. The company has strengthened refined management, and farming costs are showing a gradual downward trend. The full cost in 2023Q3 has been reduced to 16-17 yuan/kg, compared to -12% in April 2022. The company's epidemic prevention effect was remarkable. The overall survival rate of pigs in October '23 was 87-88%, ahead of peers. In terms of breeding, we will continue to promote the transformation of the pig breeding system from the American system to the French system. After the establishment of the French breeding system, PSY is expected to reach 27-28 (23Q3 is 24-25).
Combined with the high increase in pig sales, the decline in expenses and depreciation and amortization, there is strong certainty that the company's future costs will continue to improve.
The slaughter business is expanding steadily, and hematopoietic capacity is excellent. Thanks to the consumption habits of hot fresh meat in Zhejiang Province, the company's slaughter business is based on sales, which can maintain a relatively stable profit level and has excellent hematopoietic capacity. 2023Q1-3 has deep losses in pig farming, and the company's net cash flow from operating activities is still close to 200 million yuan, +20.25% over the previous year. By expanding and expanding sales channels to southern provinces, 2023Q1-3 has slaughtered about 3.11 million pigs. With the release of pig production capacity, there is room for a significant increase in the self-supply ratio of pigs used for slaughter (23H1 is 41%), which is expected to reduce procurement costs, increase slaughter capacity utilization (23H1 is 24%), and the profitability of the slaughter business is expected to further increase.
Investment advice: We expect the company's revenue in 2023-2025 to be 99.28/168.65/20.54 billion yuan, respectively, and net profit to mother of -5.90/6.80/919 billion yuan, respectively. The current stock price corresponding to 2023-2024 PE is 16.59/12.28 times, respectively, covered for the first time, giving it a “buy” rating.
Risk warning: Risks such as the occurrence of animal epidemics, commodity price fluctuations, and natural disasters.