The essence of pig cycle reincarnation is survival of the fittest, and only high-quality production capacity can have a future. Shennong Group's management team comes from the science class implementing professional ideas, the endogenous system guarantees the quality of execution, and steady expansion emphasizes available capital, and is optimistic about the continuous high-quality expansion of its high-quality production capacity.

The core competitiveness of Shennong Group's breeding business: pioneering ideas, professional implementation, and steady expansion of the pig breeding business. However, there are few enterprises that can achieve continuous low costs in the process of continuously expanding the scale boundaries of breeding volume, so there are not many enterprises that cross the cycle. The high level and degree of specialization of the farming concept and the granularity of management at the execution level are all difficult points of low-cost expansion. Among them, the most successful one is Muyuan Co., Ltd., which can be summarized as several characteristics: Chairman Keban is highly professional; focuses on endogenous systems (talent, pig farm, industrial chain, etc.) rather than mergers and acquisitions; and implementation of expansion plans. Compared to this, Shennong Group is basically in line with this, which also reflects the characteristics of the high-quality development of its farming business in the past. The company is relatively steady in terms of growth rate, but over a longer period of time, its productive biological assets and fixed asset growth rates are leading the industry, and it has also maintained sufficient capital. At the bottom of the boom, 2023Q3 is one of the few companies showing continued expansion on the reporting side. During the high dividend period, we have witnessed the rapid development and fall of “leveraged” by some enterprises. Now that the industry has entered a period of high-quality development, a steady business philosophy has become an important advantage.

Sustainable rapid growth based on high quality costs

In the context of a high-quality business philosophy, the company has achieved low-cost expansion in the past. In the past ten years, the company's pig production has maintained rapid growth. Analyzing the company's past pace of expansion in the pig breeding field, apart from the 14% and 3% growth rates in 2017 and 2020, the growth rate of pig production was above 40% in all other years. Analyzing the history of sales growth, the expansion of the company's farming business showed sustainability rather than gambling. While the company's listing volume is growing rapidly, it has always maintained an industry-leading level of cost control.

Since 2014, the company's net profit margin has continued to be higher than the industry average. If you exclude Jingji Zhinong, which is highly profitable in the real estate business, and Dongrui shares, which account for relatively high profits, and not counting the superstar agricultural and animal husbandry shares before 2021 (Zhenjing shares, which were the main leather companies), only Muyuan's profit margin level continued to be higher than that of the company until 2019. From the perspective of ROE level, similar conclusions can also be obtained, reflecting the company's high-quality profitability.

What do you think of the future development of Shennong Group's farming business?

The cost of raw materials in the Liangguang region is relatively low, and the sales price is relatively high, but this should not be simply understood as the core reason for the company's expansion to Liangguang. The company's low-cost expansion is due to the establishment of a system of ideas and models, which are extended through endogenous systems, including talent echelons, pig farm construction, etc., rather than mergers and acquisitions, and “gambling cycles and rapid development” acts such as exploiting people in the industry. Expansion to Liangguang also follows the same concept. Geographical proximity determines the similarity of the climate and topographic environment. The structure of American-style pig farms and the model of pursuing site selection to create healthy pig herds through a closed environment are also suitable for the Liangguang Mountains; in addition, compared to large-scale expansion, the accumulation of endogenous reserves of talents and supply chains is also easier to expand to neighboring provinces. The current cost advantage and sales price of Liangguang is one of the reasons for the improvement in the company's farming costs and profit level this year. The overall sales volume and share of Liangguang's sales increased. The company's cost decline in 2023 is obvious. The full cost target for this year is 15 yuan/kg. Currently, the company is planning to release 2.5 million heads in 2024, 3.5 million heads are expected to be released in 2025, and 10 million heads are planned for the long-term release volume. The company's launch volume planning is not the most aggressive in the industry; it is consistent with its steady and high-quality concept. The sustainable development concept is actually a guarantee of the company's long-term growth space.

Risk warning

1. Major epidemics have occurred in the pig breeding industry;

2. Demand for pork fell sharply in the short term;

3. Prices of raw materials have risen sharply;

4. Risk that profit forecasting assumptions are untrue or fall short of expectations.