The reduction of production capacity in the pig industry has entered a period of acceleration. The pig breeding industry ushered in the longest “cold winter” in 2023. The breeding side continued to lose blood, and the cash flow pressure on the industry is close to a critical point. In January 2024, the number of breeding sows dropped to 40.67 million, -1.8% month-on-month, and degeneration accelerated. At present, industry fundamentals still strongly support the logic of accelerated elimination: (1) Reserve sows are insufficient to be replenished due to the contraction of upstream breeding sources, and the marginal increase in production capacity is accelerating downward. (2) The pattern of strong supply and weak demand continues. In a situation where pig prices are weak and cash flow is scarce, the outflow trend of breeding sows remains unchanged. Breeding sows have officially entered a period of acceleration, and the corresponding production capacity gap will gradually be reflected in the second half of '24. On the demand side, the second half of the year corresponds to the two peak consumption seasons of summer preparation and winter preparation, which will further widen the gap between supply and demand. At that time, the industry is expected to reach an inflection point in the cycle.

Focus on reducing costs and move steadily forward. Shennong Group focuses on the long term. The management understands the cycle without betting on the cycle. It knows that cost control is an essential core competitiveness of pig breeding enterprises. In the case of high feed costs in Yunnan, the company still achieved excellent cost control through multi-channel optimization and efficiency: (1) The company has established in-depth cooperation with PIC international breeding companies, and top pig breeding groups have laid the foundation for improving efficiency and reducing costs; (2) The company attaches importance to team building, and has established a complete internal training and incentive mechanism; (3) Advanced modern breeding models guarantee the company's biological efficiency. Safety is a big cause. As the cycle trough continues to prolong, the low cost advantage also plays a more prominent role in safeguarding its profitability and operational safety.

The accumulation of elements is deep, and multi-dimensional growth strategies are being promoted. Currently, the company has accumulated sufficient long-term assets such as pig breeding and pig houses, and has sufficient capital, a healthy balance ratio, sufficient production capacity capital, and steady growth without worry. Judging from the speed of expansion, the company maintains a steady strategy. Under the condition of continuing to increase the surrogacy ratio, the listing target for 2024 and 2025 is 2.5 million heads and 3.5 million heads. From a regional perspective, the company is currently expanding its layout outside the province to the Liangguang region. The effect of reducing costs and increasing prices is obvious. The share of business in the Liangguang region will increase to more than 30% in '24. Judging from the industrial structure, the company has long attached importance to the integrated layout of the industrial chain. The upstream feed sector supports aquaculture production needs, and production capacity is expected to exceed 1.5 million tons by the end of 24. The production capacity of 2.5 million heads of downstream slaughter and processing has been stable for a long time, and future increases in production capacity and utilization will strongly meet the company's expansion needs.

Profit forecast, valuation and rating: The company is an integrated enterprise in the pig breeding industry chain. It has excellent cost control capabilities and a perfect epidemic prevention and control system. We are optimistic about the company's future growth. As the cycle reverses, the company is expected to achieve high performance growth. The company's net profit for 2023-2025 is estimated to be -3.6/4.4/2.06 billion yuan, respectively, and the corresponding EPS is -0.69/0.85/3.92 yuan, respectively. Referring to comparable company valuations, the company was given 10 times PE in 2025, with a target price of 39.20 yuan, covering the first time.

Risk warning: the risk of the African swine fever epidemic, the risk of pig prices falling short of expectations, and the risk of rising raw material costs.