2023 results are in line with market expectations

COFCO Jiajiakang announced its 2023 results: revenue in 2023 was -10.3% to 11.57 billion yuan, and profit before and after adjustment to fair value of biological assets was 0.16/- 171 million yuan, +3.4/-530 million yuan year over year. The basic performance market was in line with expectations. The company's contrarian profit mainly contributed to profits due to steady operation and hedging of pig farming. On a half-yearly basis, 1H/2H23 revenue was +8.9%/-23.9% year-on-year to $58.2/5.75 billion yuan, and 1H2H23's profit before fair value adjustment was +15.8/-1.23 billion yuan to 1.7/-150 million yuan year-on-year.

Development trends

Pig sales are growing steadily, fresh business continues to be strategically invested, and futures hedging underpins performance. 1) Pig breeding: The number of products released is growing steadily, and low pig prices suppress income. The company's pig breeding revenue in '23 was -5.2% year-on-year to 7.31 billion yuan, of which sales volume was +26.7% year-on-year to 5.2 million heads. 2) Fresh pork: Increase investment in franchise stores and optimize brand channels to drive sales growth. Fresh pork revenue was -12.5% to 4.21 billion yuan, and sales volume was +6.1% year-on-year to 245,000 tons, of which flaxseed pork sales were +47% year-on-year. 3) Meat products and meat imports: The import business operates efficiently to reverse the trend and achieve profit. Revenue from meat products was +2.7% to 780 million yuan; revenue from meat imports was -18.8% year-on-year to 2.46 billion yuan, with segment profit of 40 million yuan. 4) Futures hedging: Futures hedging hedges against the impact of low pig prices. We estimate the company's futures profit of about 1.4 billion yuan.

Focus on refined production management, and maintain steady financial strength. 1) Aquaculture management: Refined management consolidates cost advantages. According to the March 19 announcement, the company carried out internal benchmarking to improve cost uniformity; optimize feed formulations, etc. to reduce feed costs; and focus on talent incentives to dispatch employees. We estimate that the total cost of the company in '23 is about 16 yuan/kg, which is at the leading level in the industry. 2) Financial strength: The company reduced the bar in a countercyclical manner, and the balance ratio is at a low level in the industry. The balance ratio in 2023 was 12ppt to 43% year on year. We judge that the company allocated shares to COFCO Group, the majority shareholder, raised HK$1.55 billion in net raising HK$1.55 billion in 23, while expanding external financing channels and strengthening banking cooperation, and focusing on internal fund management such as inventory and accounts receivable.

The pig genome selects a firm investment in breeding, optimizes the operation of the fresh food business, and is optimistic about the company's long-term growth. 1) Pig breeding: The company officially launched a genomic breeding platform in March 23, using a large number of gene chips for genotype determination. We determine that it may help accelerate population performance optimization. Long-term high-quality pig breeding business may have export space, further contributing to performance flexibility. 2) Fresh pork: On the product side, the company diversifies the variety of products and develops high-quality meat products to meet diverse consumer needs. On the channel side, the company actively promotes the upgrading of franchise stores to enhance business profitability through efficient operation. On the brand side, the company integrates online and offline brand marketing to spread the high-end brand image and expand the influence of the Jiajiakang brand.

Profit forecasting and valuation

Considering price fluctuations and adjustments in the pace of release, we adjusted the 2024 net profit forecast from 1.26 billion yuan to 420 million yuan, and introduced the 2025 net profit forecast of 91 million yuan. The current stock price corresponds to 16/7 times P/E in 2024/25, maintaining an outperforming industry rating. Considering the company's historical average market capitalization center, maintain the target price of HK$2.4, corresponding to 23/10 times P/E in 2023/24, corresponding to 43.7% upward space.

risks

The price of pigs is lower than expected; the number of products released is lower than expected; the risk of an epidemic; rising cost pressure.