Investment advice
Dekang Agriculture and Animal Husbandry pioneered the “No. 2 Farm” model, leveraging the extension of farmers' surrogacy processes from piglets to sows to achieve low assets, strong binding, and high efficiency. We believe that the barriers to “Farm No. 2” are technological empowerment, efficient management, scale effect, and first-mover advantage. The model led by Dekang and scientific and technological innovation are leading the iterative upgrading of the domestic pig farming model to the Danish model, which is expected to achieve light assets, low cost, and highly elastic expansion.
rationales
What is “Farm No. 2”: It pioneered the use of farmers to raise sows on their behalf, with low assets, strong binding, and high efficiency. 1) Model introduction: Based on the traditional “company+farmer” model, No. 2 farmers extend the surrogacy process from piglets to sows, and are responsible for the construction of sows and fattening houses. Farmers receive higher payroll returns, and the company achieves asset-light expansion. 2) Model characteristics: light assets, strong binding, high efficiency. For No. 2 farmers, they can obtain a higher return on investment, more systematic technical services, and a more cost-effective supply of raw materials. According to the announcement and our estimates, the average maintenance fee for farm No. 1/No. 2 is 217/340 yuan/head, respectively, and the ROA of 1H23 No. 2 farm/Shenwan agriculture, forestry, animal husbandry and fishing sector is 17%/2%. For the company, the No. 2 farm model can achieve low assets for expansion, strong binding of cooperative farmers, and fully leveraging farmers' enthusiasm to achieve high efficiency. According to the announcement and our estimates, the average net assets of 1H23's pigs are only 417 yuan/head, and the farm No. 2 surrogacy agreement reached 10 years; from January to September '23, the full cost of the company's pigs was 16.0 yuan/kg, which is lower than the industry average.
The core barriers of the model: technological empowerment, efficient management, scale effect, and first-mover advantage. 1) Technological barriers:
The company has 2 national pig core breeding farms, and self-cultivated Dekang E series boars. The descendants of commercial pigs had lower meat ratio, higher daily weight gain, and shorter shelf life. The standard weight for commercial products was released 12 days earlier. 2) Management barriers: The company assists farmers in scientific site selection and guidance health management plans, and digitally tracks farming management processes. 3) Scale barriers: The company uses its own supply or collection of feed ingredients, animal protection products, etc. to take advantage of scale and reduce raw material supply costs. 4) First-mover advantage: Meet Dekang's cooperative farmers' own capital investment standards are high, and related high-quality farmers' resources are scarce.
Outlook: Dekang took the lead in upgrading and iteration to the Danish model, and there is plenty of room for potential capacity expansion. 1) Potential space: Potential farmers at Farm No. 2 include small and medium-sized retail households, workers returning to their hometowns, etc. We estimate that relevant farmers in the southwest region can contribute more than 10 million pigs to the farm. 2) Learn from Denmark: Based on strong bonds of interest between farmers and associations/cooperatives, Denmark achieves asset-light development and leads the world in production efficiency.
We believe that Dekang's “No. 2 Farm” pioneered a domestic sow surrogacy model, strengthened the linkage of interests, and deeply empowered farmers in terms of technology, management, and scale, and is expected to lead the iterative upgrading of the domestic surrogacy model to the Danish model.
Profit forecasting and valuation
Considering swings in pig prices, we lowered our 2024 net profit forecast of 8% to 1,431 billion yuan, keeping the 2023/25 forecast of 14.72/3776 billion yuan unchanged. The current stock price corresponds to 11 times P/E in 2024, based on the SOTP valuation method, and reduced the target price by 23% to HK$60, corresponding to 14 times P/E in 2024, with 30% upside compared to the current price. Maintain an outperforming industry rating.
risks
Pig prices are lower than expected, upward pressure on costs, release is lower than expected, epidemic and policy risks.