Continue to push forward contrarian expansion and maintain a “buy” rating
Shengnong Development released its annual report. In 2023, it achieved revenue of 18.487 billion yuan (yoy +9.93%), net profit to mother of 664 million yuan (yoy +61.66%), and deducted non-net profit of 667 million yuan (yoy +88.35%). Among them, Q4 achieved revenue of 4.560 billion yuan (yoy +2.14%, qoq -5.92%) and net profit to mother of 75.2822 million yuan (yoy -134%, qoq -124%). We expect to record net profit of 18.15/28.43/2,561 billion yuan in 2024/25/26, respectively. Of these, the chicken and parent-generation chicken seedlings and prepared products businesses are expected to make profits of about 1.5 billion yuan and 300 million yuan respectively in 2024. Referring to the comparable company Wind, we agreed to expect about 11x and 14x PE, respectively. Considering the gradual increase in promotion of Shengnong's parent chicken seedlings and the C-side net interest rate or continuous improvement, we gave Shengnong's 2024 raw meat and parent's chicken seedlings business profit 15x PE, and the prepared food business profit was 25x PE, corresponding to a target price of 23.63 yuan, maintaining a “buy” rating.
The volume of prepared products accelerated in 2023. In 2023, prices dragged down a small loss on the revenue side. The company's revenue growth in 2023 was mainly brought about by a relatively rapid increase in prepared product sales: in 2023, the company's revenue from raw chicken exported basically stabilized at around 9.9 billion yuan; the prepared food business revenue increased 27% year on year to about 7 billion yuan, mainly driven by a 27% year-on-year increase in sales, and the year-on-year sales growth rate accelerated markedly. On the profit side, we estimate that in 2023, the company's raw chicken and prepared products businesses made profits of 400 to 500 million yuan and 200 million yuan to 300 million yuan, respectively, with year-on-year increases of about 60% and 27%, respectively. Among them, the significant increase in raw chicken profit mainly benefited from overall sales growth combined with the company's initial results in reducing costs and increasing efficiency. In 23Q4, the company's losses were mainly due to a 16% year-on-year price drop for raw chicken products due to sufficient supply in the industry, and a 17% year-on-year price drop for prepared products due to product restructuring, which in turn led to a slight loss of raw chicken and prepared products at the same time.
Self-built acquisitions bucked the trend and expanded production. In 2023, Shengnong continued to buck the trend and expand production capacity. In 2023, Shengnong continued to buck the trend and build a number of ancestral and parent-generation chicken breeding farms and commercial broiler farms. At the same time, production capacity such as Shengyue Agriculture and Animal Husbandry and Anhui Sun Valley was acquired in 2023. Currently, the company's own white feather chicken breeding capacity exceeds 700 million birds, and the total production capacity for deep processing of food already built and under construction exceeds 500,000 tons. The company's preparation sales volume in 2023 was +27% year-on-year, benefiting from an increase of 20,000 tons in production capacity at nine food factories, and an increase in factory production capacity by 20% in 2023; it is expected that the total production capacity of prepared products will increase by 20% in 2023; it is expected that another 60,000 tons of production capacity will be added after the completion of the 10th food factory in 2024. In terms of parent breeding chickens, in 2023, Shengnong's ancestral chicken breeding volume accounted for about 20% of the country's total. They sold 9.01 million sets of chicken chicks raised by their parents throughout the year, and successfully iteratively developed “Shengze 901 Plus” based on the “Shengze 901,” which improved indicators such as the feed-to-meat ratio. The parent breeding chicken export business is expected to gradually contribute a certain amount of incremental profit to the company.
Raw meat products are progressing on two tracks, and profit growth can be expected
The number of domestic white feather broiler ancestral renewals decreased by 23% year-on-year in 2022, and this has now been transmitted to the parents' generation of chicken seedlings. We expect the current gap between supply and demand for white feather chicken in 2024, which may drive the company's chicken prices to rise. At the same time, the C-side of Shengnong's condiment business is growing rapidly, and profit growth can be expected.
Risk warning: chicken price rise/cost falling short of expectations, sudden large-scale bird flu outbreaks, etc.