Short-term performance is under pressure, looking forward to improved demand and profit recovery
We achieved revenue of 18.69 billion yuan (+3.6% YoY) and net profit to mother of 1.05 billion yuan (profit of 410 million yuan in '22). Net profit attributable to mother was in line with the previous forecast (forecast net profit of 10.7 to -1.03 billion yuan). After excluding losses caused by fair value of biological assets reduced by sales costs, the current profit was 2.16 billion yuan, +6.8% YoY. Over the past 23 years, the company continued to optimize its herd structure and explore business potential through implementing measures such as technological empowerment, business innovation and lean management. Looking ahead, weak terminal consumer demand may cause raw milk prices to continue to be pressured in the short term. We will reduce the 24-25 EPS to 0.23/0.32 (0.26/0.43) to reflect the trend where milk prices continue to be low due to weak demand, and introduced a 26-year EPS of 0.39 yuan, referring to comparable companies' 24-year PE average of 7x (Wind's consistent expectations), giving the company a 24-year 7xPE target price of 1.75 HKD (HK$1.90 previously) to maintain the “buy” rating.
Raw milk business/ruminant breeding systematized solution revenue in '23 +18.9%/-19.5% YoY revenue for raw milk +18.9% to 12.09 billion yuan. Revenue growth in the raw milk business was mainly driven by +26.5% in sales, while the average unit price of raw milk ranged -6.0% to 4.38 yuan/kg. By the end of '23, the number of dairy cows kept in the Group was about 583,000, +16.7%; adult cows accounted for +2.4pct year on year; the annual yield of adult cows (excluding Juanshan cows) from high-quality fresh milk ranches was about 12.0 tons, or +5.3% year-on-year.
Ruminant Farming Systematic Solution (CRFS) business revenue in '23 was -19.5% year-on-year to 5.79 billion yuan. The feed business implemented product upgrading, innovation and structural optimization, and took the lead in establishing a county service center in the industry at the end of 23 to promote the opening of link nodes and solve the pain points of the “last mile” industry; revenue from the breeding business was +21.7% compared to the same period, and market competitiveness was further strengthened.
The imbalance between supply and demand for raw milk squeezed the gross profit margin, and the loss of fair value of biological assets dragged down net profit +0.2pct to 6.4% year on year. Among them, the gross margin of the raw milk business was -2.8pct to 28.6% year on year. The gross margin of the raw milk business contracted sharply mainly due to the phased imbalance between supply and demand of raw milk, and the average sales price of raw milk per kilogram of raw milk fell 6.0% year on year in '23. The 23-year sales expense ratio was +0.1 pct to 3.3% year over year, and the management expense ratio was +0.2 pct to 4.2% year over year. The fair value of biological assets lost 3.61 billion yuan in '23 (loss of 1.62 billion yuan in '22), mainly due to factors such as the decline in the sales price of raw milk in '23 and the decline in the market prices of beef cattle and breeding cows. Excluding losses due to the fair value of biological assets minus sales costs, the profit for the year 23 was 2.16 billion yuan, +6.8% year-on-year.
Looking forward to subsequent improvements and maintaining the “buy” rating
Considering that it will take time for milk prices to start the upward cycle, we lowered our profit forecast. We expect the 24-25 EPS to be 0.23/0.32 yuan (the previous 0.26/0.43 yuan), and introduce a 26-year EPS of 0.39 yuan. Referring to the comparable company's 7x 24-year PE, the company will be given 7x 24 years PE, and the target price will be 1.75 HKD (HK$1.90 the previous time) to “buy”.
Risk warning: the price of raw milk is lower than our expectations; feed costs are rising rapidly; loss of fair value of convertible notes is increasing.