2023 results are in line with market expectations
The company announced its 2023 results: revenue of 13.46 billion yuan, +9.5% year on year, net profit of 175 million yuan, -68.9% year on year; corresponding 2H23 revenue of 6.82 billion yuan, +2.4% year on year, net profit to mother of -34 million yuan, compared with 55 million yuan in the same period last year. The results are in line with market expectations.
Development trends
The drop in milk prices dragged down revenue growth, and the new business performed brilliantly. Benefiting from measures such as genetic improvement and technology improvement, the company's dairy cow yield was +3.3% to 12.6 tons in 2023; the size of the company's herd increased from 405,000 to 451,000 at the end of '22. Benefiting from increased yield and natural herd growth, the company's raw milk production was +9.5% year-on-year to 2.59 million tons in '23. In terms of milk prices, due to weak demand and increased supply, the industry is currently showing a pattern where supply exceeds demand. Domestic raw milk prices were -7.7% year on year in '23, and the company's milk price fell 5.6% year on year, which is better than the industry's performance. In addition, the company's new business revenue increased 35.9% year over year to 3.19 billion yuan, developing strongly, and its revenue share increased 4.6 percentage points year over year to 23.7%.
Reduced costs improved gross margins month-on-month, and changes in fair value affected net interest rates. In '23, the company's gross margin of raw milk was -2.7ppt to 28.4%, mainly affected by the decline in raw milk prices; benefiting from the 2H23 kg drop in milk feed costs (-4.6% YoY, -4.2% month-on-month), 2H23's raw milk gross margin was +0.2ppt to 28.5% month-on-month, and -1.6ppt year-on-year, and the decline narrowed month-on-month. The company's cost of kilogram milk feed was +0.4% year-on-year, while the comprehensive procurement price of bulk feed was +2.8% year-on-year, and the internal benefits brought about by the increase in yield continued. The company's annual management expenses rate increased, mainly due to the fall in the price of beef and raw milk; in addition, due to the decline in the price of beef and raw milk, changes in the fair value of dairy cows reduced the sales cost of dairy cows, causing losses of +29.6% year-on-year to 1.28 billion yuan, which dragged down net interest rate performance. The company's net profit margin in '23 was 1.3%, of which 2H23 net profit margin was -0.5%.
The decline in costs may hedge against the downward pressure on milk prices. It is recommended to focus on the progress of improving supply and demand in the industry. According to data from the Ministry of Agriculture, social milk prices fell by about 10.9% year on year from January to mid-March this year (1Q23 base is higher). Considering that the supply of raw milk is still loose, we expect milk prices to drop by a single digit year over year in '24.
In terms of costs, according to data from the Ministry of Agriculture, the price of soybean meal fell from 4.38 yuan/kg to 3.91 yuan/kg in January-January this year, and the price of soybean meal fell by about 21% year on year at the end of February. In addition, considering that the company locked in some raw material prices ahead of schedule, we expect the sales cost of milk kg to drop 10% + year on year in 24, hedging the downward pressure on milk prices. We expect the company's gross margin of raw milk to remain basically the same in '24, and management rates are also expected to improve slightly, but losses due to changes in fair value may increase slightly over the same period last year; it is recommended to focus on improving industry demand and supply clearance.
Profit forecasting and valuation
Considering the decline in milk prices, net profit for 24 was reduced by 86.5% to 110 million yuan, and a net profit of 200 million yuan was introduced for 25 years. The company traded 42/22 times 24/25 P/E; considering that the company is at the bottom of the cycle and profit adjustments, the target price was lowered by 25% to HK$0.75, corresponding 25 times 25-year P/E and 15.4% upward space, and considering that the company remained at the bottom of the valuation for a long time and maintained an outperforming industry rating.
risks
Demand is weak; milk prices are falling; feed costs are rising.