Affected by low pig prices, the company's profit was under pressure in '23. Supported by the low cost advantage, the company's launch is expected to maintain high growth, fully unleashing profit flexibility during the period when pig prices rise. Maintain a “Highly Recommended” investment rating.
Sales continued to rise, and low pig prices dragged down profits. The company disclosed its 2023 annual report. During the reporting period, the company achieved revenue of 4.04 billion yuan (yoy +1.8%) and net profit to mother of 645 million yuan (year-on-year loss). Looking at the fourth quarter of a single quarter, the company achieved revenue of 1.03 billion yuan (yoy -29%) and net profit to mother of 305 million yuan (year-on-year loss). Specifically: 1) In terms of pig farming, in 2023, the company listed 2.67 million pigs (yoy +75%). Affected by low pig prices, it is estimated that the pig breeding sector lost 3-4 billion yuan, the total cost of commercial pigs was 15.8-16.3 yuan/kg, with an average head loss of 100-150 yuan; 2) In other business aspects, the poultry farming+leather business is also expected to lose money; 3) The company calculated a loss of 111 million yuan, of which expendable biological assets depreciated 45.22 million yuan, and asset disposal losses of about 100 million yuan due to the shutdown of the yellow chicken business.
The cost advantage is stable, and production capacity may be maintained at a high rate. In terms of cost, we estimate that the total cost of the 23Q4 company has been reduced to 15.7 to 16.2 yuan/kg, and continues to be at the leading level in the industry. Driven by factors such as increased capacity utilization, improved production indicators, and declining feed costs, the full cost may have maintained a downward trend in 24 years.
In terms of production capacity, at the end of 2023, the company's productive biological assets were 386 million yuan (yoy +23%). With the support of optimized production efficiency and outsourced piglets, the company's sales volume is expected to maintain a high increase.
Production capacity continues to decline, and pig prices are poised to reverse. We believe that since January '23, production capacity for breeding sows has continued to decline, and there is a clear trend corresponding to the 24H2 pig price increase. The main logic is: 1) 24H1 pig prices may still be under pressure. From the supply side, the overall production capacity of 23H1 sows continues to decline, but the magnitude is slow, corresponding to the 24H1 supply contraction or overall decline; from the demand side, pork consumption has obvious seasonal characteristics, and the first half of the year is the traditional low season for pork consumption. 2) 24H2 pig prices may rise steadily. The number of newborn piglets in the country has declined markedly since October 2023, corresponding to a gradual contraction in the supply of 24H2 pigs, while pork consumption or seasonal recovery, the price of 24H2 pigs is expected to rise steadily.
Maintain a “Highly Recommended” investment rating. Sow production capacity continues to decline, supporting a trend rebound in pig prices. Supported by low costs, the company's production capacity expanded rapidly or supported rapid growth in sales volume over 24-25 years, fully unleashing profit flexibility during the period of rising pig prices. We estimate that in 2024-26, the company's net profit to mother will be 503 million yuan, 986 million yuan, and 767 million yuan respectively. Maintain a “Highly Recommended” investment rating.
Risk warning: Pig price performance/company size expansion fell short of expectations, sudden large-scale uncontrollable outbreaks, and major food safety incidents.