1. The industry's production capacity has been reduced for more than 1 year, and emphasis is placed on large-scale cycle opportunities
The number of breeding stocks hit a new low in 21 years. It has been over a year since the current round of capacity removal. As of February 2024, the Ministry of Agriculture/Yongyi Consulting's cumulative removal rates were 10%/12% respectively, and the amount of breeding capacity all hit new lows since 21. Given that the Ministry of Agriculture/Yongyi Consulting's cumulative removal ranges in the previous cycle (2021-22) were 9%/15% (corresponding to the 22-year cycle pig price high of 28 yuan/kg+), and the optimization of the three-yuan sow elimination has greatly compensated for the actual production capacity removal in 21 years. Therefore, we expect this round of production efficiency has not improved significantly. The degree of removal may be sufficient for support Large cycle reversal.
2. Zhejiang pig integration leader for high-quality development
1) Pig farming sector: High quality development, stable at 5 million heads ① Sufficient production capacity & capital reserves, leading the industry in listing growth. The company has built 18 modern pig farms in Zhejiang Province and is currently actively expanding to surrounding provinces and cities. By 2023M3, the company's annual production capacity of pigs had reached 3 million heads. The company had 530 million cash and cash equivalents at the end of the third quarter of 2023, with relatively abundant capital reserves; in addition, under farming losses, the company's slaughter business can still achieve considerable profits. The company will produce 2.3026 million pigs in 2023, and we expect the company to release 400/5.5 million pigs in 2024/2025, leading the industry in growth.
② With multi-dimensional efforts, farming costs have dropped significantly. In terms of breeding, the French breeding system has gradually improved production efficiency (the number of French breeding pigs produced is higher). As of 2023M10, the company's PSY is 24-25 (23M3 is 24); in terms of nutrition, self-supplied feed saves raw material costs, and continuous formula and equipment changes will effectively reduce feed waste. As of 2023M10, the company's feed-to-meat ratio is about 2.7; in terms of epidemic prevention, Zhejiang's geographical advantage (low breeding density, few retail households) & high-standard self-breeding building breeding model. Currently, the company's prevention and control results are ideal; in terms of operation and management, the company's current prevention and control results are ideal; 18 have been built Pig farms are all distributed within Zhejiang Province, and the company is only expanding production capacity around Zhejiang. The management radius is still controlled within a close range. At the same time, the organizational structure is flat to improve management efficiency; in terms of incentives, equity incentives and daily production assessments stimulate employees' enthusiasm. Based on the multi-dimensional basic techniques of pig farming, the company's total breeding cost in the third quarter of '23 was about 16-17 yuan/kg (23Q1 was 17.8 yuan/kg), and it is expected that there is considerable room for subsequent cost reduction.
2) Slaughter sector: Hot fresh provides stable profits, and the slaughter volume is steadily expanding. The company's current annual slaughter design capacity can reach 14 million heads. On the one hand, the company actively “entered” the hot fresh meat consumer market in South and Southwest China to increase slaughter volume. The company slaughtered 3.11 million heads in the first three quarters of 2023 (3.464 million heads slaughtered for the full year of '22). On the other hand, we rely on the channel advantages accumulated over many years of slaughter to actively improve capacity utilization and further consolidate profitability. Judging from the company's historical annual report review, under the general loss of the slaughter industry in 2021, the company's slaughter sector was still able to achieve an average net profit of about 31 yuan.
3. Profit forecast and investment advice:
Maintain a “buy” rating. Based on: 1) the current round of production capacity removal may be sufficient to support a large-scale cycle reversal; 2) the company's costs are continuously optimized and subsequent cost improvements can be expected; 3) leading the industry in terms of capital reserves; 5) The current market value corresponds to an estimated average market value of 2,300 yuan/head in 2024, which is in a relatively low range in history. If the actual production capacity removal of the industry exceeds expectations, the average market value space supported by the average profit margin is expected to open up further (average market value of 1w+yuan during the historical boom) Significant upward space, continued firm recommendations, and maintained a “buy” rating .
Risk warning: pig prices fall short of expectations; company listing falls short of expectations; animal disease risk; food safety risk; cost reduction falls short of expectations; estimates have subjective risk; risk of changes in the company's stock price.