Incident: Achieved revenue of 18.69 billion yuan in '23, +3.6% year-on-year, net profit to mother of 1.05 billion yuan, from profit to loss (profit of 410 million yuan in '22). Mainly due to a decline in the gross margin of the company's raw milk business and a loss of 3.61 billion dollars (1.62 billion dollars for the same period in '22) due to changes in the fair value of biological assets minus sales costs in '23.
The pressure on gross profit is mainly due to the decline in raw milk prices. Milk prices are expected to stop falling and rebound in 3Q24-1Q25.
Revenue from raw milk in '23 was +18.9% YoY to 12.09 billion yuan, of which raw milk sales were +26.5% YoY to 2.945 million tons, and the average unit price of raw milk was -6.0% YoY to 4.38 yuan/kg. In terms of volume and price breakdown, the company's production can be expected to continue to grow steadily. In '23, the number of dairy cows kept in the Group was about 583,000, +16.7%; adult cows accounted for +2.4 pct year on year; the annual yield of adult cows (excluding Juanshan cows) from high-quality fresh milk ranches was about 12.0 tons, +5.3% year over year. Yield efficiency continues to improve, and the company's raw milk sales are expected to maintain double-digit growth in the future. However, the gross margin of the raw milk business was -2.8pct to 28.6% year-on-year, mainly because the company's performance is closely related to the raw milk price fluctuation cycle, and milk prices are an important factor. We are not pessimistic about the future price of raw milk. Currently, factors such as the withdrawal of small and medium-sized ranches, the narrowing of domestic and foreign price differences, and the still high level of feed all form the bottom support for raw milk prices. At the same time, considering the duration of the raw milk cycle, we expect milk prices to stop falling and rebound between 3Q24-1Q25.
The cost of kilogram milk feed continues to decline, and farming efficiency continues to improve. In '23, the company's kilogram feed cost was 2.45 yuan, -1.2% year-on-year. The cost of 22H1/22H2/23H1/23H2 is 2.43/2.53/2.49/2.41 yuan, respectively. The cost of 23H2 kg milk feed has declined markedly from the high point of 22H2. The main reason is to strengthen procurement timing, adjust feed formulations, and increase dairy yield. In the future, as prices of bulk raw materials continue to fall and operational efficiency is further improved, the cost side is expected to have some room for decline.
Affected by dairy cow valuation adjustments, the fair value loss of biological assets has increased dramatically. The fair value of biological assets lost 3.61 billion yuan in '23. In '23, the price of raw milk fell rapidly and feed costs were still high, leading to a reduction in the valuation of adult cows; at the same time, the price of phased out beef fell; the valuation of reserve cows also declined due to rising feeding costs. Due to prudent accounting considerations, the fair value loss of biological assets calculated by the company reached 3.61 billion, which is significantly higher than in previous years. It was 410 million for the full year of '21 and $1.62 billion for the full year of '22.
The ruminant farming systematic solution business is under pressure, and the company is actively adjusting.
In '23, revenue from the Ruminant Farming Systematic Solution (CRFS) business was -19.5% year-on-year to 5.79 billion yuan, but gross margin increased. Mainly due to the low prosperity of the farming industry and large-scale losses on small and medium-sized ranches, the company strengthened risk management and adjusted sales strategies to focus on high-quality customers.
Profit forecast and investment advice: We expect the company's 2024-2026 revenue to be 207.5/227.0/24.70 billion yuan (previous value: 223.8/260.8/NA billion yuan), net profit to mother of 4.0/8.7/1.2 billion yuan (previous value: 11.2/1.81 billion NA yuan), and the estimated EPS for 2024-2026 will be 0.11/0.23/0.32 yuan (previous value 0.30/0.48/NA yuan), respectively. Taking into account comparable company valuations, Youran Animal Husbandry was given 9 times PE in 2025 (previous value: 9xPE in 2024), lowered the target price to HK$2.22 (1HKD=0.9236 CNY, previous target price of HK$2.85), and maintained a “superior to market” rating.
Risk warning: Debt ratios are relatively high, commodity prices are rising, and downstream demand recovery falls short of expectations.