The main business of animal insurance is booming, and the future may improve
In '23, the company achieved operating income of about 5.406 billion yuan, a year-on-year decrease of 8.24%; net profit attributable to parent shareholders was about 403 million yuan, a year-on-year decrease of 26.73%. The company's performance in '23 was mainly affected by factors such as the overall slump in the aquaculture industry, insufficient downstream demand, and increased competition in the animal insurance industry. Revenue from the biological products and chemicals business of the company's main animal insurance business decreased by 16.77% and 12.09%, respectively. Facing fierce competition in the market, the gross margin of the herbal medicine and chemical business also decreased by 2.97% and 4.68%, respectively. Under the slump in the overall prosperity of the industry, the company promoted the “one province, one policy” sales policy. The market share of key provinces continued to consolidate and increase, and overall sales volume and unit sales prices continued to increase in key provinces. In the future, profits in the animal insurance industry are expected to improve as the downstream farming cycle recovers. Looking at the pig cycle, considering the transfer of early production capacity, it is expected that the peak of pig supply will pass, and industry supply may gradually shrink in the second quarter. Furthermore, considering recent monthly CPI data, we are optimistic about the resilience of domestic consumption recovery. In the future, as pig consumption warms up seasonally, it is expected to drive the pig market. At the same time, major pig companies have accumulated financial pressure for a long period of time, and the trend reduction in overall industry production capacity is expected to boost the long-term pig market and further support the recovery logic of the animal insurance industry.
New products nurture performance potential
The first is the expansion of pet vaccine categories. In December '23, the triple-inactivated vaccine for feline rhinotracheitis, calicivirus disease, and panleukopenia (HBJ06 strain +CHZ05 strain +PSY01) independently developed by the company passed an emergency evaluation organized by the Ministry of Agriculture and Rural Affairs and obtained a temporary veterinary drug product approval number for sale. Before the emergency evaluation of the first batch of domestically produced vaccines was passed last year, the cat triple inactivated vaccine “Miaosanduo” produced by Eli Lilly of the United States and distributed by Shuo Teng China occupied a considerable domestic market. In the future, domestic vaccines will compete and contribute to performance. Furthermore, at the beginning of '24, the company announced that the compound dichlorothrin pipropyl drops, which were jointly declared by Chengdu Zhongmu Biopharmaceutical Co., Ltd., and other organizations, were approved as new veterinary drugs, filling the gap in domestic pet drug segmentation, and the company's pet product layout was further developed. Second, the African swine fever vaccine is expected to open up a new growth pole. In March 2023, the company and the Institute of Biophysics of the Chinese Academy of Sciences jointly developed an African swine fever subunit (nanoparticle) vaccine development project. The company has submitted an emergency evaluation application for the African swine fever subunit vaccine, which is currently being organized by the Ministry of Agriculture and Rural Affairs. The large demand and scale of the African swine fever vaccine market may have brought significant support to the performance.
Investment advice
Zhongmu Co., Ltd. is an established domestic mobile insurance leader. The downstream farming cycle is driving performance improvement, and approval and promotion of new vaccines are expected to usher in progress, and the company's performance potential is optimistic. We expect the company's net profit to be 501 million yuan, 616 million yuan, and 759 million yuan respectively. EPS will be 0.49 yuan, 0.60 yuan, and 0.74 yuan respectively. Corresponding to 2024-2026 PE will be 18.11, 14.73, and 11.96 times, respectively, to maintain the rating and give a “buy” rating.
Risk warning
There are risks such as the progress of veterinary drug approval falling short of expectations and fluctuations in the downstream farming cycle.