Key points of investment:
The company released its 2024 quarterly report. In the first quarter of 2024, the company achieved operating income of 4.21 billion yuan, -7.1% year-on-year, and realized net profit to mother of 61.92 million yuan, turning losses year on year (23Q1, the company achieved net profit of 89.45 million yuan). Due to the sharp drop in chicken prices, the company accrued asset impairment losses of 67.21 million yuan; at the same time, it increased its marketing efforts, and sales expenses increased by 32.43 million yuan over the same period of the previous year, so the performance during the reporting period was lower than our previous expectations (we expect the company to achieve net profit of 100 million yuan in 24Q1 for the first quarter of 2024).
Chicken business: Sales are growing steadily, costs have been optimized, and we are waiting for the cycle to pick up. Thanks to the release of new production capacity within 23 years, the 24Q1 company achieved relatively rapid growth in chicken sales. Referring to the company's monthly sales announcement, in the first quarter of 2024, the company achieved sales of 294,000 tons of chicken, +11% year-on-year (growth rate of about 7% for the full year of '23). However, chicken consumption was sluggish during the reporting period, and chicken prices were at the bottom of history (refer to the Animal Husbandry Association data, the comprehensive price of white feather broiler products from domestic slaughter and processing enterprises was the lowest in the same period since 2019). During the reporting period, the company's chicken business achieved sales revenue of 2.98 billion yuan, -3.9% year-on-year, and the average sales price was 10,164 yuan/ton, -13.3% year-on-year. Gross sales margin was 7.7%, -0.92 pct year over year, and +0.31 pct month over month. Due to the relatively stable performance of the food business, referring to the company's profit situation in 23 years (23H1 was 104 million, 23H2 was 147 million), excluding food subsidiaries and impairment effects, the chicken business is expected to lose 50-80 million yuan in 24Q1, and the full cost of a ton of chicken is about 10,300-10,400 yuan/ton, which is clearly optimized from the full year of '23.
Food business: Sales of meat products have maintained rapid growth, C-side marketing continues to gain strength, and brand building is progressing in an orderly manner. Referring to the company's monthly sales announcement, in the first quarter of 2024, the company achieved sales of 81,000 tons of deep-processed meat products, +11% year-on-year. Against the backdrop of year-on-year pressure on catering demand in the first quarter, it still maintained a relatively rapid growth rate. The average sales price was 23,797 yuan/ton, -14% year-on-year. During the reporting period, the company increased its marketing efforts for its own brands in the food business. Brand building expenses and sales service fees increased markedly. Sales expenses increased by 32.43 million yuan over the same period last year, and the 24Q1 sales expenses rate was 3.33%, +0.95pct compared to the same period last year.
I am optimistic that the rise in chicken prices during the year will drive a recovery in the company's performance and maintain the “gain” rating. Consumption was sluggish in 24Q1, while the supply side remained relatively abundant, and chicken prices were at the absolute bottom in recent years. Looking backwards, with reference to the trend in sales of chickens raised by upstream parents, it is expected that chicken supply will gradually decline from the end of the second quarter. Meanwhile, with the recovery in pork prices, demand for chicken alternatives is expected to be boosted. I am optimistic that chicken prices will gradually rise during the year, and the company's performance will improve quarter by quarter. Since the slump in chicken prices during the reporting period exceeded our previous expectations, we slightly lowered the company's 24-25 profit forecast and added a 26-year forecast. The company is expected to achieve revenue of 224.9/247.2/27.70 billion yuan in 24-26 years and achieve net profit of 21.9/20.9/29.10 billion yuan (adjusted 24-25 year forecast value of 2,41/2.48 billion yuan). The PE valuation corresponding to the current stock price is 9/9/7X, maintaining the “gain” rating.
Risk warning: sharp drop in the price of poultry products; food safety risks; C-side brand promotion falls short of expectations.