1Q24 net profit to mother decreased by 390 million yuan month-on-month, in line with our expectations

Hefeng Co., Ltd. announced 1Q24 results: revenue of -7.9%/-20.4% month-on-month to 7.22 billion yuan, net profit of -100 million yuan, from profit to loss year-on-year, a year-on-year decrease of 390 million yuan. The results are in line with our expectations. We believe that the decline in the company's revenue is mainly due to the decline in raw material prices leading to a decline in feed prices. The month-on-month improvement in performance benefited from the month-on-month improvement in chicken prices and breeding costs, while the company's impairment losses and investment losses were reduced.

Development trends

Prices and costs in the meat and poultry business improved month-on-month, and the feed business benefited from a decline in raw material costs. 1) Meat and poultry business: In 1Q24, chicken prices rebounded month-on-month, and breeding costs improved month-on-month. According to Boya Hexun, the average price of chicken products in 1Q24 was +1.3% month-on-month, and has rebounded from a low level. Considering the month-on-month improvement in chicken seedlings and feed costs, we expect this business to reduce losses month-on-month. 2) Feed business: Feed prices and raw material costs both declined in 1Q24.

According to the Development and Reform Commission and Huiyi Network, 1Q24 corn and soybean meal dropped by a total of 115 and 473 yuan/ton, and pig feed prices fell by a total of 160 yuan/ton. We believe that feed price adjustments often lag behind raw materials, and it is expected that this business is relatively profitable. 3) Pig business: Pig prices continued to be weak in the first quarter. According to the Ministry of Agriculture and Rural Affairs, the average price of live pigs in 1Q24 was -2.2% month-on-month to 14.9 yuan/kg. We expect this business to still lose money.

Benefiting from both price and cost improvements, profitability increased markedly from month to month. 1) Gross profit margin: 1Q24 gross margin was -0.1/+3.7ppt to 4.4% month-on-month. We believe that the main reason was the increase in the price and cost of the chicken raising business and the increase in the gross margin of the feed business due to lower raw material prices. 2) Expense rate: The cost rate was +0.6/+1.2ppt to 5.4% month-on-month during the 1Q24 period, or due to a decline in revenue scale. 3) Impairment and investment losses: 1Q24 asset and credit impairment losses were the same: -42.7%/-71.3% month-on-month, meaning that the decline in pig and chicken prices narrowed; investment losses turned losses year-on-year but decreased by 130 million yuan month-on-month. 4) Under the combined influence, the net profit margin for 1Q24 was -1.7/+4.1ppt to -1.4% month-on-month. Profitability was under short-term pressure but improved significantly from month to month.

The industry's prosperity is expected to improve. The company continues to expand production, reduce costs and increase efficiency, and there is plenty of room for improvement in performance.

1) At the industry level, in the meat and poultry business, we expect that white chicken prices will still have room to rise in 24, and chicken profits are expected to improve; in the feed business, we expect the prices of corn and soybeans for feed to continue to fall this year, compounded by improved downstream farming profits, and the profit prosperity of the feed business is expected to increase; the pig farming business is expected to improve due to rising pig prices. 2) At the company level, on the one hand, the company has actively expanded its production capacity in recent years. The export targets for feed export, broiler slaughter, and pig export in 24 years are +10% or more, +6% to over 860 million birds, and +3% to 21% to 1.2 million heads, respectively. On the other hand, the company continues to improve the degree of compatibility in all aspects of the meat and poultry business, optimize the pig breeding structure, and focus on reducing costs and increasing efficiency in the long term.

Profit forecasting and valuation

The current stock price corresponds to 11/8 times P/E for 24/25. We kept our 24/25 net profit forecast of 58/ 770 million yuan unchanged, and maintained a target price of 9.3 yuan. The target price corresponds to 15/11 times P/E for 24/25, with 33% upside. Maintain an outperforming industry rating.

risks

Raw material prices fluctuate; farming boom is sluggish; risk of animal diseases.