Key points of investment:
Event: The company announced the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 3,891 billion yuan, +17.76% year on year; realized net loss attributable to shareholders of listed companies - 401 million yuan, or -257.04% year on year.
2024Q1 achieved operating income of 1,082 billion yuan, +20.82% year-on-year; realized a net loss attributable to shareholders of listed companies of 3.5659 million yuan, a year-on-year reduction of 96.63%. The performance was in line with expectations.
The company's listing volume increased significantly in 2023, but low pig prices caused losses in the farming business, and asset and credit impairment calculations also had an impact. In 2023, the company released 1,520,400 pigs, an increase of 63.66% year on year; however, with abundant supply in the industry, pig prices were sluggish throughout the year: the average annual price of three yuan pigs nationwide was 15.00 yuan/kg, down 19.27% year on year (Yongyi Consulting). It is estimated that the company lost 260 yuan/head on a single head. At the same time, based on the principle of prudence, the company added a total impairment of 185 million yuan on assets and credit, further hampering the company's performance. In terms of other business, the company's slaughter and deep food processing achieved revenue of 1.23 billion yuan, +38% year-on-year; the feed business achieved revenue of 498 million yuan, -13% year-on-year.
2024Q1's sharp loss reduction was mainly due to the combined effects of continuous optimization of farming costs and asset impairment and recovery. The company listed 496,900 pigs in 2024Q1, a year-on-year increase of 40.95%. It achieved operating income of 1.08 billion yuan and a net loss of 3.57 million yuan to mother, with significant year-on-year and month-on-month losses. It is mainly due to cost reduction due to optimization of breeding indicators and falling raw material prices, and the combined effects of the company's cancellation and transfer of early asset impairment preparations based on future pig price estimates (45.74 million yuan).
Based on high-efficiency “upstream” pig breeding, the company's breeding costs are continuously optimized. Benefiting from the optimization of pig breeding and feed costs, the company's breeding costs have been steadily declining quarterly since 2023Q2: as of 2024Q1, the company's total breeding cost was about 14.5 yuan/kg (including total share costs). Considering that subsequent low-cost raw materials will successively replace existing high-priced raw materials, the company's breeding costs are expected to be further optimized, and the company's breeding costs are expected to reach 13 yuan/kg in 2024.
Production capacity is expanding steadily, and the company's listing growth is guaranteed. By the end of 2024Q1, the company was able to keep about 90,000 sows, an increase of about 50,000 over the end of February. It is expected that after the successive deliveries of new pig farms in Guangxi, Yunnan and other regions this year, the production capacity of the company can breed sows is expected to increase further. The expansion of production capacity “protects” the steady increase in production volume: the company is expected to release 152/250/3.5 million pigs in 2023-2025, with a CAGR of 52%, which is at the leading level in the industry.
Investment analysis: As a local pig company in Yunnan, the company relies on efficient pig breeding and biosafety prevention and control management to achieve excellent breeding cost performance, and continues to be optimistic that the company will continue to achieve cost optimization and growth in the future in the context of steady operation and capacity expansion. We maintain the company's 2024-2025 profit forecast and introduce the 2026 profit forecast: the company is expected to achieve operating income of 57.26/81.86/99.37 billion yuan in 2024-2026, +47.2%/+43.0%/+21.4% year-on-year; achieve net profit of 2.68/10.54/1,267 million yuan. The current PE valuation levels corresponding to the stock price are 71X/18X/15X, respectively, maintaining the “overweight” rating.
Risk warning: The process of capacity expansion falls short of expectations; rising costs due to declining farming efficiency; fluctuating raw material prices; risk of abnormal trading fluctuations, etc.