Key points of investment:
Event: The company announces the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 110.861 billion yuan, -11.19% year-on-year; achieved a net loss attributable to shareholders of listed companies of 4.263 billion yuan, and a profit of 13.266 billion yuan for the same period last year. In the first quarter of 2024, the company achieved operating income of 26.272 billion yuan, +8.57% year-on-year; realized a net loss attributable to shareholders of listed companies of 2,379 billion yuan, and a loss of 1,198 billion yuan in the same period last year. The results were in line with previous expectations.
Sluggish pig prices were the main cause of the loss in performance. Although the company achieved an increase in pig production in 2023 and 2024Q1: the company sold 63.816 million pigs in the full year of 2023, +4.3% year-on-year; 2024Q1 sold 16.011 million pigs, +15.6% year-on-year.
However, against the backdrop of abundant supply in the industry and “poor peak season”, pig prices fluctuated at a low level: in 2023, the average price of three-yuan pigs nationwide was 15.00 yuan/kg, down 19.27% year on year; 2024Q1 the average price of three-yuan pigs nationwide was 14.51 yuan/kg, down 3.03% year on year (Yongyi Consulting). As a result, the company's farming business also fell into losses: it is estimated that the company's average loss in 2023 and 2024Q1 was about 65 and 154 yuan/head, respectively.
Continue to do a good job in health and production management, and optimize farming performance to drive down costs. According to the company's customs records, the full cost of the company's commercial pigs for the full year of 2023 was 15 yuan/kg, which is a significant decrease compared to 2022 (15.7 yuan/kg). 2024Q1 was affected by the winter epidemic and the Spring Festival, and the full cost of farming gradually increased to 15.8 yuan/kg in January-January. However, with continuous optimization and improvement in various aspects such as epidemic prevention and control, nutritional formulations, and talent training, production performance improved in March, and the full cost of 15.1 yuan/kg was achieved. We expect that in the future, the company is expected to gradually achieve the full cost target of breeding of 14 yuan/kg in 2024 against the backdrop of improvements in production management such as epidemic control (improving the health level of pig herds) and falling feed raw material prices.
Production capacity reserves are abundant, and the scale of farming is steadily expanding. By the end of 2023, the company had a farming capacity of about 80 million heads/year. By the end of 2024Q1, the company was able to keep 3.142 million sows, an increase of 0.4% over the end of 2023. Population optimization and updates are ongoing: productive biological assets have increased significantly (2024Q1:10.637 billion yuan, +14.19% quarter-on-quarter), mainly due to an increase in the number of reserve sows. At the same time, the company has accelerated the renewal of sows, which is also an important reason. Adequate production capacity is the cornerstone that supports the company's continued growth in pig production: in 2024, the company plans to release 66-72 million pigs.
The slaughter business continues to develop, steadily reducing costs and increasing efficiency. The company slaughtered a total of 13.26 million pigs in 2023, +80% over the same period last year, and the average loss dropped to around 70 yuan. By 2024Q1, a total of 10 slaughterhouses had been put into operation, with a slaughter capacity of 29 million heads/year. It is expected that as the company further improves the operational efficiency of the slaughterhouse put into operation and optimizes the slaughter products and customer structure, the slaughter business may be expected to be profitable in 2024.
Investment analysis opinion: As a leading enterprise in the pig breeding industry, the company is expected to take the lead in benefiting from the rise in pig prices and lead to an improvement in breeding profitability with outstanding breeding costs. Considering that the trend of continuous contraction in pig supply in 2024 is relatively clear and the magnitude or higher than our previous expectations, we raised the 2024 average pig sales price assumption; at the same time, considering that raw material prices have declined by a certain margin, we expect the company's breeding costs to continue to decline, so we raised the 2024 profit forecast, maintained 2025, and introduced the 2026 profit forecast: the company is expected to achieve operating income of 1337.88/1604.94/153.651 billion yuan in 2024-2026, +20.7% /+ over the same period last year 20.0%/-4.3%; net profit attributable to mother was 136.68/247.62 billion yuan in 2024-2026 (previous forecast was 10.609 billion yuan in 2024), corresponding PE was 18X/10X/13X, respectively, maintaining the “buy” rating.
Risk warning: Production volumes fall short of expectations due to factors such as aquaculture epidemics; rising costs due to declining production efficiency; fluctuations in raw material prices, etc.