The 2023 results are within the scope of the performance forecast. The 2023 and 1Q24 results are in line with our expectations of Tang Renshen's announced results: revenue of +1.5% year over year in 23 to 26.95 billion yuan, and net profit to mother of -1.66 billion yuan to -1.53 billion yuan year on year. The pressure on performance was mainly due to low pig prices. At the same time, the company calculated a loss of 50 billion yuan in various assets. Revenue of 1Q24 was 4.88 billion yuan, -25.2% year on year; net profit to mother was -200 million yuan, +140 million yuan year over year. The results for 2023 and 1Q24 were in line with our expectations.
Development trends
The number of pigs released increased rapidly, and feed sales increased steadily. 1) Pigs: Revenue of 51/1.3 billion yuan in '23/1Q24, +6%/+8% year-on-year. In '23/1Q24, the number of pigs released was +72%/+21% to 371/950,000 heads; in '23, commercial pigs/piglets accounted for 91%/9%, and in 1Q24, the share of commercial pigs/piglets was 88%/12%. 2) Feed: Revenue of 23 billion yuan, -1.5% year-on-year; domestic and foreign feed sales in '23 were +15% to 7.08 million tons. We estimate that export sales increased by 5-6% to 550-5.6 million tons.
There has been positive progress in increasing the efficiency and cost reduction of pig farming, financial strength has remained steady, and production capacity has remained stable in 1Q24.
1) Increased efficiency and cost reduction: The company's 23-year PSY is about 24-25 heads/year. We estimate that the full cost in 23 years is about 17.3 yuan/kg, 1Q24 or 16.6 yuan/kg. We believe that efficiency and cost reduction may be further promoted as pig breeding systems are replaced, management and processes are digitized, incentive mechanisms are adjusted, or further promoted. 2) Stable capital: The balance ratio of 64.8%/67.4% in the year 23/1Q24, the balance of monetary funds in 1Q24 was 2,333 billion yuan, and the total amount of bank credit in '24 reached 14 billion yuan, with sufficient financing reserves; net cash flow from operating activities in '23/1Q24 was 54/-150 million yuan. We judge that the feed business contributed to positive cash flow. 3) Productive biological assets and inventory: In '23/1Q24, the company's productive biological assets were RMB45/449 million yuan, and the inventory was 25.47/ RMB2,712 billion. Considering the replacement of high-performance breeding pigs, the company's production capacity for sows may have remained basically the same.
The growth of pigs has a production capacity base, and the feed business contributes to the company's ability to withstand risks. 1) Pig breeding:
In terms of sales volume, the company has sufficient production capacity, and the asset-light model provides growth momentum. The company expects its pig production capacity to basically meet the 24-25 launch plan, and the company plans to increase fattening production capacity, mainly “company+farmer”, which is expected to support the company's 24-year production target of 4.5 to 5 million heads. In terms of cost optimization, the company has built a team of breeding professionals and promoted the optimization of the “New Danshi” high-performance breeding system, which we believe is expected to increase the efficiency and reduce costs of pig breeding. 2) Feed: Stable business profitability and collaborative enhancement of the company's resilience to risks. In terms of sales volume, the company's internal supply and development of major external customers are expected to increase the scale of business; in terms of tonnes, optimization of the company's product structure and increase in capacity utilization are expected to enhance profitability.
Profit forecasting and valuation
We maintain our 24/25 net profit forecast of 225/597 million yuan. The current stock price corresponds to 37/14 times P/E for 2024/25, maintaining an outperforming industry rating. Based on a steady recovery in pig prices, the target price was lowered by 12% to 7.5 yuan, corresponding to 48/18 times P/E in 2024/25, corresponding to 31% upward space.
risks
The risk of the pig epidemic; pig prices and sales volume fell short of expectations; the increase in the price of feed ingredients exceeded expectations.