Key points of investment:

The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 89.92 billion yuan, +7.4% year-on-year, and realized net profit to mother of 6.39 billion yuan, which turned into a year-on-year loss (profit of 5.29 billion yuan in '22). The full-year performance was in line with expectations. In the first quarter of 2024, the company achieved operating income of 21.85 billion yuan, +9.4% year-on-year, and realized net profit to mother of 1.24 billion yuan, a significant year-on-year reduction in losses (23Q1 loss of 2.75 billion yuan). The company's performance is in line with our previous expectations (we expect the company to lose 1 billion yuan in 24Q1 in the 2024 quarterly report).

Pig breeding: The scale of production continues to grow rapidly, costs are optimized quarterly, and the cycle is waiting for the cycle to pick up. Throughout 2023, the company sold a total of 26.26 million pork heads (including hairy pigs and fresh products), +46.7% over the same period, exceeding the target of 26 million heads set at the beginning of the year. The average sales price of hairy pigs was 14.81 yuan/kg, -22.3% year-on-year. Referring to the company's investor relations activity records and monthly sales announcements, in the first quarter of 2024, the company sold a total of 7.18 million pork heads (including hairy pigs and fresh products), +28% over the same period last year, maintaining a relatively rapid listing growth rate. However, the overall market was still sluggish. The average sales price of the 24Q1 company's hairy pigs was 14.3 yuan/kg, -4% compared with the same period last year. The comprehensive cost of pig breeding in 24Q1 fell to around 15.2 yuan/kg (about 16.7 yuan/kg for the full year of '23), down about 1 yuan/kg from 23Q4, and the 24Q1 pig farming business lost about 900 million yuan. The company currently has sufficient production capacity and capital reserves. By the end of March, there were about 1.55 million breeding sows. The pig farming business PSY had risen to around 23 (22 for the full year of 23 and 20 in '22), the market rate for pork pigs was 92%, and the effective breeding capacity for pork pigs had increased to more than 35 million heads. At the same time, the company has sufficient capital reserves. At the end of 24Q1, the company's balance ratio was 63%. Short-term and medium-term interest-bearing debt accounted for about 45%, and the long-term debt ratio was higher than that of short-term debt. The various types of funds available are approximately $11 billion. It is expected that the company will still efficiently complete the annual release target of 30 to 33 million heads throughout the year.

Broiler breeding: Broiler sales have increased steadily, fresh sales rates have increased, and breeding costs have declined significantly. Referring to the company's investor relations activity records and monthly sales announcements, the company sold a total of 1.18 billion broilers (including hairy chicken, fresh products and cooked food) in 2023, +9.5% over the same period, completing the target set at the beginning of the year for a 5%-10% increase in broiler sales. Affected by the sluggish market, the average sales price of chicken throughout the year was 13.69 yuan/kg, -11.5% compared with the same period last year. In the first quarter of 2024, the company sold 267 million broilers, +0.2% year-on-year, of which about 35 million fresh products were sold (fresh sales rate reached 13%) and 2.8 million cooked food. The average sales price of fried chicken was about 13.0 yuan/kg, +1.3% compared with the same period last year. Referring to the company's investor relations records, the total cost of selling chicken in 24Q1 dropped to around 12.8 yuan/kg (about 13.6 yuan/kg for the full year of '23), and the profit of the chicken farming business is expected to exceed 100 million yuan in a single quarter.

I am optimistic that the livestock and poultry farming cycle will pick up during the year, and maintain the “gain” rating. Since 2023, pig and broiler prices have continued to be sluggish, and there have been deep losses in the breeding process. The country's production capacity for breeding sows has been reduced for five consecutive quarters. We are optimistic that overall pig supply will trend down in 2024, and prices will rise quarterly. At the same time, benefiting from falling raw material prices, farming enterprises are expected to achieve significant optimization on the cost side. I am optimistic that the company's performance will improve quarter by quarter, and the bottom will pick up. Since the pace of recovery in the industry is slower than our previous expectations, we lowered the company's assumption of sales prices for pigs and broilers in 2024 (lowering the estimated average sales price of pigs from 18.0 yuan/kg to 16.7 yuan/kg, and lowering the average sales price of broilers from 14.5 yuan/kg to 14.0 yuan/kg). Based on this, we lowered the company's profit forecast for 24, raised the 25-year profit forecast, and added a 26-year forecast value. The company is expected to achieve operating income of 1118/1216/127.7 billion yuan in 2024-2026 and achieve net profit of 80.1/103.3/6.85 billion yuan (the forecast value for 24-25 years before adjustment is 119.7/9.73 billion yuan). The PE valuation corresponding to the current stock price is 16X/12X/19X, with reference to comparable companies' 24-year valuation levels (see Table 1) to maintain an “increase in holdings” rating.

Risk warning: Livestock and poultry prices continue to be low; raw material prices fluctuate greatly; risk of farming epidemics.