2023 and 1Q24 results are in line with our expectations

Tiankang Biotech announced its 2023 and 1Q24 results: The company achieved revenue of 19.026/3.777 billion yuan in 2023/1Q24, +12.0%/-2.9% year on year, realized net profit attributable to mother of -1,363,054 billion yuan, year-on-year -1,644 billion yuan/+0.68 billion yuan, and realized net profit deducted from non-mother of 1.378/57 billion yuan, year-on-year. The results were in line with our expectations.

Development trends

Release flexibility and rapid improvement in 1Q24 costs. In 2023, the company's pig breeding business achieved revenue of 5.54 billion yuan, +8.1% over the same period last year. 1) Sales side: Benefiting from the gradual release of production capacity in Henan and Gansu, in 2023/1Q24, the company released 2,828,647,200 heads, respectively; 2) Cost side: We estimate that the company's full cost in 23 years is 17.5 to 18 yuan/kg. Based on the renewal of the Danshi population, replacement of feed ingredients imported from Central Asia, and the gradual weakening of the impact of the epidemic, etc., we determine that the 1Q24 company's cost or marginal improvement to around 16 yuan/kg; 3) Profit side: We estimate that the pig business lost about 23 billion yuan in 23 years Around this, it was mainly due to low pig prices and the company prepared 455 million yuan for impairment of expendable biological assets at the end of the 23-year period.

Maintain steady growth, improve feed growth, and build a stable business foundation. 1) Animal insurance: Achieved revenue of 996 million yuan in 23 years, +5.9% year over year. We believe that the main reason is that the Jilin crown border also contributed to increased sales of new products such as avian influenza vaccine and diarrhea vaccine, and that the company continues to develop foot-and-mouth disease markets; in terms of profit, it contributed 660 million yuan in gross profit, and gross margin -3.3ppt to 62.6% year on year, mainly due to increased bargaining power of downstream customers and intense market competition; 2) Feed: Revenue +17.4% to 6.492 million yuan, and sales volume +20.8% to 2.804 million tons. At The growth of the Qingxin Market in Ganning, Shaanxi; in terms of profit, the gross margin of the feed business was +0.4ppt to 10.2% year-on-year in '23, contributing 620 million yuan in gross profit.

The capital is abundant and steady, and I am optimistic about the flexible release of the farming business and the gradual recovery of profits. 1) Industry level: We judge that pig prices have an upward foundation starting in 2Q24, which is expected to drive continuous improvement in breeding profits and gradual recovery in upstream animal protection and feed business demand; 2) Company level: ① Breeding business: In terms of listing, the company can currently keep about 140,000 sows, and PSY is expected to continue to increase through Danish population renewal. We judge or support the company to meet the target of 3 to 3.5 million heads; from a cost perspective, if the marginal improvement trend continues, the company may be expected to achieve the annual cost target of 15.5 yuan/kg. ② Financial strength: The company has sufficient capital and a healthy debt structure to provide financial guarantees for expansion.

As of the end of '23/1Q24, the company's monetary capital was RMB 28.2/2.68 billion, respectively, and the balance ratio was 52.8%/53.7%, respectively.

Profit forecasting and valuation

We kept the 2024/25 net profit forecast of $462/767 million unchanged. The current stock price corresponds to 21/13 times P/E in 2024/25. Keep the target price of 10 yuan unchanged, corresponding to 29/18 times P/E in 2024, with 38% upside compared to the current stock price. Maintain an outperforming industry rating.

risks

Pig prices, release volumes, and vaccine development fall short of expectations; risk of animal epidemics; fluctuating feed raw material prices.