Clear ideas for cost reduction and development, and maintain a “buy” rating
Superstar Agriculture and Animal Husbandry released its quarterly report, achieving revenue of 949 million yuan (yoy +6.16%, qoq -8.33%) and net profit of 138 million yuan (yoy +32.85%, qoq +54.37%) in Q1 2024. Superstar has achieved a stable cost advantage by relying on advanced breeding systems and leading breeding management, while rapidly expanding the scale of farming. We expect the company's net profit to be 4.34/25.13/2,083 million yuan in 2024/25/26, and the BVPS will be 6.87/11.79/15.88 yuan, respectively. Referring to the comparable company Wind in 2024, we have a clear expectation of 3.2x PB. Considering that the company has a clear idea of using an asset-light model to help scale expansion and cost reduction, we gave the company 7.19x PB in 2024, with a corresponding target price of 49.40 yuan, maintaining a “buy” rating.
Impact of the commissioning of the Dechang project, the full cost increased in the short term
In 24Q1, the company listed about 510,000 pigs, about +7% compared to the same period, of which about 450,000 to 500,000 fat pigs were listed, about +36% compared to the same period last year. We estimate that the 24Q1 company lost about 0.15 to 0.2 billion yuan in the leather business, about 0.2 billion yuan in impairment losses in expendable biological assets, and about 140 million yuan in the pig farming business. This translates to an average loss of about 278 yuan for pig heads, an increase in losses over the same period last year. On the one hand, the increase in the company's average pig loss was due to the fact that the average domestic pig price remained weak in 24Q1, and on the other hand, it was affected by the short-term increase in the total cost of the company's fat pigs. We estimate that the full cost of the company's 24Q1 fat pigs is about 15.8 to 16.3 yuan/kg, which is an increase compared to the full cost of around 15.5 to 16 yuan/kg in 23Q4 and the full year of 2023. We analyzed that the total cost increase was mainly due to a significant increase in depreciation and amortization due to the company's annual design and transformation of 800,000 Dechang projects in Q1, and the company's production costs are still falling steadily.
The idea of reducing costs and expanding potential is clear, and the asset-light model helps scale expansion
1) Cost reduction: Although the company's total cost of raising pigs has increased in the short term, it is still at a relatively leading level in the industry, and there is still plenty of room for future cost reduction. The company's full cost target for 2024 is about 14.7 to 14.8 yuan/kg, which is highly attainable. On the one hand, the company's Dechang project has begun to introduce breeding pigs one after another, and it is expected that the introduction will be completed by the end of May. With the subsequent Dechang project, the reduction in single-head depreciation and amortization expenses is expected to drive the company's total cost reduction significantly; on the other hand, the company will continue to reduce pig breeding costs by implementing preferential selection and optimization of genetic management at the breeding end, and improving pig survival rates at the fattening side. There is still plenty of room for exploration. 2) Additional listings: In 2024/25/26, the company's listing targets are 350~400/700~800/10 million heads, respectively. The company's production capacity expansion will mainly use asset-light models such as leased pig farms and “company+farmer”. The contracted pig breeding farm has a production capacity of about 90,000 heads, which are expected to be delivered one after another, and the capital expenditure pressure required for expansion is low.
The pig cycle is about to reverse, and the company's low cost and high expansion advantages are obvious
Domestic breeding sows showed an accelerated trend of degeneration from 23H2 to 24Q1, which is expected to drive the pig cycle to reverse in 2024 and enter a relatively continuous profit period for the pig breeding industry. The company is a high-quality pig company with low cost and high expansion, and is expected to record excessive profits during the period when pig prices rise.
Risk warning: pig price rise/cost decline/release volume falls short of expectations, sudden large-scale outbreaks, etc.