Incident: The company released its 2023 annual report and 2024 quarterly report on April 29. The full year of 2023 achieved revenue of 19.03 billion yuan, +12.0% year over year; realized net profit of 1.36 billion yuan, -585.5% year over year; and accrued asset impairment losses of 50 billion yuan, which dragged down the annual performance. 2024Q1 achieved revenue of 3.78 billion yuan, -2.9% year-on-year, and -12.6% month-on-month; realized net profit of 50 million yuan, and successfully turned a loss into a profit year-on-month.

The company's various businesses improved to varying degrees in 2023, and the growth trend continued in the first quarter. In 2023, the company's pig breeding industry chain achieved revenue of 5.54 billion yuan, +8.1% year on year, gross profit margin -13.8% year on year, -22.1PCT year; feed business achieved revenue of 6.49 billion yuan, +17.4% year on year, gross profit margin 10.2%, year on year +0.4 PCT; veterinary drug business achieved revenue of 1.10 billion yuan, +5.93% year on year, gross profit margin +62.6% year on year, and -3.3PCT year on year. 2024Q1 continued its growth trend. The feed business achieved sales volume of 669,000 tons, +13.5% year over year; animal vaccines achieved sales revenue of 340 million yuan, +13.1% year over year. In 2024, the company aims to achieve 3.15 million tons of feed sales and 1.2 billion yuan in animal vaccine revenue.

The number of pigs released is growing steadily, and cost control is becoming more and more sophisticated. In 2023, the company sold 2.816 million pigs, +38.9% year on year; the average sales price was 14.2 yuan/kg, -18.0% year on year. 2024Q1 sells 647,000 pigs, with an average sales price of 13.4 yuan/kg. The company's breeding costs have been gradually reduced. In September and October 2023, the total cost of the company's pig breeding was reduced to less than 16.5 yuan/kg, and 2024Q1 was reduced to 15.99 yuan/kg. Based on an average shipping weight of 120 kg, the company had an average initial loss of about 311 yuan in the first quarter. The company's production capacity is mainly stable. By the end of 2023, the company was able to breed 140,000 sows, reaching 25 PSY heads.

With the commissioning of some of the company's newly built breeding bases and the progress of the renewal of Danish sows, the scale and production efficiency of the company are expected to increase in the future. In 2024, the company aims to sell about 3 to 3.5 million pigs, and strive to reach about 28 PSY heads, and keep the total cost at 15.5 yuan/kg.

Monetary reserves are relatively abundant, and cash flow is safe and stable. By the end of 2023, the company's monetary capital was 2.82 billion yuan, and the overall capital reserves were relatively abundant; the net cash flow from operating activities was 1.75 billion yuan, and the hematopoietic capacity of the main business was relatively excellent. Furthermore, the company has smooth financing channels, maintains a good and stable cooperative relationship with local banks, and has sufficient capital credit lines, which can guarantee the safety and stability of the company's cash flow.

Investment advice: We expect the company's net profit to be 518, 10.84, and 1,497 million yuan respectively in 2024-2026, and EPS of 0.38, 0.79, and 1.10 yuan, respectively, and the corresponding PE is 19, 9, and 7 times, respectively.

The pig cycle is expected to see an important reversal in the second half of 2024. The company is the largest pig breeding enterprise in northwest China. It has natural epidemic prevention advantages. Pig breeding and later business will work hard at the same time to maintain the “recommended” rating.

Risk warning: The release of pigs falls short of expectations; policy implementation falls short of expectations; risk of sudden major animal diseases.