Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 1,647 billion yuan, -0.7% year on year; realized net profit to mother of 84 million yuan, -30.3% year on year; gross profit margin 13.0%, -0.7pp year on year, net profit margin 5.08%, and -2.1pp year on year. 2024Q1 achieved operating income of 412 million yuan, +5.7% year-on-year; realized net profit to mother of 20 million yuan, -13.1% year-on-year.
Comment: Cut costs and increase efficiency to cross the trough. The decline in performance in '23 and 24Q1 was mainly due to increased depreciation and amortization of fund-raising projects and marketing expenses. In 2023, the feed industry faced a double squeeze of upstream and downstream pressure. Upstream raw material prices, represented by commodities such as corn and soybean meal, fluctuate greatly, and are operating at a high level; pig farming is booming, pig prices have dropped by about 20% compared to the same period, and demand for high-end feed is weak. In this context, the company accelerates the construction of fund-raising projects, optimizes marketing strategies, continuously improves the level of refined management internally, and increases efficiency and reduces costs.
Breeding sows have further accelerated their degeneration, and the breeding industry has reversed into a definitive trend. According to data from the National Bureau of Statistics, at the end of the first quarter of 2024, the number of pigs stored nationwide was 408.5 million, a decrease of 22.44 million heads compared to the same period last year, a year-on-year decrease of 5.2%, setting a new low in 4 years. Judging from the number of pigs stored, it has been declining for 2 consecutive quarters since the third quarter of 2023, and the decline is increasing rapidly. At the end of the first quarter of 2024, the number of breeding sows was 39.92 million, a year-on-year decrease of 7.3%, and the number of breeding sows hit a four-year low. The double bottom of production capacity and storage indicates that pig prices will maintain an upward channel in the future, and the profit cycle is expected to continue for a long time. In the company's feed sales structure, front-end high-priced feed is expected to benefit from a recovery in the farming market and increase its share in the company's sales structure.
Raise capital to expand feed production capacity, and production capacity will increase by 145% in the next 3 years. Facing growing market demand, the company plans to expand pig feed production capacity over the next three years. The company currently has a production capacity of 617,000 tons. After the completion of all projects, the company will add 900,000 tons of production capacity, increasing production capacity by 145.9%. As pig prices recover in the second half of the year, feed prices are expected to pick up at the same time. Fund-raising projects are put into operation and demand for pig feed is recovering. The company is expected to see a sharp rise in volume and price in the second half of the year.
Profit forecasting and investment advice. We expect the company's EPS to be 0.91, 1.1, and 1.26 yuan from 2024 to 2026, and the corresponding dynamic PE will be 15/12/11 times, respectively, maintaining the “buy” rating.
Risk warning: risk of fluctuations in pig and pork prices, risk of animal disease, risk of scale expansion falling short of expectations, risk of declining product competitiveness.